Commodities, Currencies, Frontier Markets, Metals

Copper Proves A Rocky Road For Zambia

By John Filitz

Zambia CopperThe town of Luanshya, situated on Zambia’s copperbelt, serves as a bellwether for the country’s economy. However, political developments in Zambia are causing significant uncertainties in the copper industry.

With a sustained annual GDP growth rate above 6%, driven primarily by copper, the past decade has been tumultuous for Luanshya. Founded as a service town for the country’s first copper mine, Roan Antelope Copper Mines Ltd in 1927, the town in the northwest of the country has through the years seen significant episodes of copper prices driving booms and busts.

Commodity Volatility

The first such episode occurred in the early 1930s, reducing an initial workforce of 31 941 at the peak of the 1930 boom to just 6 677 by the end of 1932. The second and possibly the most protracted collapse occurred during the post-liberation period of state ownership. Starting in 1969 and morphing into full-scale nationalization in the 1970s, the period of culminated in the late 1990s with increasingly inefficient mines under state control, succumbing to a sustained slump in the copper price.

Ultimately, by 1987 Zambia was forced undertake painful structural adjustment as part of a World Bank and IMF bailout. The severity of the crisis is demonstrated by the fact that in the period 1974-1994 saw per capita income decline by over 50%, resulting in Zambia becoming the 25th poorest nation in the world.

InternationalCouncilofMetalsandMining

Source: International Council of Metals and Mining

Resilience of Copper

Copper mining continues to play a dominant role in the Zambian economy. China’s spectacular rise has since 2004 resulted in the country witnessing the longest and most prolific growth phase to date. Annual GDP growth averaged 6.5% in the period of 2004-2016.

Copperprise

For the town of Luanshya, fortunes too had changed. After the failed privatization to Indian investment group Binani in 1997 and subsequent forfeiture to the state, it was sold to the Swiss-based International Mineral Resources and the Bein Stein Group Resources of Israel in 2002.

The 2008 financial crash cut short this revival, forcing it into closure once again and laying off its 2500 workers. The subsequent acquisition of the mine in 2009 by the Chinese Nonferrous Metals Company (CNMC) on the back of a commodities bull run, revived hope that southern Africa’s oldest copper mine could be salvaged. CNMC reopened the mine in 2010 and undertook a modernization program, but has since, along with other copper mine operators in Zambia, faced strong domestic and international opposition.

Diminishing Returns

With 60% of its population living in poverty, and with copper mining accounting for between 65-80% of its total exports and foreign exchange earnings, the risks of a path dependent economy is evident for Zambia. Continued commodity price volatility, seeing the price of copper drop from a near all-time high of USD$10 000 per ton in February 2011 to $4 797 per ton as of April 2016, has drawn the viability of many of Zambia’s copper mines into question.

thealchemist

Source: The Alchemist

Perfect Storm

Zambia’s seeming inability to break the resource curse is demonstrated by yet another missed opportunity to utilize dividends during the boom years. This is demonstrated by its failure to adequately predict electricity demand resulting in a period of protracted electricity shortfall. The shortfall in excess of 500MW is in part explained by the country facing a drought of historic proportions, impacting its hydroelectric power stations of Kafue Gorge, Victoria Falls and Kariba Dam.

The tough operating environment was made worse by an ill-timed proposal in early 2015 to increase mineral taxes from 6% to 20% for open cast mines and 8% for underground mines.

At Luanshya, a tense standoff followed between CNMC and the government in late 2015, with threats of a mining license withdrawal, over the decision to place  1600 staff on forced leave. In response, the tax proposals were flatly rejected by the mining industry, threatening a cessation of all mining activity, including proposed and much-needed plant optimization. Succumbing to pressure, the government conceded with a revised variable tax of between 3-9%. There are on-going discussions for a preferential copper tax. It is within this setting that over 10 000 mining jobs were lost in 2015.

Between a Rock and a Strong Currency

The Zambian kwacha’s historical strength against the US dollar brings misplaced optimism. A rally in early 2016 from a high of 13.89 to 9.76 to USD is according to the World Bank not an indication of a dynamic economy, but rather as a result of a stagnation in economic activity, including private consumption. With CPI averaging over 10% per year in the period 2006-2016, with a high of 22% in 2016, further diminishes incentives for investment outside of the mining sector.

Zambian-kwacha

Zambian kwacha to the USD$

Elections 2016: Rising Expectations and the Need for Visionary Leadership

Given the recent unprecedented sustained boom in Zambia driven by copper, and the untimely death of charismatic President Michael Sata in October 2014 – winning on an anti-corruption and anti-poverty ticket – many citizens were hopeful for change. The current President Edgar Lungu is set to serve out the remainder of Sata’s term until the upcoming general elections this August.

In a post copper boom Zambia, the next president will need to employ a range of monetary, fiscal policy and non-monetary instruments and measures to attract foreign direct investment. This will include careful administering of the recently approved IMF bailout package of $1 billion to deal with trade challenges and high inflation in the commodity down-cycle.

Rising tensions, erupting in xenophobic protests in Lusaka against foreign business owners on 18th of April 2016, and allegations of widespread corruption will be another set of challenges for the next president. The failure to address systemic corruption has contributed to Norway’s decision to close down its embassy in Zambia, citing a lack of political will by Zambian authorities.

For the town of Luanshya and Zambia’s copper mining sector, there is hope for a gradual recovery. This is underpinned by much-needed optimization plans and key concessions in the mining tax code. Addressing electricity constraints will also be crucial.

The task for the next president is arduous and historically unprecedented: to shift the Zambian economy’s trajectory to one that is more inclusive, diversified and sustainable. This in a post-boom context of raised expectations and depressed global demand for copper. The one thing for certain is that Zambia’s future in the medium-to-long term remains inextricably linked to copper.


Courtesy of Global Risk Insights © 2016

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