The mining industry looks at basing refineries in Peru

One of President Pedro Pablo Kuczynski’s election campaign themes was that Peru’s mining sector should increase its involvement in higher value-added activities, moving beyond simple ore extraction into more smelting and refining. “Pedro Pablo is very clear on this. Today we export a lot of rocks with our raw materials and some of those minerals should be refined in Peru,” said Alfredo Thorne, just weeks before he was sworn in as the minister of economy and finance alongside the rest of the new cabinet. Thorne added that Peru needed to discuss its partnership with China – a major market for its metals exports – to see if there could be a greater role for refined products.

A Push To Refine

Peru has only one copper refinery in operation, run by Southern Copper Corporation. Roughly 85% of the country’s total mining exports by value are shipped as ore concentrates, with the remaining 15% being processed or refined products.

Before taking office, Kuczynski suggested that the value of Peru’s mining exports could increase by as much as 25% without any rise in mine output if the country simply increased its local refining activity. The then president-elect said an increase in refining could be achieved without harming the environment, although he also argued that Peru’s existing environmental protection regulations were excessive. “Our standards for emissions are more demanding than in Finland – that’s why more smelting and processing plants aren’t built. We have to change that,” he said in a speech in July 2016. Kuczynski suggested that if Peru applied the same environmental standards as Canada or Chile, seen as examples of best practice, there would still be scope for commercially viable refining activity.

Environmental Concerns

Sensitivity over environmental issues is heightened in Peru due to controversy over the La Oroya polymetallic facility, a zinc and lead smelter and copper refinery notorious for high sulphur dioxide emissions. The town of the same name was once described by Time magazine as one of the world’s most polluted places. Previously owned and operated by the Peruvian state, La Oroya was privatised in 1997 when Doe Run of the US acquired it. The new owners had difficulties in running the facility profitably while simultaneously meeting environmental remediation and improvement targets. Since 2012 the local operating company has been in bankruptcy proceedings and production has been suspended, with various attempts to sell the plant failing to attract a buyer. Any new operator will have to meet tough environmental standards, known as Estándares de Calidad Ambiental (ECA).

There has been much debate over whether the ECA for sulphur dioxide in Peru has been set at an unrealistically high level. Companies must emit no more than 20 micrograms of SO per cu metre of air. In contrast, the maximum is 250 micrograms in Chile, and Canada has set a 275-300 microgram range. President Kuczynski has noted that La Oroya has the capacity to refine copper with high arsenic content, the type produced by the nearby Toromocho mine, which is operated by Chinese-owned Chinalco. He has therefore expressed interest in a potential agreement with Chinese investors that would put the La Oroya refinery on a sustainable footing. In April 2017 it was reported that a draft government resolution proposed raising the SO limit to 250 micrograms. Marcos Alegre, the minister for environmental management, noted that while the World Health Organisation recommended a 20-microgram limit, this was an “ideal value” that no country other than Peru had enforced. The limit to 250 micrograms was “more in line with reality”.

Industry Input

Various experts have commented on the viability of greater refining in Peru. Víctor Gobitz, general manager of private mining company Minera Buenaventura and president of the Institute of Peruvian Mining Engineers, said the country may be able to compete effectively only in certain niche areas of the refining business, such as dealing with copper with high arsenic or fluor content. He felt Peru had a comparative advantage in these areas because of its geographic location, low energy costs and qualified labour.

Rodrigo Prialé, president of the Third Congress of International Mine Management and general manager of Gerens, has suggested that it will be hard to find new investors for the La Oroya complex for two reasons: the high environmental standards and the fact that, apart from some local copper supplies, it is not an integrated operation, and would need to source reliable supplies of zinc and lead. Instead, Prialé suggested that investing in a new refinery in a region such as Arequipa, might be more attractive given the location of the country’s main mines and existing infrastructure. He noted that southern mines, such as Las Bambas, Antapaccay, Constancia and Cerro Verde, will be producing roughly 45% of Peru’s total copper output. Smelting and refining copper concentrates from those mines in Arequipa could prove to be a profitable investment.

Some industry analysts said there were major obstacles to increased refining in Peru. Carlos Rojas, CEO of Andino Asset Management, noted that with many Chinese refineries currently working at half their capacity, any new refineries in Peru would have to handle major volumes to achieve economies of scale. “It is a question of scale. We would have to process almost all of Peru’s current production of mineral ore to compete with the Chinese refineries in terms of efficiency and profitability,” he said. Another analyst, Sebastián Cruz of Kallpa Securities, argued that Peru’s major mining companies are highly profitable in their core business of exporting mineral concentrates, and therefore might hold back from entering a potentially more competitive and less profitable sector such as refining.

However, some were more positive about the idea. Gustavo Saavedra, president of the National Society of Engineers, said the government should be issuing tenders for the construction of up to five refineries in the country. He argued that countries like Germany and Japan operate their own copper refineries very profitably while not mining any indigenous copper at all.

Models To Follow

A related question concerns the proportion of refined and processed metals to be exported or retained in Peru for use by the country’s emerging metalworking sector. The Peruvian Exporters’ Association (Asociación de Exportadores, ADEX) suggests that the government consider the Chilean and Mexican models for meeting domestic metal demand.

In Chile the country’s copper commission (Comisión Chilena del Cobre, Cochilco) assesses local demand for refined copper and sets a quota for the refineries, determining how much output should be exported and how much should be used at home. Cochilco holds regular auctions of refined copper for domestic consumption, using the international price as its baseline. Mexico uses a similar model, but fixes the price of some refined metals below international levels, as part of a policy to promote the development of the local metal processing industry. According to Juan Varilas, president of ADEX, there is an argument in favour of similar intervention by the Peruvian state to kick-start local refining and metalworking, breaking out of the cycle of small-scale production and diseconomies of scale.

State Meetings

Peru’s interest in refining has been expressed in two high-level meetings between President Kuczynski and the Chinese government. In September 2016 Kuczynski visited Beijing and met his counterpart President Xi Jinping. On that visit, Kuczynski met a number of Chinese business leaders and invited them to invest in Peruvian mining and refineries.

Vice-president Martín Vizcarra said that if the Southern Peruvian Gas Pipeline is completed, any future refineries established in the south of the country near some of the largest mines would have access to cheap and clean energy. In November 2016 there was a second meeting when President Xi visited Lima for a summit of the APEC countries. Both governments expressed their desire to increase trade and business links.