Africa’s second largest copper hotspot, Zambia faces a plethora of economic hurdles to include currency woes, spiralling inflation, constricted private sector pulse and above all a deteriorating country risk profile. The red metal producer launched an economic recovery plan that will seek to leverage off mining as a sector that could accelerate ‘V’ shaped economic recovery especially post COVID19 that saw the highest growth erosion in the history as Zambia receded 2.6% (FY20). The southern African nation nonetheless produced north of 868,000MT of copper in 2020 and will target 900,000MT this year. Base metal fortunes look positive for Zambia as the red metal posted 105.0% recovery today from the 4,340/MT lows seen in harsh pandemic times (March20), to flirting with 10-year highs of a few points shy of $10,000/MT.
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The largest global commodity trader Trafigura see’s copper rallying aggressively to highs of $15,000/MT as global decarbonisation efforts fuel global deficits. Goldman Sachs expects a 12-month rally to $10,500/MT while Citigroup sees the red metal spiking to $12,000/MT.
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The global greenfield fever, in the electric car era will be the biggest driver of red metal demand in the medium to long term while in the interim Chinese demand will be topical as the worlds second largest economy recovers from the COVID induced supply disruptions of 2020.
Other drivers of sustainability are the worlds efforts towards the sustainable development goals (SDG2030). The efforts have suffered set backs with the COVID pandemic. The sustainability agenda is vivid in the renewable energy space which extends to both electricity generation through solar and wind means to the lithium battery driven electric car era which requires 20 kilos of copper wire on average for conductivity.
DESPITE SHRIVELLING SENTIMENT MINING IS POISED TO BE THE BACKBONE OF ZAMBIA’S ECONOMIC REBOUND
Zambia’s dire situation spurred by a shrivelling sentiment mood following a hat-trick of defaults on coupon payments on its dollar bonds maturing 2022, 2024 and 2027 respectively. Within ongoing debt restructure process by Lazard Frere’s credit ratings have deteriorated narrowing the Southern African countries chances of accessing credit on the international capital markets on the back of a default rating. Talks with the Washington based lender on possible balance of payment support are in progress but until a package is granted fiscal posture will remain feeble.
The copper producer is currently at a critical point of its economic transformation process with the state taking over two key mines namely Konkola and Mopani Copper Mines respectively. Zambia has commenced a restructure process around Konkola Copper Mines into a smelter and mineral resource business, while it recently concluded a transaction with Glencore after a stake purchase making the Zambian authorities 100% shareholder. Despite controversy around the KCM transaction which is still in the courts locally and arbitration in London, the re-organisation process was nodded by a Zambian court.
AN OPPORTUNITY FOR A SOVEREIGN WEALTH FUND AS COPPER BULLS PERSIST
Copper price bulls will not only provide an opportunity to liquidate its debt but is a chance for the red metal producer to build a sovereign wealth fund to assist in times of economic turbulence. Let alone foreign exchange reserve build shoring up will be given a boost to help cushion the economy against external shocks. Zambia’s foreign exchange reserves have plummeted to decade and half lows of $1.2billion weakening the economies import cover. A commodity price boom will provide reprieve for foreign exchange reserve accumulation and will buffer currency depreciation hopefully to stabilise exchange rate deprecation.
CONSISTENT POLICY AND STABILITY IN TAXATION KEY TO UNLOCKING INVESTMENT
The prospects are high, outlook positive but successfully implementation of mining reforms will be very key in driving Zambia’s sustainable growth. For years the mines have felt double taxation in the mineral royalty space, policy inconsistency to include value added taxation (VAT) payment delays have shrivelled Zambia’s propensity to invest costing it production over the years. The authorities will seek to find an equity partner for Mopani to expedite the full production capacity that will trickle benefits to the country. The copper price forecasts could bail Zambia out of its economic doldrums only to the extent that mining re-organisations are conducted in the most strategic fashion.
Zambia’s has a series of projects for circa $2billion on the cards to include Lubambe and the Kansanshi (S2) initiatives that will increase the nations production capacity.
The Kwacha Arbitrageur
