HEAVY METAL

Zambia 2017 | ENERGY & MINING | FOCUS: COPPER PRICES

The free fall in copper prices in the last several years left a significant impact on the Zambian economy, and as the market recovers, experts are urging the country not to abandon its diversification program.

Zambia flourished in the commodity boom of 2004-2011, with the economy reaping the benefits and growing an average of 7% YoY. Copper exports are Zambia's number one source of foreign exchange, and as receipts reduced starting from 2011, the local currency slipped into depression, which in turn increased inflation because the Zambian CPI features a large proportion of imported goods. The global surplus of copper, compounded with the difficulties related to production in Zambia, meant Zambian mines have been unable to match their counterparts in other parts of the world in providing cheaper copper. Furthermore, Zambia has been suffering from its own supply problems, as the Honorable Minister of Energy David Mabumba told TBY: “Between early 2015 and up to October 2016, Zambia's rainfall pattern was poor, and with low water levels in many of our hydro plants, generation capacity—of which 95% comes from water sources—fell almost 50%.” Or, as resident Director of Maamba Collieries, Ashwin Devineni, put it: “Mining companies in Zambia are not getting their due share of energy owing to the severe power deficit.” The global surplus then, compounded with the difficulties related to production in Zambia, meant Zambian mines have been unable to match their counterparts in other parts of the world in providing cheaper and cheaper copper.

In addition, high interest rates limit the amount of capital that can be borrowed by firms such as logistics and transportation companies, which deal directly and indirectly with the mining industry, looking to mitigate a forced downsizing of their operations.

However, since late 2016, there has been somewhat of a reversal of fortunes for commodity markets, particularly the copper industry. In 4Q2016, global copper prices jumped 10%, reaching USD6,101 a ton by 1Q2017. The current uptick in prices has much to do with recent events tipping the scales of supply and demand. The first of these is increased manufacturing activity in China. The official China manufacturing Purchasing Managers' Index (PMI) from late 2016 came in at 51.2, nudging over the halfway mark to indicate expansionary activity, as opposed to contraction. This was the fastest rate of improvement since March 2011, and was great news for copper sales. A second important factor is the possibility of high demand in the US following Donald Trump's promise to pump a significant amount into funding infrastructure projects. Economists in Zambia are keenly tracing the so-called “Trump effect” on copper prices, claiming increased spends on structural projects, as well as the growing likelihood of another war on ISIS, should keep prices up well into the year.

Herryman Moono, the National Secretary of the Economics Association of Zambia (EAZ), explained, “The key message for a country like Zambia is that there is a need to diversify the economy if we are to be insulated from copper price volatility. In addition to this, it is important to make proper use of revenues from copper during periods of copper booms by setting up a stabilization fund.” Such a mineral stabilization fund, like the one established by the Chilean government in 2007, was advocated by the EAZ late 2016 as a way of protecting the country from further fluctuations in the copper price.

It was not until the slump that diversification was placed back on the agenda with any serious momentum. In his inauguration speech on September 13, 2016, HE President Lungu stressed the need for Zambia to diversify away from copper into agriculture, manufacturing, and tourism, calling for the public sector to improve policy relating to these areas, and for the private sector to seize opportunities as they were made available.
As the mining community begins to celebrate the bright outlook at the beginning of 2017, others are advocating for caution. There is the real danger that Zambia will make hay while the sun shines and forget about all its wet-weather contingency plans. Indeed, if these ups and downs in the copper price have taught us anything, it is that where copper prices are concerned, the only thing that we can be certain of is uncertainty.