Bloomberg News

Chile Seeks Developed Status, Meets Soaring Energy Costs

January 15, 2013

Furling Prosperity

A Miguel Torres vineyard in south-central Chile is producing more expensive wines to help cover increasing energy costs. Photographed in Chile, December, 2012. Photographer: Cristobal Palma/Bloomberg Markets via Bloomberg.

Fernando Almeda, who moved to south-central Chile’s Curico valley from his native Spain two decades ago to pursue his love of winemaking, says the Andean nation is a paradise for vintners. Its Mediterranean-like climate is well suited to growing grapes, while the Andes mountain range to the east and Atacama Desert to the north provide natural barriers against pests.

And as Chile comes closer to becoming a developed nation, it cultivates a growing number of consumers who can afford the quality of wine produced by Miguel Torres Chile vineyards, where Almeda works as technical director, Bloomberg Markets magazine will report in its February issue.

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Yet the very prosperity that has benefited Miguel Torres and other companies -- Chilean gross domestic product grew at an average annual rate of 4.4 percent in the 10 years through 2011 -- is bringing a new set of concerns.

While Chile’s overall inflation accelerated by just 2.1 percent in November, energy and labor expenses surged in the past five years, Almeda says while sipping a glass of Santa Digna Estelado sparkling wine over lunch at one of the vineyard’s restaurants.

Miguel Torres, which is owned by Barcelona-based Miguel Torres SA, now markets mid- to high-range products, such as the newly introduced Estelado, which tend to have wider profit margins than cheaper wines. The vineyard is also trying to contain costs by mechanizing harvests and generating its own sources of energy.

Shrinking Returns

“Costs are on the rise, and returns are shrinking,” Almeda says, as he looks out the window at the vines soaking up the springtime sun. “Business from my perspective is more complex every day.”

Throughout Chile, companies from copper miners to pulp producers have been forced to adapt to higher operating costs, especially from electricity and labor. Labor costs rose 7 percent in October from the year before, according to a government index that lists only percentages.

Electricity prices on the central grid jumped 75 percent in the past six years. Demand for energy and laborers is bulging in a country whose economy is growing at more than twice the pace of the global average.

The challenges threaten to slow expansion and stymie the government’s goal of becoming Latin America’s first developed nation by 2018. To do that, Chile would have to attain $22,000 in per capita GDP, up from $18,350 now, according to President Sebastian Pinera.

Double Power

The rise in power prices is driven partly by a shortage of inexpensive supply. Chile, which is the world’s top copper producer, needs to double its electricity-generating capacity during the next decade from today’s 16,500 megawatts, say mining companies BHP Billiton Ltd. and state-owned Corporacion Nacional del Cobre, known as Codelco.

They and others plan $100 billion of expansions to copper and gold mines. That’s the largest-ever projected investment increase in Chile, where mining accounts for about 15 percent of GDP. Joaquin Villarino, president of mining lobby group Consejo Minero, says companies will have to shelve many initiatives because of energy shortages and costs.

BHP and Codelco have called on the state to speed up the approval permits for new power generators.

Blocked Projects

So far, those requests haven’t been met. The government and courts have blocked two large-scale projects since Pinera, a billionaire businessman and a former member of the center-right National Renewal Party, took office in March 2010.

Courbevoie, France-based GDF Suez SA halted its 540-megawatt Barrancones project at Pinera’s request in August 2010 when environmental groups opposed it. The Supreme Court in August 2012 delayed Brazilian billionaire Eike Batista’s 2,100-megawatt Castilla coal-fired plant and ordered a more comprehensive environmental impact study.

“It was a mistake when our president suddenly decided Barrancones shouldn’t continue,” says former President Ricardo Lagos, a Socialist. “Now, our energy policy isn’t very clear, which makes it difficult for some to make investments with Chile.”

For all of its challenges, Chile has an economy that would be the envy of many nations. The country’s fiscal condition is in the rare position of having no net debt, with a $15 billion sovereign wealth fund it has built from selling copper and bonds.

High GDP

Chile GDP grew an estimated 5.2 percent in 2012, more than double the average around the world, according to analysts surveyed by Bloomberg.

Private consumption and investment are fueling growth as mining companies buy equipment and Chileans hit the malls and travel on vacation, says Joaquin Vial, the newest member of the Chilean central bank’s five-member board.

The unemployment rate fell to 6.5 percent in September, from 7.4 percent the year before, while real wages grew 3.3 percent in September from a year earlier, according to government data.

The peso has been increasing in value -- it grew 8 percent against the U.S. dollar in the first 10 months of 2012 -- and inflation during 2012 was less than half of the 6.2 percent average in Latin America, according to analysts polled by Bloomberg.

Still, Chile’s growth threatens to create some inflationary risk, Vial says. Electricity shortages are a big concern, he says.

Pulling Back

Some energy companies in Chile are pulling back on investments. Colbun SA (COLBUN), the Santiago-based power firm that holds 49 percent of the 2,750-megawatt HidroAysen hydroelectric project, in May said it wanted to delay development of its transmission line, citing lack of popular support.

Demonstrations against HidroAysen in 2011 led to hundreds of arrests as protesters marched in downtown Santiago against the project’s potential damage to Patagonian rivers and rain forests.

The HidroAysen joint venture says its design has the highest environmental standards. It would create a conservation area larger than 28,000 acres and donate land to a national park.

The absence of plants such as Castilla and HidroAysen will create supply constraints after 2015, says Hugh Rudnick, a professor of electrical engineering at Pontificia Universidad Catolica de Chile in Santiago. Companies will have to operate diesel generators to meet demand, he says.

High Cost

That would cost four times more than coal-fired power, Rudnick says.

The nation’s electricity prices exceed the average for the 34-nation Organization for Economic Cooperation and Development by 61 percent. Energy accounts for 20 percent of BHP’s costs in Chile -- three times the level seen in neighboring Peru and the U.S., Peter Beaven, the company’s base metals director, says.

Almeda, the Miguel Torres technical director, says the vineyard is researching the possibility of using solar panels. Codelco is also investing in solar to supply electricity and heat to mines in the Atacama Desert.

Chile’s robust labor market has made it difficult for companies such as winemaker Miguel Torres to find workers during harvest. The vineyard responded in 2011 by purchasing equipment that picks grapes.

“Consumption, investment, credit and employment are growing at high rates,” Vial says. “Clearly, it’s all a little bit higher than what would be considered the optimal trajectory.”

Another trend troubling some Chileans is the rise of income inequality, especially when compared with the country’s neighbors. Chile’s Gini index, a measure of the income gap in which zero represents perfect equality and 100 complete inequality, is 52.1 compared with 44.5 in Argentina and 48.1 in Peru.

More Education

Vial says the need to educate more of the population is as serious an issue as energy shortages. Without that, the country won’t have trained workers to staff the anticipated new mines and other plants in coming decades, he says.

Groups of students and labor unions stage protests almost monthly in Santiago to demand cheaper schooling and better wages.

The protests, which started in 2011, led to the ouster of two education ministers and have helped make Pinera the least-popular president since Chile’s return to democracy in 1990, according to Santiago-based polling company Center for Public Studies.

Pinera had a 27 percent approval rating in a survey of 1,512 people taken July 5 to Aug. 9. Pinera responded to student demands in 2012 by increasing corporate taxes to raise an additional $1 billion a year for scholarships and cut costs of student loans.

Not Enough

The tax revenue won’t be enough to meet the needs of a population that demands better services from the state, former President Lagos says.

“Emerging middle classes are demanding, and if those demands aren’t met, we will continue to have students in the street,” says Lagos, who received a doctorate in economics from Duke University in Durham, North Carolina. “The question of taxation is going to be an important issue in the next presidential campaign.”

Former President Michelle Bachelet, also a Socialist, who now heads the United Nations body charged with empowering women, is likely to run in the November 2013 election for president against one of Pinera’s former cabinet members. Presidents in Chile can’t serve for two consecutive terms.

The candidate from Pinera’s cabinet could be Laurence Golborne, who resigned as public works minister in November to prepare his presidential run. He oversaw the 2010 rescue of 33 miners in the Atacama Desert.

Promote Growth

Bachelet, who, according to the Center for Public Studies, left office with a 78 percent approval rating, would win if elections were held today, says Patricio Navia, a political science professor at New York University.

Meanwhile, the Pinera administration believes the best strategy is to continue promoting economic growth by investing in worker-training programs and cutting red tape for exporters.

Those steps will open new job opportunities and create the wealth needed to improve education, says Finance Minister Felipe Larrain.

At the Torres vineyards, Almeda, who retains the accent of his native Spain after 20 years in Chile, says his company may buy more land so it can increase future production. It can take a vine half a decade to start generating quality grapes.

He says companies, like economies, must plan now for challenges -- and opportunities -- that could spring up years down the road.

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Jonathan Neumann at jneumann2@bloomberg.net.


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