Peru Keeps Growing and Growing

It’s all in the mine
Ask anybody what Peru is famous for, and the replies you are most likely to get are: “it’s where you’ll find the ancient city of Machu Picchu high up in the mountains”, or “it’s a country that suffers from terrible earthquakes and landslides”, or “isn’t it where the potato was developed?” The answers to which are, of course, yes, and in case you are unsure, there are 5000 varieties of potato in the country! Perhaps not so well known is that the pre-Inca cultures had an amazing knowledge and technology, from cranial surgery to advanced architecture. Mining also had its beginnings during pre-Incan times, and much of its transformation today is due to the booming prices of the country’s mineral exports. As Tony D’Altorio, of Investment U Research comments in a recent article, “Global mining companies can’t seem to get enough of gold, copper and the like, so they are planning US$41 billion in investments over the next decade. That should quadruple Peru’s copper exports, placing it neck and neck with Chile, currently the world’s biggest producer”. In November 2010, news came through that the Canadian mining company Norsemont will begin to mine copper-gold-molybdenum porphyry in the first quarter of this year, while another Canadian company, Panoro has begun an exploration programme at Cotabambas in southern Peru for mining copper-gold. In December the Estrella Gold Corporation announced a JV with Cliffs Natural Resources Exploration for exploration and potential development of iron oxide, copper-gold deposits.

The Ministry of Energy and Mines reported that between January and August 2010 mineral product exports totalled US$13.4 billion, which was 39.6% up on the same period in 2009. The country’s copper exports to China, the US, Canada and Japan amounted to US$5.3 billion, a 67% rise on the previous year. The free trade agreements with countries such as the US and China have helped trade to triple during the past ten years. In addition there are negotiations with the European Union and Japan. In November 2010, the Peruvian President, Alan Garcia and South Korean President Lee Myung-bak signed a free trade agreement that, in the words of Garcia, “...is a highly comprehensive free trade pact… it will offer great opportunities for companies in the auto industry”. He said the FTA would greatly boost the two countries’ cooperation in petrochemical and refinery businesses and gas development projects. “It was highly important that South Korean companies invest in Peru’s gas development projects.” The country started exporting its natural gas this year and is seeking foreign investment to build more gas pipelines.

Easy to grow, difficult to move
Of equal importance is the agricultural industry. The country exports the world’s largest amount of asparagus, produces specialty coffees, paprika, organic bananas, and cultivates cocoa, sugar, artichokes, avocados and mangos, and has now increased the export of designer clothes. There are indications that Peru is set to increase annual agricultural produce exports to some US$10 billion within 10 years, up from US$3 billion last year. Growing demand from China, Vietnam and Russia may allow Peru to more than triple exports of fruits and vegetables by 2020. Jose Chlimper, CEO of Corporacion Drokasa SA, Peru’s top asparagus exporter and the largest pharmaceutical group, said that the country must improve its roads, seaports and airports to reduce bottlenecks that currently hinder exports. Chlimper, a former agricultural minister and a director of the central bank since 2006 remarked that during the past decade the country had not advanced or improved its infrastructure programme. Relief will surely arrive with the completion of the Interoceanic Highway, the mega international, transcontinental highway that connects Brazil’s Atlantic ports with Peru’s Pacific ones. Last month, President Garcia inaugurated a 310 km section of the southern corridor in the Arequipa region. The US$38.4 million project is expected to benefit more than 1 million people in the region. The entire Interoceanic project is expected to be completed this year. One company that will certainly be using the highway will be Portugal’s biggest construction company, Mota-Engil SGPS SA. It has indicated that it is looking at investing in crude oil and soybean storage facilities at its northern Peruvian port to handle Brazilian exports. The company is currently investing US$127 million at the port of Paita to triple capacity to 300 000 containers a year in a move to double its local sales to US$140 million this year, with the construction of roads and copper mining projects for Anglo American Pic, Xstrata Pic and Aluminium Corp of China Ltd. Last month, the company’s country manager, Pedro Costa said, “There’s a big focus on copper and a lot of investment in the oil industry in the north. We’ll potentiate Paita with all the produce coming from western Brazil, and make good use of the Interoceanic Highway.”

Construction looking good
Last year, Peru’s public and private construction industry was calculated to have expanded by 18%, being one of the main drivers of the country’s 7.8% economic growth in 2010. Although not expected to attain the same rate this year, it could still reach double figures. Building investments in and around Lima should increase by over US$3 billion. The Peruvian Chamber of Construction (Capeco) says that housing represents nearly half of the country’s construction activity. However, it also points out that there is a shortage of about 2 million homes, while in the Lima area, there is a shortage of around 400 000. Capeco states that there should not be a problem meeting supply needs, although rapidly expanding domestic production of cement, steel, bricks and other materials will probably be complemented by imports. However there are various problems in the housing and construction sectors. These include land shortages (mainly in Lima), increasing housing deficit and the high level of brick making that uses child labour. Other factors include water shortages, public transport issues and the length of time needed to obtain the necessary building permits.

Peru’s cement industry is currently being boosted by a number of expansions and investments. In April 2010, Cemex announced that it would be investing US$100 million in the Blue Rock Cement Holdings investment fund towards the construction of a new 1 million tpa cement plant. Then in the following month, Cementos Lima said that it was planning to invest US$180 million in the expansion of the Atocongo plant, near Lima. Cemento Andino is currently involved in installing a new kiln line at its Condorcocha plant, while Cementos Yura is installing a new kiln line in southern Peru. Further investments up to 2016 are expected to be announced. Cement consumption this year is likely to increase by 5% to about 8.5 million tpa.

Turning left again?
Politics will play an important part this year with the build up to the country’s Presidential election in April. In recent years there have been a number of left-wing victories throughout Latin America, but not in Peru. It has taken many years for the country to recover from the terrorist atrocities inflicted by the Maoist Shining path and Marxist Túpac Amaru guerrillas in the 1980s and 1990s, coupled with the left’s economic agenda that resulted in a slump and hyperinflation between 1985 and 1990, under (at that time) the centre-left president Alan Garcia, yes we are talking about the same Alan Garcia, the country’s current president who made a dramatic comeback in 1996 having fallen from favour 16 years previously, and who was said “to have re-invented himself as a neoconservative”. On I January, Susana Villáran is being sworn in as Lima’s new mayor. Not only will she be the capital’s first female mayor, she is a moderate left-wing politician who the local press reports “is being identified as part of the modern, liberal left, with deep roots in social concerns, while the alliance she represents, Social Force (SF), is working to present an image of central political force removed from radical ideologies”. The challenges she faces are said to be enormous, but she has promised clean and efficient municipal government. If in the few months before the Presidential election she is seen to be seriously carrying out her promises and she can rally the left after 26 years out of office, then President Garcia’s American Popular Revolutionary Alliance (APRA) party might be in for a rough ride between now and election day.

In September 2010, the US Forbes magazine listed Chile, Peru and Colombia as the best countries for business taking into consideration several indexes: GDP growth, GDP/capita, trade balance, population and budget affairs. The magazine looked at 129 countries. When discussing Peru, it pointed out that the country’s rapid expansion has helped to reduce the national poverty rate by about 15% since 2002, but unemployment remains high, and away from the capital, Lima, there is still much poverty in the villages and families struggle to eek out a living. Despite macroeconomic performance, overdependence on minerals and metals subjects the economy to fluctuations in world prices, and this together with poor infrastructure precludes the spread of growth to Peru’s non-coastal areas. Not all Peruvians have shared in the benefits of growth… clearly a major challenge that awaits whoever wins the election in April.

Author:
Paul Maxwell-Cook, Managing Editor, World Cement

Read the article online at: https://www.worldcement.com/the-americas/01022011/reginoanl_insight_into_peruvian_economy/