How social unrest affects mining in Peru, according to JPMorgan

RIO DE JANEIRO, BRAZIL – JPMorgan Latin America economist Diego Pereira has assessed and shared the potential economic and political implications of the recent social unrest in Peru, which led the central government to institute a curfew on April 5 in Lima and several other areas following protests sparked by the rising costs of fuel, fertilizer, among other goods.

While there were no reports of significant mining operations being affected by these protests, and President Pedro Castillo lifted the curfew before the end of the day, JPMorgan believes that this episode is likely to increase country risk premiums for mining companies operating in Peru and underscores its thesis that mining companies with exposure to low-risk jurisdictions can earn an equity premium.

Among Europe, the Middle East, and Africa (EMEA) miners, Hochschild (with an overweight recommendation) is the most exposed to Peru, with about 90% of earnings derived from the country.

However, this will decrease to around 50% by 2025 once the Posse greenfield project in Brazil is commissioned. Among diversified miners, Anglo American (neutral recommendation) has the largest exposure to Peru, deriving 20% of 2023 earnings from the country, while the group’s US$5.5 billion flagship Quellaveco copper greenfield project is scheduled to come online this year (full year of earnings contribution in 2023). The bank also estimates that Glencore (overweight) earns 10% of the country’s earnings.

HISTORY OF RECENT SOCIAL UNREST IN PERU

Rising social tensions associated with the national transport strike forced Castillo’s government to issue curfews on Tuesday, April 5, in Lima and Callao to prevent the protests from spreading.

The strikes began the previous week in Junin (support base of the ruling Peru Libre party), with the increase in gasoline prices being the main catalyst. However, the central problems related to formal versus informal transport services are long-standing.

The situation boiled over in the center of the country through protests by heavy load carriers, joined by peasants from Junin, and at the end of the week, thousands of people took to the streets of Huancayo to protest against the increase in fuel, the price of fertilizers, and the high cost of transporting products. For several hours there were confrontations with the police, looting, and attacks on public and private property.

GOVERNMENT REACTION

In response to the popular demonstrations, the government reacted during the weekend by announcing a 90% exemption of ISC on gasoline and a 10% increase in minimum wages.

The tax exemption for certain gasoline should lower wholesale prices by about 20% and will be in force until June 30. However, the same decree allows an extension for a maximum of six additional months after evaluating the evolution of the international price of oil and its impact on domestic prices. In terms of fiscal sacrifice, it amounts to S/ 250 million per month.

But the announcements did not go far enough to appease the demands, which extended to other regions, including metropolitan Lima. Road and highway blockades, clashes with the police, and looting were the focus of attention.

POSSIBLE ECONOMIC AND POLITICAL IMPLICATIONS

In this context, President Castillo and his cabinet declared a curfew in Lima on Tuesday, April 5, to stop the protests.

“In our opinion, the measure seems disproportionate and may aggravate the overall situation. First, the economic cost of imposing such a curfew is about ten times greater than the cost of the transport strike,” JPMorgan notes.

“Second, it is unclear whether the measure will be sufficient to quell tensions, as they have spread to all regions of the country and demands have transcended gasoline prices (e.g., transport unions are demanding their formalization to end blockades),” it adds.

In addition, the bank estimates that other sectors may find incentives to express their frustration with the higher cost of living, particularly in food prices, which is exacerbated by the transportation strikes and the closing of markets due to the curfew.

“Finally, the government’s decision to implement a curfew, which goes against constitutional rights, will likely affect its low popularity while inflaming its relationship with Congress,” he concluded.