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The Economy in Chile

Due to anemic Canadian growth in the current economic environment and the foreseeable future, Sell Side Handbook is adopting Latin American coverage and will be discontinuing Canadian commentary

This was supposed to be an April Fools joke. It was not very funny.

Overview of Chilean Industry and Latin American Business Environment

After a strong recovery from military junta rule, Chile has become a liberal free market economy that is more developed than any other Latin American nation excluding Mexico and Brazil, but with far better growth prospects – although on a go forward basis Colombia and Macri-led Argentina may be more promising. There are more Chilean professors at many Canadian universities (especially Pacific Rim school UBC) than any other South American country. The education system is strong and infrastructure development is well planned.

While Brazil (which is in an economic trough as commodity prices are down and the corruption of the Workers Party regime unravels) and Venezuela (doing very poorly due to depressed oil prices and the kleptocratic Maduro government) are part of left-leaning trading bloc Mercosur, Chile is part of the pro-free trade Pacific Alliance that includes many prominent countries on the Pacific Rim and has a pre-existing free trade agreement (FTA) with China. The FTA has made Chile’s largest trading partner by far, given Chile’s abundance in copper and other industrial metals and agricultural history.

Chilean mining revenues are growing at a 9% year-over-year compound growth rate whereas food and drinks are growing at 20% per year. This is a big opportunity for Chile. Chilean exports are currently around 80 billion USD per annum. Within the approximately $15 billion in food exports from Chile, most of it is from produce (2/5ths). However, around 1/3 is seafood (fish, crabs, snails), and 3/4ths of the seafood are Chilean salmon. Also, seafood exports are growing substantially quicker than all other food export categories (including wine, grains and meat).

Mining Industry in Chile

Along with state-owned and private Chinese players, many Canadian giants have substantial operations in Chile, including Teck, Barrick Gold (Pascua-Lama gold mine) and Silver Wheaton (streaming operation with said mine). 60% of Chile’s exports are mining.

Chile, in terms of financial markets, is known as a copper producer. That said, with Chinese industrial growth slowing and a shift towards domestic consumption (cutback on government spending, tighter regulations on corruption and official expenses, interest rate liberalization and stronger financial prerequisites for loans), the demand for commodities falls and the demand for consumer goods grow.

Agriculture and Seafood in Chile

Many people do not know that around 20% of Chile’s exports (around $15 billion) are from food and drink (fish, Chilean wine), and with China’s demographic shift from manufacturing to domestic consumption this is sure to grow (Copper prices, $3,000 a metric ton during the financial crisis went to $11,000 during China’s boom post-crisis and has settled around half of that in the current slowdown and has stabilized).

Salmon is the largest fish export, and Chile is the #2 largest producer worldwide due to natural environment, relative labor advantage, and economies of scale. Salmon production is around 700,000 tons per annum, or a third of world production. Salmon is 2/3 of aquaculture in Chile while mussels make up the remaining third.

As with most industries, a few players dominate the market. AquaChile, Agrosuper, and Multiexport Foods. AquaChile is a pure play fish producer.

Chile is the 9th largest fish producer in the world and 2nd in South and Central America after Peru. China is #1 by far, with almost 40% of fish production. However, most of the fish production from Chile is cheap fish, like everywhere else, (sardines, anchovies, mackerel, things to put on pizza and to make fish oil). Salmon is only ~10% of production, but that is already enough to be the #2 salmon producer in the world after Norway, followed by the UK.

European salmon is currently the most popular globally, with the Scottish having the most famous recipes and Russians selling very expensive salmon. Chile will need a larger marketing campaign to drive demand. If the brand image can be equalized, Chilean salmon would be extremely competitive as they already have a large cost advantage (UK and Norwegian labour is extremely expensive).

Aquaculture (farming water dwelling species), is ideal in Chile for Salmon. South Chile has optimal temperatures for salmon, allowing salmon to grow quickly. The geography is segregated and has natural barriers to keep salmon easily managed.

Since the aforementioned mackerel and anchovies are excellent sources of fish feed, raising salmon healthily is easy both through domestic production and from large scale purchases from big players (usually from Scandinavia: Norway, Sweden, Denmark, Finland).

Vertical integration works well when the market is not saturated. Since Chile has such a strong presence in the salmon industry and benefits from scale, salmon producers control every part of the supply chain, ensuring there is less input volatility and ensures that a similar product is shipped every year. Accordingly, Chilean salmon is has consistent product quality.

Chilean salmon demand is currently from the EU and Japan, but the most lucrative market is China. Salmon consumption grows due to health, taste and prestige. Total salmon exports in Chile are around $3 billion.

Related Reading for Metals & Mining

Metals & MiningLithium Mining Primer · Cobalt Mining Primer · Valuation of Metals & Mining Companies Part III: Credit · Valuation of Metals & Mining Companies Part II: Multiples · Valuation of Metals & Mining Companies Part I: Introduction · Types of Mining Methods · Overview of Senior Gold Producers in Canada · Gold · Steel Industry Trends · Net Asset Value in Mining · Metals & Mining Streaming Primer · Precious Metals – Gold, Silver and PGM · Metals and Mining Trends · Metals & Mining Investment Banking · Coal Market Basics · The Economy in Chile · No pot of gold at the end of the rainbow · Metals & Mining ·
ex investment banking associate

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