Find us on Google+

Wednesday, 3 December 2008

Banda's Challenges : Falling Copper Prices

In A memo to President Banda , I mentioned briefly some of the challenges facing the new President. I thought a new series is in order to expand on these. The first is falling copper prices, which are expected to track the global slowdown and may not rebound until early 2010, with significant consquences for the little revenue we get from copper and now appears to be hitting the start of some mining projects - as this piece illustrates).

Global copper prices tumble (ZNBC News 17/11/08) : Newly appointed Mines Minister Maxwell Mwale is Monday scheduled to meet Chief Executive officers of all mining companies. The Mines Minister will discuss how the economic global crisis is affecting mining operations in Zambia.

Mr. Mwale says during the meeting, stakeholders will also discuss how the slump in global copper prices has affected copper production in the Southern African nation.

On Sunday, the prices of copper on the London Metal Exchange (LME) reduced from 3800 united states per tonne to 3600 per tonne. The fall in metal prices has caused animosity in the local mining sector with some mine contractors being forced to reduce their labour force.

In other instances, mining conglomerates such as the Canadian International Copper Systems which was carrying out exploration works at Mokambo in Mufulira District have suspended their activities. Mine suppliers and contractors have further expressed worry at the fall in copper prices calling for remedial measures.

Update (18/11/2008) : The Financial Times has a piece related to this - Copper’s fall takes shine off Zambia’s ambitions, where it notes : "At least five exploration projects have been mothballed", according to industry sources.

17 comments:

  1. By the way, copper is going to recover if the dollar collapses. The fall in world commodities prices, many of which are traded in US dollars, are in step with the temporary strengthening of the dollar.

    Continued demand from China and a possible dollar collapse mean that copper is going back to it's highest valuation and beyond that.

    That is, if the dollar collapses. The $700 billion rescue packats is hugely inflationary, no matter whether it is effective in saving the US economy or not. The only caveat I see, is that Europe is doing the same as the US, which would mitigate a rise in the Euro against the dollar. But I also think their bailout packages are more moderate.

    If there is a new rally in world currencies against the dollar, copper is going back up.

    And add to that, China's economic stimulus package is mainly about infrastructure creation, which means that copper as an industrial metal remains very much in demand.

    ReplyDelete
  2. A dollar collapse will weaken global confidence and since the USA is a major world consumer that could only deepemn the global downturn with severe repurcussions in other areas...

    Its not an outcome one should hope for...methinks!

    ReplyDelete
  3. Copper price will recover when the world economies recover - a simple matter of supply and demand rather than a function of currencies. The strength of a currency usually signals the strength of the economy, not vice versa. The dollar is a world currency, hence I doubt whether it will collapse. Besides, the Americans focus their lives around their economy, and not around culture and politics like many other countries, so they will fix whatever is ailing them.

    ReplyDelete
  4. Is your conciousness and awareness also shared by those in government? I doubt it. That's the crux of the matter - we have leaders who are not following these events. They get no sleepless nights because they can always count on somebody else bailling them out. They forget that - that is submission, a thing that we fought against so viciously during independence struggle.

    ReplyDelete
  5. China is not immune to economic woes in the US and Europe and as such the Chinese stock markets have equally plummeted in response to reduced demand from the West. Therefore a US dollar collapse is not good news for them as they export so much to the US.

    On the tumbling copper prices, this was identified as a risk to the growing economy by the IMF earlier this year in this report, which says in part:

    The Zambian economy has performed well in recent years and the medium-term outlook is favorable, with real GDP expected to grow at 6-7 percent annually. However, this projection could be undermined by a sharper drop in copper prices than expected and continued electricity outages.

    ReplyDelete
  6. Zedian,

    China is not immune to economic woes in the US and Europe and as such the Chinese stock markets have equally plummeted in response to reduced demand from the West. Therefore a US dollar collapse is not good news for them as they export so much to the US.

    But irrelevant to Zambia. Dollar inflation will raise the price of commodities, and China has an infrastructure stimulus package that would (I think) specifically create a demand for an industrial metal like copper. They're going to need tens of thousands of miles of copper wires to develop.

    ReplyDelete
  7. Mr K,

    But irrelevant to Zambia.

    I beg to differ. While China has an 'infrastructure stimulus package', which in theory should maintain demand for our copper, there's a huge element of the Chinese economy that is dependent on exports to the West. Therefore China will slow down pace of growth, while the West will contract.

    The world is an economic 'food chain', with Zambian at the bottom, and hence we're already feeling the effects of the global downturn in as much as copper prices are concerned. Yesterday, I heard in the news that shares in mining companies have plunged and sooner than later, Zambia will feel the effects of that, despite the Chinese demand for copper being there.

    I'm actually surprised that the copper prices have started falling already because I expected a sort of delayed reaction as the ripple effects travelled from the consumers in the West, to the producers in China and finally to the suppliers in Africa.

    ReplyDelete
  8. This report will substantiate my point.

    Mr K,
    Your theory does not explain what we're currently observing in the current global economic. Perhaps in the longer term China will dip into it's massive forex reserves (which it built up thru' exports), to further stimulate it's infrastructure development. But in the short term the ripples are travelling down the supply chain.

    Furthermore, a collapse in the US dollar in relation to the Chinese currency will spell doom for Chinese exports.

    ReplyDelete
  9. Zedian,

    Mr K,
    Your theory does not explain what we're currently observing in the current global economic. Perhaps in the longer term China will dip into it's massive forex reserves (which it built up thru' exports),


    Which it built up by exporting (their own, not someone else's) finished goods, not raw materials, and they never put their to be exported raw materials in the hands of foreign corporations which they then did not tax or put any restrictions on.

    One reason they had such farsighted government, because even though they slightly liberalized their economy, they are still communists, with a long tradition of central planning, which is paying off handsomely in their new economy.

    They also have the selfconfidence to promote their own people and their own national interest, instead of handing their fate over to the IMF and foreign miners.

    to further stimulate it's infrastructure development.

    They already have a such a program in place. It is part of their own stimulus package.

    But in the short term the ripples are travelling down the supply chain.

    I would agree with that. However, because of it's policies, China is in an excellent situation to recover - unless the dollar collapses, in which case they are holding a lot of worthless paper.

    Furthermore, a collapse in the US dollar in relation to the Chinese currency will spell doom for Chinese exports.

    And the reserves they built up exporting their goods. But not medium term internal growth. There is a tipping point where China can turn much of it's economic activity to supplying goods and services to Chinese nationals mainly, just as the United States does for US citizens. Only 20% of US GPD is about exports.

    The last time people outside of the US ended up with lots of US cash (the Saudis back in the 1970s, the Japanese in the 1980s), they ended up buying large amounts of US realestate.

    About my original post - I might have gotten a little carried away, but I do think the US dollar has peaked versus other currencies (including the Euro) and that in itself will increase the price of copper.

    Maybe the government should just develop a few mines of it's own, sell enough copper to cover costs, and hoard copper and make the Kwacha a copper backed currency. :)

    We've seen the Gold Standard, we have seen the Petrodollar, let's have the Copper Kwacha.

    ReplyDelete
  10. Mr K,
    "Which it built up by exporting (their own, not someone else's) finished goods"

    Actually it is the exporting of the goods of foreign companies that China has attracted to set up factories there.

    http://www.hvk.org/articles/0703/6.html

    ReplyDelete
  11. Zedian,

    I think you may be on to something with the concept of China holding on to the majority of its forex reserves for use over the medium rather than short term. I suspect that their current caution in the face of what many Western analysts are calling a period where" cash is king" and "the whole world is on sale" may be largely due to fears over their currency "market basket" being incorrectly balanced to meet current and oncoming conditions. Large forex reserves would be necessary to prevent undue currency fluctuations by market-basket currencies from undermining China's dominant export position. Similar to activities by the Japanese central bank visa vie the dollar during the 80's.

    Do you think that they are just holding for the short term prior to a buying spree at what they determine is the absolute bottom (which when and if they deploy a significant portion of those funds in any form would define at least a short term market bottom), defending their medium term currency exchange rate position with perhaps excessive conservatism, or something completely different and unanticipated? Doesn't it seem odd to you that they are holding so much cash without seeming to care what they might grab with it given current valuations, in contrast to cash-heavy investors like Berkshire Hathaway and Dubai?

    I have even heard reputable reports that Southeast Asian banks whose stock values have dropped not just below book value, but below cash on hand value, are still not deploying cash in quantity. Is there another fiscal monster out there like the CDS mess in the Asian closet that most of us just don't know about yet? Is this just typical of banks in that region as some assert, or would this not be the first time people close to the problem saw the writing on the wall before the rest of us?

    ReplyDelete
  12. Yakima,

    I think it is just fear of spending and lending in this current climate that Asian banks are not deploying their cash. They are waiting to see where the bottom is. Eventually they have to lend because cash by itself does not earn much.

    ReplyDelete
  13. Interesting article on Nigerian oil:

    http://news.bbc.co.uk/2/hi/programmes/from_our_own_correspondent/7808670.stm

    ReplyDelete
  14. Kafue,

    I am still not convinced that asset holding by the PRC central bank in particular is due to fear of spending and lending, especially after watching the CNY::USD ratio over the last few months. It just stays frozen at 6.83::1 day after day, moving fractionally and then moving back. I am increasingly convinced that the Kwacha, Rand, Pound, etc. are not falling against the dollar, rather they are falling against the Yuan, while the dollar is being propped up to effectively reduce raw material prices at a time when demand for finished products has dropped sharply. What do you think?

    ReplyDelete
  15. Yakima,

    The yuan was appreciating in recent years due to pressure by America on China to reduce the trade deficit. However since July, 2008 it has remained about the same, probably to protect the Chinese exporters from the effects of the financial crisis.

    http://www.contrarianprofits.com/articles/shift-in-china-trade-policy-could-accelerate-western-steelmakers’-slump/10663


    The other countries currencies had fallen against the dollar because their economies were seen to be badly affected by the fall in commodity prices and the dollar was seen as a safe haven.

    ReplyDelete
  16. Kafue,

    Thanks for the link, certainly paints a bleak picture. My understanding was that the yuan was appreciating against the dollar due to the inclusion of other G8 currencies in the "yuan basket", which in turn would imply a fall of the yuan against the dollar as other G8 currencies fall against the dollar due to flight to safety. Alternatively, if the current crisis is causing the yuan to appreciate against other G8 currencies due to perceived strength in the Chinese economy, we would expect to see the dollar fall against the yuan along with the rest of the "basket". Examination of the closing rate for last 120 days between CNY and USD however indicates no appreciable movement at all, in either direction, every move is countered almost immediately. So if abandonment of the "basket" approach is a sign of a larger shift in policy such as described in the steel industry article, then you could probably be fairly certain that such a shift is indeed taking place after 120 days.

    ReplyDelete

All contributors should follow the basic principles of a productive dialogue: communicate their perspective, ask, comment, respond,and share information and knowledge, but do all this with a positive approach.

This is a friendly website. However, if you feel compelled to comment 'anonymously', you are strongly encouraged to state your location / adopt a unique nick name so that other commentators/readers do not confuse your comments with other individuals also commenting anonymously.