How Peru Could Survive The End Of The Commodities Supercycle – by David Gacs (Business Insider – January 7, 2014)

With a mere 30 million people living within its borders, Peru is only slightly larger than the state of Texas. But as the world’s third-largest producer of both copper and zinc and its sixth-largest source of gold, the country enjoyed an outsized benefit from a cresting wave in global commodities markets over the last decade. Between 2002 and 2012, as the price of most commodities soared, Peru’s average annual GDP growth rate was 6.4 percent. As recently as 2010, the Latin American country’s GDP expanded by 8.8 percent, making it one of the fastest-growing economies in the world.

But the commodities “supercycle” ended in 2013 and seems set to retreat further in the rear-view mirror. The average price of gold in 2012 was $1,699 an ounce, but Credit Suisse commodities analysts say the 2013 year-end average was some 16 percent lower at $1,421 per ounce. Copper prices have fallen sharply too, from $7,971 a ton on average in 2012 to $7,349 this year – a 7.8 percent drop. It’s been quite the precipitous decline: Copper was selling for more than $9,000 a ton in 2010. Mining investment in another major commodities exporter, Australia, has already peaked, prompting a great deal of discussion about how to rebalance the economy.

But though Peru, too, needs to think about diversifying its economy, the situation is different – not least because there is still plenty of mining investment in the pipeline. Credit Suisse analysts and other observers believe resource-rich Peru’s strong domestic economy and healthy public finances should ensure a relatively soft landing.

Credit Suisse analyst Juan Lorenzo Maldonado pegs Peru’s 2013 GDP growth at 5.1 percent, down from 6.3 percent in 2012. That’s in line with the Peruvian central bank’s forecast, which was lowered from a previous estimate of 5.5 percent in December But he expects stronger, not weaker, growth in 2014 (up 5.5 percent) and again in 2015 (5.8 percent). That’s a comedown from recent years, but still head and shoulders above most of its neighbors. Credit Suisse analysts project Brazil, for example, will grow by a comparatively anemic 3 percent in 2014, up from just 2.4 percent in 2013.

Commodity-hungry China, which accounted for about 17 percent of the Andean nation’s total foreign trade in 2012, has been key to Peru’s recent economic success. China spent $7.85 billion on Peruvian goods in 2012 alone, with $4.45 billion of the total going toward copper purchases and another $2.15 billion to other metals. But with China growing more slowly than it once did—after growing at 9.2 percent in 2011 and 7.7 percent in 2012, the world’s second-largest economy coasted in 2013, expanding by just 7.6 percent—Chinese import demand has flagged as well.

Total Peruvian exports to China fell 7.5 percent in the first 10 months of 2013 compared to the same period in 2012. As lower gold and copper prices translate into lower export earnings, Peru’s current account deficit hit an estimated 5 percent of GDP in 2013 and looks set to clock in at a similar 4.7 percent in 2014. Even at the height of the financial crisis in 2008, the country’s current account deficit was just 4.2 percent.

That’s the bad news. The good news: despite those falling commodities prices, mining companies are planning – at least as of now – to stay busy in Peru. In August, the Peruvian Ministry of Mining valued the investment pipeline of 50 major projects that are either currently underway or awaiting approval at $57.4 billion –more than one-fourth of this year’s estimated nominal GDP. About $36 billion are copper projects, while gold and iron ore ventures account for some $7 billion apiece.

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