By Fabian Cambero

SANTIAGO (Reuters) – Copper prices are likely to remain strong, but the spread of COVID-19 variants could spark fresh volatility in the market, the chairman of Chilean state miner Codelco, the world’s largest copper producer, told Reuters.

The price of copper has hit near decade highs this year and climbed earlier this week after Chile tightened its lockdown over a spike in COVID-19 infections, with several new variants circulating. Some analysts linked the price rise to concerns over supply.

“There is a lot of concern around the world about the health crisis worsening as a result of volatility generated by the new variants,” Juan Benavides told Reuters in a telephone interview, in his first comments on the potential impact of the second wave.

He said price fundamentals remained strong given growth in the United States, Southeast Asia and China. Prices dipped back on Wednesday on demand worries.

South America has become the epicenter of the pandemic. Brazil is battling a record COVID-19 death toll in part driven by the ‘P1’ variant, Argentina is seeing a rapid rise in cases and no. 2 copper producer Peru faces one of the world’s worst excess death tolls.

Benavides said he was confident Codelco could maintain operational continuity and financial performance, as it had during the first wave of the pandemic. COVID-19 hit Chile for the first time in March 2020.

Codelco will also push forward with its ongoing projects to revamp its aging mines, which Benavides said was “key to sustain production.” He said production would dip in 2022 and 2023 as older facilities were phased out and newer ones brought online, citing examples like the Rajo Inca project in the Atacama.

Benavides ruled out Codelco issuing new debt, saying a reduction in operating costs and the copper rally that saw the price in February shoot above $9,000 a tonne for the first time since 2011, had helped “significantly” bolster cash reserves.

That cash injection would allow it to finance its operations and meet debt repayments for 2021-2022, he said, adding that the company plans to improve productivity to help generate “very positive” cash flows to drive down its debt.

“Since we have that surplus, there is no need to turn to the market,” he said.

Copper miners have warned the high metal price could see unions push for lucrative contracts, raising costs or creating tense negotiations that risk strike action.

Codelco has pending labor discussions at its flagship El Teniente mine and its Andina project, where workers recently rejected an advance contract offer. Workers at Radomiro Tomic mine accepted a new contract offer last week.

Benavides said Codelco, which turns over all of its profits to the Chilean state, could not afford to be excessively generous.

“Raising costs today due to bad negotiations can mean mortgaging divisions for tomorrow, which is simply not viable,” he said.

Benavides also cautioned about the potential impact of legislation moving through Congress to prevent industrial activity near Chile’s bountiful glaciers.

Rule changes could impact development of Codelco mines, including Andina, which sits in a mountainous region near the capital Santiago and produced 3% of Chile’s total copper output last year.

(Reporting by Fabian Cambero; Writing by Aislinn Laing; Editing by Adam Jourdan and Rosalba O’Brien)