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Monday, 10 March 2014

Zambia's Copper Risks, 2nd Edition

Copper prices were on track for their biggest drop in more than two years Friday, as investors worried about slowing growth in China, the world's biggest consumer of the industrial metal. Copper for May delivery, the most actively traded contract, fell 3.6% to trade at $3.1015 a pound on the Comex division of the New York Mercantile Exchange. It was the lowest price since November and the biggest one-day percentage drop since December 2011 (Source: Wall Street Journal)

Investors have become unnerved by a barrage of negative economic news coming out of China, which accounts for 40% of the world's copper demand. On Friday, a solar-equipment maker became the first Chinese company to default on a bond traded in the mainland, according to Moody's Investors Service.

The default comes amid broader fears about the impact of China's economic slowdown on demand for industrial metals, which are used in everything from smartphones to household plumbing. Activity in China's manufacturing sector fell to a seven-month low in February, HSBC said on Monday.

As I have been arguing for a longtime, Zambia is facing significant risks from the ongoing reduction in copper prices. Copper prices are headed for the longest slump in 20 years, on signs of weakening demand after manufacturing slowed in China. A significant slowdown in copper prices will amplify the current monetary and fiscal challenges facing Zambia.

Chola Mukanga | Economist
Copyright © Zambian Economist 2014


  1. According to the BBC the copper price fell by another 200$ a mt today.

    The Chilean Peso is at its lowest level for 3 years.

    It would seem inevitable that Zambia will suffer similarly.

    Your last two posts, Emerging Markets but falling currencies and the countries copper risks, have come at the right time. Hopefully it is a brief downturn.

    I remember before the great crash of 2008 being on a plane next to a financial advisor. I asked his opinion. He said buy gold the world is going to crash. I found it difficult to believe but he was right. Some are saying that it is going to happen again but that this time the problem will be China. It does seem rather difficult to believe that it can happen so soon again. The difference this time would be that the commodity exporters will suffer this time unlike last time because China never stopped manufacturing and continued importing but this time would stop importing commodities like copper.

    The above link suggests that the drop in the price of copper is due to China decreasing its demand for copper.

    The only other point to make is that for many years people have said the country must diversify but it has never really happened. The goose that lays the golden egg cannot be shot but surely over 25 years some meaningful diversification could have been achieved that reduced to country's exposure to copper crashes. Copper is not oil.


    Above shows that the copper price is no lower than the middle of last year. Hopefully it will pick up again.

    "Interestingly enough the Kwacha and the copper price have both dropped exactly 9% since January 1. This is in line with my suggestion for an Export Price Norm, where the currency is pegged to the price of the country's main export - in the case of Zambia this of course is the copper price."

    Above, in quotation marks, is a comment by a leading economist received in an email. He thinks that is the way the currency should fluctuate if the country has a main commodity. He is opposed to trying to use reserves to keep the currency 'strong'.


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