ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and León Portocarrero

March 21st – April 6th, 2009

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Latin American countries use a variety of strategies to mitigate the impact of extractive activity.

After a sharp fall, some mineral and hydrocarbon prices have recovered in recent weeks.

Nationalization initiatives in the extractive sector face significant obstacles.

Latin American countries use a variety of strategies to mitigate the impact of extractive activity.

Just as the growth of the extractive industries across Latin America has had a range of environmental and social impacts, affecting the land, the water and the air as well as the local communities, the countries where these extractive activities take place have implemented a range of different responses to these impacts.

Colombia, for example, emphasizes prevention, strengthening environmental legislation and the monitoring of mining activities through the Institute of Geology and Mining (Ingeominas). Peru, on the other hand, now confronts the price of decades of indifference as it is being forced to move the entire City of Cerro de Pasco away from the open mining pit that threatens to literally swallow up the city. In Bolivia, the Bolivian Mining Corporation has paid the landowners affected by the activities of the Jindal Steel Project in the Mutún area. However, none of these solutions has been trouble-free.

In Colombia, Ingeominas is in charge of the enforcement of Law 685, which in 2001 established the current guidelines for obtaining mining permits for exploration and exploitation. Representatives of this institute have said that they strengthened the enforcement and monitoring of the studies to locate minerals, and the process of granting exploitation rights. However, the former head of the portfolio of Environment, Housing and Territorial Development, criticized the fact that mining was allowed in natural reserves and parks. Faced with these allegations, Ingeominas replied that those titles had been granted in the past, between 1990 and 2003.

In Peru, the mining company Volcan S.A extracts silver and copper at an open pit mine in the department of Pasco, very close to the capital city of Cerro de Pasco. This has led to water pollution, acid rain, as well as ongoing noise pollution and particle emissions from the explosions in the pit. Even worse, the open pit has continued to expand towards the city, destroying entire neighborhoods as it grows. In response, the government decided to relocate the city away from the mining activity. With this objective, the government created an inter-institutional commission to develop the guidelines and strategies for the relocation. The construction of a new city would begin in about five years, after the viability studies have been completed and planners have devised ways to attempt to replicate longstanding social and community relationships.

Meanwhile, in Bolivia, the Bolivian Mining Corporation agreed to pay US$ 2.5 million to the owners of 5,250 hectares of land that would be affected by exploitation in the Mutún area by India's Jindal Steel. But the State's delay in paying the owners for their lands led to a delay in Jindal's presentation of their investment plan and in the negotiations over hiring local services and labor.

The policies for mitigating the environmental and social impacts of extractive activity thus are very different across Latin America. Countries must continue to evaluate the efficiency of their policies for reduction of the negative effects of the extractive industries, and generate new alternatives if the ones in place are proven to be unrealistic.

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After a sharp fall, some mineral and hydrocarbon prices have recovered in recent weeks.

Over the last few weeks, oil and mineral prices, which had fallen over the last several months, recovered and achieved their highest levels since the end of 2008. This led to hopes for improved results for companies in the Latin American extractive sector, but several analysts predicted that any recovery would only be temporary.

The most significant price recoveries were in copper and oil, two key commodities for Latin American countries such as Chile, Peru, Venezuela and Ecuador. International copper prices increased over 4%, reaching US$ 1.86 per pound on April 3rd. Compared with December 2008 levels, the accumulated price increase for copper has been over 40%. However, it remains below the early 2007 level of US$ 2.24 per pound.

Meanwhile, international oil prices approached US$ 54, a 54% increase from the US$ 35 per barrel price of December 2008. This rebound was even more meaningful for oil produced in Ecuador, where the effect of international increases combined with April's reduction in the penalty imposed due to the lower quality of Ecuadorian oil, from US$ 17.2 per barrel to US$ 5.48. The final export price for Ecuadorian oil rose to US$ 48.5 by March 27th.

The reasons given for this recovery are diverse and have different implications for its duration. In Chile, Diego Hernandez of BHP Billiton said that the rise in copper prices was only the result of the withdrawal of scrap salesmen from the copper market, so prices would fall again in the near future. By contrast, Jose Pablo Arellano, president of the state-owned copper firm Codelco, said it was actually the result of a recovery in demand, which would imply the "return of more price increases." Another explanation of the recovery cited a reduction in copper stocks due to the delivery of supplies that had been paid for in advance. Juan Pablo Cordova, a Peruvian Central Bank analyst, said that the primary explanation for price increases was purchases made by the Chinese Government and overall market optimism. Again, these explanations all point towards a temporary recovery.

As for oil prices, the Minister of Mines and Oil of Ecuador Derlis Palacios said that the recovery is due the oil market's adjustment to current oil demand. Palacios said he believes prices fell excessively at the end of 2008 because of panic and oversupply of oil, but would now stabilize around US$ 55 per barrel.

The volatility of commodity prices between the end of 2008 and the first months of 2009, and the diversity of explanations these changes has generated significant uncertainty for the companies in the sector and also for the Latin American States who receive revenue from these activities.

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Nationalization initiatives in the extractive sector face significant obstacles.

In Venezuela and Ecuador, nationalization of the mining companies operated by Techint and Perenco respectively faced problems in recent weeks, creating conflicts between State and private companies. In Ecuador, the French company Perenco took action in the international courts, while reports on the Techint negotiations in Venezuela are still contradictory and uncertain.

Venezuelan President Hugo Chavez decided in late 2008 to nationalize the Steel Company of the Orinoco (Sidor), operated by the Argentine company Techint. The nation's Minister of Finance, Ali Rodriguez Araque, said on March 24th that the State had reached an agreement with the company and had already begun paying the compensation awarded. However, company representatives said that no such agreement existed, nor had there been any payment. The lack of information about the agreed amount and the fact that Techint has not yet informed the New York Stock Exchange of the payment both support the claim that the nationalization is yet to be finalized.

Techint is the most important steel producer in Venezuela. These contradictory reports on its nationalization process come after three months with no reported progress at all, despite the fact that the company and the State arrived at the main agreements in late 2008. Recent months have even included a speculated price between US$ 1,650 and 1,900 million.

The Ecuadorian government has continued to withhold 70% of output from the French oil firm Perenco, after a March 4th embargo over a debt of US$ 338 million due to unpaid windfall profit taxes. This measure was taken a few weeks before the oral arguments in Paris over a claim made against the government by Perenco and OXY USA, seeking to avoid the tax payments. The dispute has halted Ecuador's renegotiation of the Perenco contract for a move from a concession system to service type contracts.

As these cases show, initiatives in some Latin American states to seek larger extractive industry rents through nationalization and contract renegotiation are not yet complete. Uncertainty continues to hang over these processes, in Venezuela due to the lack of agreements and in Ecuador due to the intervention of the international courts.

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Sources: El Mercurio, El Universal, Perú 21, AméricaEconomía, Clarín.com, El Comercio (Peru), Elcomercio.com (Ecuador), ElDeber.com.bo, El Universal, La República (Peru), latercera.com, Folha Online

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