Due to the drop in metals prices, Peru is now probably a net importer

This little post gives a general ballpark idea of some cold, unpleasant realities in the pipeline for Peru (and for LatAm in general):

1) Despite propaganda to the contrary, Peru is still heavily dependent on metals exports to maintain its growing economy.

2) The recent drop in world metals prices will hurt Peru badly.

3) Peru is now probably running a trade deficit with the rest of the world, as its demand for imports to fuel its growth now outweighs its exports.

Here we go with a couple of charts. This first one shows Peru's exports Jan 2006 to August 2008.

(click to enlarge)

As we can see, although non-mining exports have increased in the period the dominant sector is still mining. In August 2008, for example, metals exports accounted for U$1592.27m of the U$2943.2m in total exports (54%). You'll also notice that at the end of the chart I've made some estimations for October 2008, and it looks likely that it will be the first time in a long time that mining exports are lower than their non-mining counterparts.

This is because the prices for metals have slumped since August 2008 (as anyone holding mining stocks will quickly tell you). To give you some idea, here is a little table that shows how much each of the "big five" metals made in export revenues for Peru in August 2008, and then on the right hand side we apply October 2008 prices to the August 2008 production levels (by which I assume copper at U$1.80/lb, gold at U$730/oz, silver at U$9/oz, lead at U$0.50/lb and zinc at U$0.50/lb).

	Aug Exports (U$m)	Aug Prod at Oct prices
cu	721.17	452.65
au	432.35	376.48
ag	48.31	29.43
pb	76.05	40.64
zn	113.49	149.80
TOTAL	1391.37	1049.00
Difference = U$342.37m

The result is that for the same amount of production, Peru loses over U$342m in revenues simply due to the spot price changes. That's a theoretical 12% of the country's export revenue gone up in smoke, people. That's a lot.

It also means that Peru's trade balance is likely negative. Here's the monthly trade balance 2006 to Aug 2008, and you'll note that the average monthly trade surplue for 2008 is all but gobbled up by the projected deficit from just four major metals exports mentioned above.

(click to enlarge)

Forget iron ore, molybdenum, asparagus, fishmeal, mangoes, and all the other things Peru sells to the world; just the price slumps in copper, gold silver and lead are nearly enough to put Peru's accounts into the red.

The bottom line is that financial crisis is going to hit everyone. Peru is the example in this post, but consider that 60% of Chile's export FOB is just in copper and it doesn't need a brain surgeon's intellect to work out the rest. This is true for Argentina's soya. It's true for Venezuela's oil. It's true for Brazil's multiple soft and hard commodities. This slowdown will make no exception for left-wing or right-wing politics. The simple fact is that if these prices stay where they are, ALL of South America is in the toilet.

Last week President Twobreakfasts announced to his people that Peru would grow 7% in 2009. I have a sneaky suspicion that he's being a touch optimistic about things. What do you say?