Dr. Copper is at it again, making immense headlines and is the most spoken about topic recently exceeding pandemic effects and climate change. They say copper is a bellwether for economic pulse for the globe and exporting nations. As a commodity traded on the London Metal Exchange – LME, the red metal is used in the manufacture of electric wires for power transmission, bullets, earthing material and other construction related material. The price of copper exceeded $10,000/MT on the LME and this has sparked excitement and hype in producing nations such as Chile, Venezuela, Zambia, Democratic Republic of Congo, China and Australia. Trafigura, the worlds largest commodity trader has forecast that the red metal will exceed $15,000-$20,000/MT in the next decade so have other players such as Barclays and Citigroup. Given their forecasts. As opposed to pondering what is driving this supper rally traditionally, I choose to rethink the ask to ‘what is a copper boom signalling to the world and Zambia as a whole.’ Much as we celebrate market prices of assets such as metals, in this case copper, we need to focus on one silent feature ignored by many, ‘what the price rally is communicating to market players’.
CLIMATE CHANGE OVERSHADOWED BY COVID19 PANDEMIC BUT STILL GLOBAL HURDLE
Climate change would have still ranked the worlds top risk but for the COVID19 pandemic. There have been much discussions around having a sustainable global environment through saving the planet from a deterioration in its natural capital. Because of industrialisation, the environment has suffered assault from factory effluent, carbon – dioxide emissions from exhaust gases, mining pollution in rivers leading to abnormal weed growth, deforestation due to felling of trees and mining investments that do not take into account replenishment and above all usage of carbon fuels such as petrol and diesel. It is vivid that climate change has dented weather patterns causing erratic rainfall leading to ebbing dam levels which in turn has adversely impacted power generation for hydro dependent jurisdictions. Agriculture is another sector that has accelerated climate change effects through land clearing for crops but without intelligent ways of planting back trees. It is for this reason that the world has signed binding agreements such as the Paris Climate Change Agreement in 2016 which has further seen the United Nations Sustainable Development Goals – SDGs (2030) culminating in 17 individual goals towards sustainability. Climate change and the COVID19 pandemic have a dotted relationship in that they are two risks competing for the same budget pool and as such because the latter threatened lives, fiscal allocations have been pointed more towards healthcare – at the expense of productive sectors of the economy – and this has receded climate change efforts. So then how are these top global risks directly or indirectly fuelling a copper rally?
A lithium powered electric car manufactured by Tesla.
GLOBAL DE-CARBONISATION EFFECTS DRIVING AN LITHIUM POWERED ELECTRIC CAR ERA
With more realisation that fossil fuel led cars are fuelling global problems, innovation has found a home in designing electric cars that will be powered with nickel and lithium batteries, an initiative already rolled out in bulk by Tesla. But for these cars to transmit charge, copper will be very key as a component of each vehicle. What is just explained here is the worlds steps towards de-carbonisation as such carbon emissions will significantly reduce climate change effects. Overnight, these efforts have seen demand for copper, cobalt, nickel, lithium and manganese soar to the extent that car producers have appetite to buy these metals in the forward market. Jurisdictions such as the Copperbelt of Africa (Zambia and DRC) are well posed to tap into the opportunity curve.
Wind mills driving renewable energy another driver of copper demand for electric wires.
INCREASED RENEWABLE ENERGY INVESTMENTS
The world has a deliberate drive towards boosting renewable energy supply through promoting solar, wind and hydro plants. However for political and environmental reasons it can be argued that the world still contemplates on nuclear and coal powered plants which could be harmful to the ecosystem. Power generation in Africa has been tied to the availability of the underlying resources needed to generate it as such Zambia can boast of coal fired through Maamba Collieries supported by rich coal endowment while South Africa can contemplate generating power from uranium for similar reasons. Whichever way this can be viewed, demand for copper cables still remains a unifying factor as greater appetite for power generation correlates with that for transmission irrespective of the power sources. If we watch this space, the capital markets will re-align through guidelines to account for green finance methods of capital raising which the Securities and Exchange Commission – SEC have made strides around. The worlds green efforts could just be the missing piece in deepening liquidity of Zambia’s capital markets. This will also accord an opportunity for deeper pools, sensitive to sustainability, to be tapped in channeling capital to green and renewable projects. This will ‘ring fence’ (hedge) these funds as proceeds of bond issuances will be accounted for through specific projects especially at a time when the Southern African nations credit lines have narrowed steeply on account of its default rating.
Vaccine rollouts have intensified globally but India’s recent spikes could affect exports to Africa as the Asian nation seeks to address its in-house healthcare hurdles.
FASTER AND STRONGER VACCINE ROLLOUTS BUT INDIA’S SPIKE COULD STILL AFFECT ACCESS
As a bellwether for global pulse, it is clear that the corona virus effects caused the greatest supply chain disruptions which exposed how integrated and overdependent on global trade nations were and still are. Asides, trade relationships, lock-downs were the biggest disruptors of business activity especially in key consumers of base metals such as China which consumes 43% of the worlds refined copper. Global lockdowns are the drivers of the sharp constriction in the red metal market seen in march 2020 when the LME price shrivelled to 4,340/MT. However with the successfully medicinal breakthroughs seen in the vaccine world with the production of Johnson and Johnson, Astrazeneca, BioNtech and Pfizer, the market has seen an avalanche of hope for economic recovery. It is for this reason that whenever news of vaccine rollout efforts step up, the stock markets and business confidence roars in positivity. China has successfully flushed out effects of COVID19 evidenced by positive private sector sector pulse s measured by Markit Economics Purchasing Managers Index (PMI) with industrial productivity at 10 year highs. Its direct competitor the United States (US) and the Eurozone, have seen strong growth too with more lockdowns lifted and vaccine rollouts efforts accelerated. Sadly some emerging market nations such as India continue to face rising pandemic cases and this is a source of concern for the world as it has implications on vaccine distribution on the back of India being the largest producer. Africa could soon start bearing the brunt of India’s reduction in exports of the vaccine to address its internal hurdles. Notwithstanding that patent sales remain a big issue for vaccine producers to allow the world to start producing the inoculating medicines, an area that was discussed at the virtual World Bank spring meetings in April.
The US trillion dollar infrastructure project by Joe Biden is fuelling copper demand that has seen the red metal trade above $10,000/MT.
INFRASTRUCTURE BOOM IN THE US
Copper is also signalling what is to come with the recent election outcome in the United States. Joe Biden has a multi trillion infrastructure project rollout that will demand copper to execute successfully.
PORT AND MINING RELATED STRIKES IN CHILE
Strikes are also price spike spots as they weigh the supply side of copper. Recently porters in Chile staged a strike over pension requirements which was supported by the mining unions and as such any disruption in the worlds largest red metal hotspot shows evidently in the pricing.
Mines Minister Richard Musukwa. Zambia will seek to leverage off the copper price rally with the recent mining shareholding reorganisation in key mines.
STRATEGIC REPOSITIONING FOR ZAMBIA TO TAP INTO THE PRICE CURVE EFFECTIVELY
Not to diffuse the hype for Zambia but for the benefits to trickle down to citizens effectively, the Southern African nation will need more than a widened tax revenue base. A higher copper price by default means more in tax proceeds for the authorities which will help absorb debt obligations which in turn will address narrowing of fiscal deficits. One would argue that for maximum benefits, mining ownership will be a key factor for the copper producer a topic which Zambia has been on the receiving end of a hard bargain for over 25 years due to privatisation mistakes. With the recent effects to shore up ownership in the two largest mines, Mopani and Konkola copper Mines, greater investment in these vehicles is required urgently if productivity is to be ramped to levels that will cause Zambia tangible fortunes, let alone the copper price rally is signalling the need to expedite the equity partner efforts. This is a wave that can not be ignored, the gravity of which could see Zambia build a solid sovereign wealth fund overnight, an aspect that had fallen through the cracks years ago. Just like biblically, years of plenty need wisdom to store resources for future years of lack. It is very encouraging to note that the likes of Rio-Tinto have commenced exploration investment in Zambia for fresh mines in the Solwezi area which if successful will add to the production inventory just in time for the increasing price wave. However the successful symbiosis in the mining sector will only be achieved if the three faculties that the mines have flagged can be addressed namely: stability in valued added tax refund structure, stability in mining policy and above all the double taxation – ‘non tax deductibility’ of mineral royalty taxes are addressed. These if addressed have the effects of increasing propensity for exploration investment. Those that invested in the last decade are the ones benefitting from current red – metal prices.
Zambia’s head of state Dr. Edgar Lungu speaks to Lubambe Mine Director Operations Tony Davis in Chililabombwe on 07 January 2021.
Zambia nonetheless has two game changing projects worth speaking about namely the Lubambe and Kansanshi S2 projects. Other opportunity areas copper is signalling are the value addition chain and the downstream business which leverage if the copper mines when production is high. Zambia’s smelting capacity is second to none in the region and such such DRC could cause an influx of its concentrates into Zambia for processing.
In the labyrinth of talks with the Washington based lender, the IMF for bailout, a precursor for successful debt restructure, Zambia is well poised for strong economic recovery on condition that it doubles its efforts in using the mining sector as long hanging fruit to increase its earnings capacity. Effects of copper price rally have filtered through the dollar bond yields and spreads but remain weighed by its default rating whose position will change with successful debt restructure, when the deal on the cusp is inked. Recently the copper producer was upgraded a few notches above ‘CC’ to ‘CCC’ by Fitch rating agency on its long term issuer rating on local currency debt while April PMI readings showed private sector activity expansion (>50) for the first time in 26 months at 50.1 as consumer demand creeps back into the economy.
About the author: Mutisunge Zulu is an economist and financial analyst serving as the National Secretary for the Economics Association of Zambia. He currently serves as Country Non Financial Risk Head for an International Bank.
