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WRAPUP 2-Chile domestic demand firm despite manufacturing slump

by on July 30, 2012 7:33 pm GMT
 

Mon Jul 30, 2012 3:33pm EDT

* Manufacturing falls 5.5 pct in June from May
    * Index rises smaller-than-forecast 1.1 pct year-over-year
    * Key rate seen held at 5.0 pct in August
    * Domestic demand remains firm


    By Moises Avila and Antonio De la Jara
    SANTIAGO, July 30 (Reuters) - Manufacturing production fell
sharply in June from the previous month in Chile's
export-dependent economy, but domestic demand remained firm,
reinforcing expectations the central bank will keep interest
rates steady in the near-term.
    Manufacturing production, a newly created index
broadly comparable with the prior industrial output index, slid
5.5 percent in June from May and was up from a year earlier by
only 1.1 percent, the government said on Monday.   
    The year-on-year growth in manufacturing was only a third of
the 3.4 percent rate expected by nine analysts polled by
Reuters. 
    The readings in part looked lower because of a high base of
comparison set last year, when industries were recovering
strongly from the devastation of a February 2010 earthquake, the
INE national statistics agency said. 
    The manufacturing slump was felt more in sectors that rely
on exports to slowing economies in Europe and Asia than in
industries that enjoy stable domestic demand, experts said.
    "Export related sectors, such as wood pulp and chemical
products impacted negatively on (manufacturing), but contagion
from the external crisis isn't that evident because other
products that are also exported, like salmon and wine, grew,"
said Alejandro Puente, chief economist at brokerage BBVA in
Santiago.
    "With this scenario and with growth in retail sales and
domestic demand it's difficult to know where interest rates are
heading, but we believe the central bank should keep waiting for
more information and we expect rates to be held again in
August," he added.
    Retail sales rose 8.9 percent in June from a year earlier,
the INE said, a marked departure from a slowdown seen since
March.
    Also underscoring firm domestic demand, Chile's budget
director said the government posted a first-half effective
fiscal surplus of 2.0 percent of gross domestic product thanks
to a higher tax take from companies outside the key mining
sector. 
    The IMACEC economic activity index is seen
rising 5.3 percent in June on the back of brisk demand,
according to the median estimate of 12 analysts and economists
surveyed by Reuters.  
 
    
    The central bank this month kept its key interest rate at
5.0 percent for a sixth consecutive month, as expected. Minutes
of the July 12 meeting, released on Monday, showed that holding
rates steady was a unanimous decision by policy makers.
    "Holding the key interest rate was justified because its
current level is within a neutral range, while the economy's
output gaps are closed and inflation is around target, which
gives time and flexibility to wait and gather information about
the evolution of the external scenario and its impact on the
Chilean economy," the minutes said.  
    The rate remains within a neutral range,
according to the minutes.
    The consumer price index unexpectedly turned negative in
June, its first monthly decline since August 2010, with CPI
 posting a surprise 0.3 percent drop as housing,
water, electricity, fuel and transport costs retreated.
 
    Inflation in the 12 months to June slowed to 2.7 percent,
retreating below the 3.0 percent midpoint of the central bank's
inflation target.
    "We expect the central bank to remain on hold in the very
near term," Alberto Ramos, economist at Goldman Sachs, said in a
note to clients.
    "Lingering concerns about the global macro-financial
backdrop, recent better-than-expected inflation prints ... and
well-aligned inflation expectations give the central bank extra
degrees of freedom to eventually consider easing despite still
trend-like domestic demand growth dynamics and a tight labor
market," Ramos added.
    Chile, which provides about one-third of the world's copper,
produced 452,690 tonnes of the red metal in June,
up 5.6 percent from the same month a year earlier, the INE also
reported on Monday. But Copper output in the world's top
producer slipped 1.2 percent compared with May. 
    "Among the reasons that explain the (year-on-year) rise are
a greater copper recovery due to an increase in material to
process and a rise in the production of deposits that began
operations in 2011," the INE statistics agency said.  
    In the first half of the year, Chile produced 2.64 million
tonnes of copper, up 2.5 percent from the same period last year.
 
    Anglo American's disputed Los Bronces mine is being
ramped up and is expected to produce a peak of 490,000 tonnes
annually, positioning itself as the world's No. 5 copper mine.
    Antofagasta Minerals' Esperanza mine, a flagship
growth project that faced problems in its production build-up
last year, was inaugurated in early 2011.
    Chile's production of molybdenum, a metal used to strengthen
steel, plummeted 30.4 percent to 2,471 tonnes in June from the
same month last year due to dwindling ore grades, the INE added.
    Molybdenum output for the January to June period dropped
19.9 percent to 15,473 tonnes versus the same period a year ago.