Monday, January 20, 2014

Copper Company's Woes Influence Changes in Military Budget

As the presidential term of Sebastian Piñera winds down, so are hopes to eradicate the copper tax that has provided Chile's military with billions of dollars. Piñera now becomes the second-straight president to fail to win passage of the legislation, which replaces the tax with four-year spending programs based on strategic needs. The new budget plan has its flaws, to be sure. For example, Chilean defense analyst Eduardo Santos says the four-year framework lacks flexibility. But another driving force is the difficult situation at Codelco, the world's largest copper producer and the source of that lucrative source of funds. The government-owned mining company desperately needs to upgrade its aging mines, while facing slumping copper prices. In short, it needs to keep more of the money it makes. The government last month let Codelco keep an additional $1 billion of profit, for a total of $3.2 billion. The finance ministry called it a necessary investment to keep Codelco's leadership in mining and to maintain its investment-grade credit rating. Long-term, the company needs to spend $24 billion to modernize its operations. It needs to expand production by 10%, or risk losing half its output. Codelco is mandated to give 10% of all its foreign sales to the military. That would amount to more than $1 billion in the first nine months of 2013, based on Codelco figures, although the government deducts much of that sum, and several billion in unspent funds are stashed away in an emergency contingency fund. As the principal government-owned enterprise, Codelco is Chile's cash cow. Its 2012 profit of $7.5 billion was a sizable chunk of a total budget of roughly $60 billion. If the copper tax is someday eliminated, it would be replaced with regular government funds, although certain spending floors would be guaranteed.

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