You are currently browsing the category archive for the ‘Copper’ category.

From this October’s Business Diary Botswana:

Zambian President-elect Michael Sata’s recent victory over former President Rupiah Banda and his ruling Movement for Multiparty Democracy (MMD) ended two decades of MMD power while concurrently creating a cloud of uncertainty not only for Zambia’s mining industry, which per the World Bank accounts for roughly 70 to 75 percent of the country’s export earnings (albeit only about 10 percent of its tax revenue), but also those supporters of Sata’s Patriotic Front (PF) party who, having been sold a seductive slogan of “more jobs, less taxes and more money in your pockets” may be in for a rude awakening.  Even prior to the hotly contested race, which culminated in a peaceful transfer on September 23rd during an inauguration ceremony in Lusaka, some pundits opined that the 74-year old Sata (formerly a minister in Kenneth Kaunda’s United National Independence Party which ran Zambia from independence in 1964 until its defeat in 1991, at which point he joined the MMD for its first decade of governance) would in practice stray from the provocative, populist platform he so ardently promulgated.  Per The Economist, for instance, in reality “the policies of [Messers Banda and Sanda] look much the same”, an increasingly popular stance among observers predicated not only on perception but also an acknowledgement of the Zambian economy’s precarious reality—namely the vulnerability of its balance of payments to copper prices (see copper spot’s technical analysis, inset).

The lion’s share of Sata’s campaign gusto centered around the premise of redressing the country’s chronic economic imbalance, a pitiful phenomenon whereby one of the continent’s historically richest countries, previously known as Northern Rhodesia while under British Rule until 1964, ultimately became one of the poorest in the following decades “largely as a result of nationalization, mismanagement, plummeting copper prices and soaring debt”.  And while burgeoning BRIC demand eventually provoked a newfound price paradigm for natural resources—most importantly for Zambia, China’s copper consumption grew from about 1.8 million metric tons in 2000 to nearly 5 million metric tons in 2008, trebling China’s share of global consumption in the process—“most Zambians have personally yet to enjoy their new-found prosperity [as] around two-thirds of them, mostly subsistence farmers, still live on less than $2 a day” (in fact, Zambia’s GDP per capita of USD1,300 is well below the median of USD2,960 for similarly rated countries, per S&P, a ratings agency).  Along with an aim to create more jobs and redistribute the country’s wealth, Sata thus vowed to revisit a 25 percent windfall tax on mining revenues that Banda had previously abolished in 2009.  In that interim, Sata reminded his base (a contingent built largely around metropolitan areas and particularly the legions of disenfranchised youth), copper prices had increased from around $3,000/ton to nearly $10,000 to the benefit primarily of Chinese-owned firms, many of whom it is alleged routinely flout domestic labor laws (to say nothing of at least two purported criminal cases of protesting employees being fired upon by their superiors) while paying “slave wages” with Banda’s implicit approval—a Faustian deal of sorts critics claim involved kickbacks.  Undeniably, China’s influence in the country runs deep.  As the Financial Times noted in January, not only have Chinese companies zeroed in on Zambia’s copper and coal reserves, but they have also staked a growing presence in manufacturing and agriculture.  To that end, the Zambian Development Agency reported this year that in a country with an annual gross domestic product of just $13bn, China alone has injected more than $1bn.  Yet the paradox of such largesse creates friction.  “The more we keep the Chinese out, the more we will stay impoverished,” lamented Sebastian Kopulande of the country’s International Trade and Investment Center.

Zeroing in on the mining sector and its role in a perceived larger sphere of corruption, Sata underscored the lack of transparency in the industry and the need for, at the bare minimum, enhanced audits in order for the Zambian Revenue Authority to more efficiently assess its tax owed.  Mounting evidence suggested, Sata stated, that under an industry practice known as “transfer pricing” (whereby subsidiaries of the same company were said to be trading with one another at “arm’s length” in order to theoretically shift profits more efficiently and thereby minimize tax liabilities) the bulk of Zambia’s copper exports, though destined for Switzerland (more than 85 percent of asset portfolios for sub-Saharan Africa pass through tax havens such as Switzerland, home to firms such as Glencore International AG, a leading integrated commodities producer and marketer) never actually arrived at the assumed destination, per Swiss customs data.  And according to one news report, a leaked memo authored by Grant Thornton, a consultancy, at the request of the Zambia Revenue Agency (ZRA) highlighted that the pricing structure for Swiss copper, though “remarkably similar to Zambia’s exported copper”, was nevertheless “six times higher than the funds Zambia received, facilitating a potential loss of some $11.4bn,” nearly the whole of national annual output.

Yet despite Sata’s initial pledge to tackle said opacity, many remain skeptical his ascendance will result in meaningful change given an ever-murky backdrop of slowing global growth and a violent commodity unwind triggered largely by China’s slowdown.  At September’s end, for instance, Shanghai’s Composite Index hit its lowest point since July 2nd, down more than 14 percent this quarter.  Meanwhile copper prices, which at the beginning of July stood “within striking distance of record highs” per The Wall Street Journal, slid by 25% in September alone, while Barclays Capital cut its copper price forecasts to reflect “weaker-than-expected economic activity during the second half of this year, as well as in 2012” (while admitting, however, that “the weak supply picture . . . should help to buffer the downside”).  With this in mind, many analysts do not expect Sata to rock the boat, so to speak, any more than necessary, if at all.  “The risk is that he is coming in at exactly the moment when global commodity prices may have just gone into reverse and we have seen before, including in Zambia, that when prices are falling it becomes much easier for investors to pressure the government to relax transparency,” noted Alex Cobham, chief policy adviser for UK-based charity Christian Aid.  In the meantime both industry and country-wide investors sit in lurch, given the metal’s importance to Zambia’s overall macro well-being.  Yet currency markets seem to suggest that a pragmatic outcome indeed looks most probable.  While the Kwacha fell from 4,810 to 5, 150/$USD during the week of, and immediately post-election, it has since largely recovered.  Moreover analysts point out that given Zambia’s purported mission to ultimately issue a USD500mn eurobond in order to finance infrastructure expenditure (mainly in the transport and energy sectors), it is likely to tread cautiously with the very industry it hopes to help it double copper production within 5 years, less international capital markets, already shaken by the recent global macro developments, become even more reticent.


Botswana Stock Exchange (BSE)-listed junior copper miner, African Copper, announced that it would restart its operations at the Mowana Mine near Dukwi–which it shelved back in January–upon receiving $41 million in funding from mining investment firm Zambia Copper Investments Ltd (ZCI). The firm also reported a pretax profit of 27.7 million pounds ($45.91 million), compared with a loss of 2.6 million pounds last year, for the six months ending June 30.

Copper prices dropped from US$7,000 per ton at the beginning of the third quarter of last year to US$3,000/ton by the end of that quarter. But copper prices have double this year, and according to Zijin Mining Group, China’s largest gold producer, “a recovering world economy and loosening bank credit will bolster copper prices in the second half of the year.” The estimation echoes that of GFMS, a precious metals consultancy, which opined on Thursday that global copper supply was expected to fall increasingly short of demand from next year, which should see prices rising every year to 2012:

“In the short term, copper prices were expected to soften, with inventories reported by the London Metal Exchange (LME) now rising after a surge in Chinese imports earlier in the year while Chinese industry rebuilt depleted stocks. But the increase in the surplus was likely to be brief and a market deficit would become evident early next year,” GFMS said.

Marc Faber, the Swiss-born, Thai-based investor known affectionately to many as “Dr. Doom,” remarked to Bloomberg recently that Mongolia is “torn between two lovers – China and Russia,” and is a country with huge potential. “The country is incredibly resource rich, another Saudi Arabia, next to the largest population in the world.”

Earlier this month Mongolia was approved for a $229.2 million stand-by loan from the imf to help the country stabilize its economy. “Mongolia has been severely affected by the global financial crisis through a sharp reduction in the prices of its main mineral exports, notably copper,” said IMF Deputy Managing Director and Acting Chairman Takatoshi Kato. “The authorities are committed to restoring macroeconomic stability and putting in place the conditions for strong and equitable growth.”

Today, however, copper prices rose to its highest in almost six months in London based on speculation that demand from China, the world’s largest buyer of the metal, would decrease inventories. According to Bloomberg, China’s 4 trillion-yuan ($590 billion) economic-stimulus plan spurred the first increase in manufacturing in six months and a sixfold surge in bank lending in March. “Only 2% of global copper reserves are in China, and they can still expect a strong industrial boom for the next couple of years,” remarked one analyst.

Mark Mobius, an emerging market fund manager for Templeton Asset Management, concurs. “We continue to see countries such as China form alliances to secure the long-term provisions of commodities,” Mobius said. “While in the short-term, the country will be impacted by the recent correction in commodity prices, a long-term uptrend in commodity prices will benefit Mongolia.” Additionally, the country has attracted roughly $1 billion of private equity in the past 24 months, according to Robert Lepsoe, its honorary consul.

Mongolia’s MSE Top 20 Index has fallen 8.7% this year, compared with the 5.8% drop in the MSCI Asia Pacific Index.

While Chile may be sitting on a nice surplus thanks to its saving of copper revenues, allowing it to pursue more aggressive fiscal measures in the current downtown, that’s not to suggest that the economy as a whole is in the clear. On the contrary, Chile’s National Statistics Institute (INE) reported late last week that industrial production fell a bigger-than-expected 3.7% in December from a year earlier, after a 5.7% fall in November, sending the peso down 1.16% soon after the data was released in late-week trading, touching 619.00/619.50 per dollar before paring losses somewhat. Copper mining also fell more than expected. Chile’s mining sector alone, which produces more than a third of the world’s copper, was down 8.9% in December and 4.2% in all of 2008. Concurrently, exports of molybdenum, a metal used to harden steel and another of Chile’s top exports, decreased as well.

Per Reuters:

The INE said the result was due to a lower pace of economic activity and of both domestic and external demand that hit output of base metals, wood products and non-metallic minerals. “The economic data shows a downward trend which affects sectors from mining to business. This is because the dependence on the external sector makes them vulnerable to variations seen on international markets,” INE added.

Analysts predict that the data will likely put pressure on the central bank to again cut interest rates aggressively at a policy meeting in February.

Two weeks ago reports from Lusaka warned of a “copper crisis” in Zambia, one of the world’s largest copper producers.  Since the beginning of the global credit crunch, prices for the metal, which is vital to both the electronics and buildings industries, have tumbled from record highs of nearly $9000/metric ton between 2005 and 2007, to roughly $3000/ton given both perceived and actual demand destruction.  The Mail & Guardian, a South African newspaper, reported that copper accounts for 80% of Zambia’s foreign earnings.  Earlier this year, in fact, the Zambian government projected more than $415-million in revenue from copper exports after revising mineral royalty taxes from a paltry 0.6% to the global standard of 3% and introducing a windfall tax triggered by the higher prices of copper.  That tax, however, now looks suspect, as a number of mines are cutting their workforces as revenues from foreign demand dip.  Luanshya Copper Mine (LCM) shut down its Chambishi Metals Plc unit, the country’s largest cobalt producer, and its Baluba copper mine soon after suspending a $354 million Mulyashi copper project, which had been due to start producing 60,000 tonnes of copper in 2010.  According to Reuters, the firm cited “operational difficulties arising from the global credit crunch” as reasons for the decision.

In spite of the dour headlines, some officials remains cautiously optimistic. Following the LCM shutdown, the government asked foreign mining firms to use profits that they made when copper prices were high to keep working in the downturn.  And according to Reuters, Bank of Zambia (BoZ) governor Caleb Fundanga “expressed optimism that copper prices would soon rebound,” though he admitted that” developments at LCM were a threat to the country’s copper industry.”  Moreover, in October Australia’s Equinox Minerals Ltd. announced that it signed a $80 million loan facility with Standard Chartered Bank Plc and Standard Bank to complete its Lumwana copper mine in Zambia, which recently started production.  The Lumwana mine is Africa’s largest open-pit copper mine.

Industry analysts posit that most copper mines have also slowed down expansions and upgrades following the global financial crisis.  This “supply destruction” will also lead to stagnant surpluses around the world that, once they wind down, will ultimately help right the price shift.  However, renewed growth in the industry will be dependent on a turnaround in demand (i.e., in China, the world’s largest user, where, according to Paul Harper’s excellent piece on this issue, demand for copper slowed to an estimated 9.8 percent in 2008 from 26 percent in 2007), and to that extent Fundanga said that Zambia remains optimistic that the global economy will stabilize soon and that demand for copper will begin to increase.  However, he also stressed that the government would seek to mitigate the effects of falling copper demand and prices by diversifying the economy to other sectors, such as agriculture and manufacturing of copper products.  Botswana, long dependent on diamonds, has been embracing this approach as well.


Blog Stats

  • 210,506 hits
July 2018
« Nov    

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 66 other followers

RSS Links

  • An error has occurred; the feed is probably down. Try again later.



Error: Twitter did not respond. Please wait a few minutes and refresh this page.