SANTIAGO, June 27 (Xinhua) -- The price of copper plunged in recent weeks to its lowest level in 16 months as a result of the volatility of the U.S. dollar and the instability of the markets, said experts in Chile, the world's top producer of the red metal.
The Chilean Copper Commission (Cochilco) reported Friday that the price of copper stood at 375.6 dollars per pound, a 9-percent drop compared to the previous week.
According to Director of the School of International Business Engineering at Chile's University of Valparaiso Lisardo Gomez Bernal, the sharp drop in copper price is due to several factors, including the higher interest rate in the United States and the high volatility of currencies, mainly the dollar.
"The most important factor is the increase in the interest rate by the United States Federal Reserve (Fed). The interest rate is the price of money. If the Fed rate goes up, the price of the dollar goes up," said Gomez.
"Paying in more expensive dollars implies a drop in the demand for copper," he said.
In addition, said Gomez, "there is fear of a recession, mainly in the U.S. economy, which also implies a contraction in global economic activity" and a resulting decline in copper demand.
The global "increase in public spending" to counter the dampening economic effects of the COVID-19 pandemic sparked a series of reactions, whose impact is beginning to be felt, he noted.
"Historically high levels of inflation began to be unleashed ... raising the (interest) rate, which slows down investment, decreases jobs and cuts back consumption: recession generating a state of stagflation," said Gomez.
For Chile, the drop in the price of copper means less revenue, he said.
"Oddly," the price was not even buoyed by last week's brief strike by the Federation of Copper Workers, which gathers the workers of the state-owned National Copper Corporation (Codelco), the world's leading copper producer, said Gomez.
"A measure of this nature would have pushed up the price in normal times," he stressed.
Arcadio Cerda, a member of the Faculty of Economics and Business at Chile's University of Talca, said the uncertainty generated by the possibility of a worldwide recession would lead to a lower demand for copper in the future, which has a direct negative impact on its price.
But "this situation, with a strong initial impact, could ease depending on the expectations of economic agents about the future of world economic growth," Cerda told Xinhua.
He agreed the fall in the price of copper affects Chile's coffers, since it is the country's main export product, reducing the amount of money available to fund the various welfare programs the government plans to implement.
"A lower price of copper further affects the weakened economic situation of some copper companies in the state, which are already generating losses," Cerda said.
On Wednesday, the Chilean government announced a plan to reinvest 30 percent of the profits generated by Codelco from 2021 to 2024 to finance its projects.
Chilean Finance Minister Mario Marcel said the idea is to strengthen Codelco and ensure the sustainability of its contribution to the country. ■