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Thursday, 31 March 2016

Zambia's mining challenges

Mopani Copper Mines (MCM) is planning to invest over US$1 billion as part of its construction of three new mine shafts. The company plans to make the investments between now and 2018, as part of what MCM dubs its “commitment to turning Mopani into a world-class mining operation by 2023”.

The announcement is a bit of positive news for the mining sector after losing over 10,000 jobs last year following the scaling down of mining activities. MCM lost around 4,300 mining jobs. Of course Zambia is not alone in these challenges. The SADC region has lost approximately 490,000 mining jobs.

The challenge for mining companies in Zambia is that as well as high production costs and low copper prices, the companies face the huge challenge of poor electricity supply. The result is that copper production will remain weak for the foreseeable future with negative impact on economic growth and tax revenues.

Government last month noted that copper production in 2016 and 2017 is unlikely to rise above 700,000 tonnes per annum. The annual production in the last two years has stayed around the same mark. Government is hoping to reach around 1 million tonnes by 2018, if copper prices rebound.

It is unlikely that Zambia will reach the 1m tonnes of copper before 2020. Although copper prices have increased by 6% over the last 3 months to just under $5,000 per tonne, they are still 16% lower than at this time last year. World Bank projections show all main commodity prices will decline in 2016, with metals expected to drop 10% following last year’s sharp decline.

The pessimistic forecasts are due to large new capacity which is maintaining elevated supplies coupled with weak growth prospects in emerging market economies, particularly in China, which was one of the main drivers of the commodity boom in the 2000s. There also new signs that Europe may enter a recession soon rather than later.

The problem for Zambia is that the government response appears to focus on short term measures designed to ride out the storm before the election, rather than articulating a broader and more comprehensive diversification strategy. There's also the obvious point that it has no money for such a strategy!

Government short term strategy recently manifested itself in changing the mining taxation framework for the third or fourth time over the last five years, not even counting other regulatory u-turns. We now have a sliding scale mineral royalty tax on copper, which varies based on copper prices.

According to the new fiscal regime and prevailing copper prices, mining companies are now just paying less than 5% in mineral royalty taxes. Such a situation may encourage the likes of MCM to invest in 2018 but it will only deepen Zambia's current fiscal woes since tax revenues are now dwindling further.

The government will of course argue that without the new fiscal regime MCM may not have pressed ahead with the investment. So it is on the side of long term thinking. That is fair argument, but one which has a lot of holes! Luckily for government the opposition have not put forward any coherent alternative.

Chola Mukanga
Copyright © Zambian Economist 2016

1 comment:

  1. By now as a country we should have been talking of making greater strides in other economic sectors than still relying on the extractive sector. I feel the African Mining Vision if well embraced can be a good instrument that can help the country benefit from the extractive industry. with regards to that, it will be good if we could have a practical "Country Mining Vision" that can guide the country's long term and broader development objectives in the sector


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