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Now that Peru has whittled down the number of presidential candidates from 18 to just two, the South American country is one step closer to attaining the clarity it so desperately needs. Not only has Peru gone through three different presidents in six months, but it had the dubious distinction of being one of the worst-performing economies at the height of the pandemic. Pedro Castillo is the far left-wing candidate left standing, and he is expected to face a runoff with the remaining rival, conservatives Keiko Fujimori, in June.
Whoever wins will have their work cut out for them. Last year, Peru suffered a 30.2% decline in its second-quarter GDP. For 2020 as a whole, Peruvian GDP shrunk by 11.1% vs. 2019, sending it into one of the worst recessions in the Latin American region. Worse, the unemployment rate ballooned by more than 2 million people to 13.8% last year as production came to a standstill in the wake of the pandemic.
If estimates are any indication, things are looking up. The economy ministry is most recently forecasting that GDP will grow at a rate of 5.1%. on average, for the next six years. This outlook includes a prediction for economic expansion of 10% in 2021, which would be its strongest rate since the 1990s. The World Bank is estimating GDP growth of 7.6% this year. In Q1 2021, Latin America’s seventh-biggest economy is projected to have grown by 1.5%.
Peru’s economic recovery is being fueled in large part by the mining industry. Copper and gold are Peru’s “most important” mineral exports based on value, according to EY. According to engineer Enrique Garay cited by bnamericas, mining in Peru represents:
- 10% of GDP, while copper represents 4% of that total
- 60% of exports
- 16% of private investments
- 19% of tax income
Peru’s metal mining GDP, in particular, is projected to grow by 14% in 2021, according to the Ministry of Energy and Mines. This pace puts Peru’s mining industry at the top of the pack for a post-pandemic recovery. The country is inching toward that pace, slowly but surely, with copper production in February having increased 0.7% vs. year-ago levels.
Peru’s mining minister, Jaime Gálvez, has ambitiously predicted the country’s copper output will reach 2.5 million tons this year, up 16% year-over-year and establishing a new all-time high. By way of comparison, Peru produced 2.15 million tons of copper in 2020. Put another way, the Reserve Bank of Peru’s outlook is for metal mining GDP to expand by 14% in 2021.
Activity is already picking up, including the recent expansion of Peruvian mines as well as the start of construction on Minsur-owned Minas Justa, a USD 1.6 billion copper project close to Marcona. This project is expected to contribute 102,000 tons of copper coupled with 58,000 tons of copper cathode annually.
The gains from copper production are expected to offset the production-related problems created by the pandemic, according to Gálvez. There are currently more than a dozen mining projects that are in the pipeline through 2025.
One project that is looking to bolster production in the country is Sierra Metals. The Canadian mining company recently announced that it received the required approvals from the Peruvian Ministry of Environment to bolster its throughput at a plant at the Yauricocha Mine to 3,600 tons per day, up 20% from previous levels. Sierra is a major producer in the country, boasting more than 50,000 hectares of mining claims there.
The permitting is important because it’s one of the hurdles to foreign investment. Despite its vast natural resources, Peru has a complex permitting process that has cost the country a competitive edge. By way of example, it can take up to two years to receive the proper permitting to drill on 40 platforms in Peru compared to just three months in Chile and a couple of weeks in Canada. Peru’s mining minister is banking on a more streamlined permitting process to make the country’s mining industry a hotbed for investment.
Exports a Tailwind
Exports are a bright spot in Peru’s economy and they are on the rise for the most part. Copper exports grew by more than 20% in January vs. year-ago levels. While the results were impressive, they pale in comparison to that of iron ore, where exports soared by more than 132% in the same month followed by molybdenum, lead and silver with increases of 76.4%, 58% and nearly 50%, respectively. In total, Peru generated USD 2.5 billion from exports in the first month of the year, up 8% vs. 2020 levels.
Gold was a less shiny scenario, where exports fell by about 14% in January and output declined by more than 25% in February vs. the same month last year. Peru has a trio of key gold mines that are responsible for more than one-quarter of the country’s total production of the precious metal. These include Minera Yanacocha, Minera Poderosa and Minera Aurífera Retamas, all of which suffered unique challenges lately. Together, these three companies are responsible for over 25% of Peru’s total gold production, and each of these mines faced its own challenges lately, whether it was lower grades of ore, pandemic-fueled restrictions on workers or declining volumes.
While Peru’s metals industry is experiencing a boom, the broader population of 32.8 million appears to have yet to reap the benefits. In fact, while mining is a major revenue stream for the Peruvian government, it has been criticized for lofty tax breaks and an apparent disregard for local communities. If Castillo is declared the winner in the presidential election, he has pledged to nationalize Peru’s natural resources to help funnel the revenue toward schools and healthcare facilities.
In the meantime, the Peruvian population remains in dire straits. The Wall Street Journal featured a tour guide by the name of José Luís Rosas in Peru’s Machu Picchu who made it through the pandemic year by making withdrawals from his retirement fund and moving his kids from private to public school.
Now as a result of a slow vaccination rollout and a resurgence in coronavirus cases, the outlook for the tourism industry is dire. As a result, Rosas is considering moving his family to his parent’s village where he can farm fruits and vegetables. He explained how he is working to merely survive, spending his income on “cooking gas” and “a little bit of meat.”
With the presidential elections nearing some conclusion, the need for economic stability is a common thread throughout the Andean country. Mining holds the key to much of that recovery, as evidenced by its contribution to GDP and massive role in the nation’s exports. Whether or not the broader population, millions of whom are mired in poverty, will begin to reap some of the benefits remains to be seen.
*This article was written by a third-party provider and has been republished on Theassay.com in its original format. Its content does not necessarily reflect the views of The Assay’s editorial team or those of 121 Group.