Zambia set to surpass DRC in copper production
Zambia, Africa’s second largest copper producer, recently suffered the loss of its 77-year-old president Michael Chilufya Sata, who died in a London hospital on 28 October. While the Zambian kwacha fell by 2% in the wake of his death announcement, traders are confident the economy will not suffer any lengthy downturn as a result of his passing.
In fact, things are looking quite positive for the Zambian economy, which has experienced strong growth in recent years, with real GDP growth between 2005 and 2011 more than 6% per year. Moreover copper – the nation’s economic lifeblood – is doing well, and it appears that Zambia’s copper production may once again outstrip that of the DRC, regifting the former with its long-held title of Africa’s number one copper producer.
The big variable at the moment is the election of a new president, which must take place within three months of Sata’s death. Critics are divided on their outlook, with some hoping a new, more conciliatory leader will bring steadiness to the mining sector, while others worry that political in-fighting will mar the nation’s stability and consequently economy.
Surpassing DRC copper production
Last year the DRC overtook Zambia in copper production, producing 1 million tonnes. This year however the DRC looks set to produce only 950,000 tonnes, below its 1 million target. This shortfall has been attributed to fears concerning changes to the country’s mining code, as well as its energy shortage. “This year Zambia’s production will surpass us and that’s because of our energy deficit,” said Vice-president of the DRC’s Chamber of Mines Simon Tuma-Waku.
Zambia’s rich Copperbelt region in the northwest of the country is its undisputed industrial base, and supremacy in this area underpins the national economy.
A less Cobra-like president
Sata’s vice-president and friend Dr Guy Scott has become interim president following the death of the former and pending national elections in January 2015. Scott is incidentally the first white president in Africa since FW de Klerk lost the 1994 South African elections to Nelson Mandela. The son of Scottish parents will not however be eligible to run for presidency himself, owing to his parents’ foreign births.
So far the transition from one leader to another has been admirably smooth, as was the case in the 2011 election in which Sata took over the presidency from Rupiah Banda. The question is whether or not this peaceable transfer of power will continue throughout the election season. There is concern that in-fighting will take place within the Patriotic Front (PF) over whom should succeed Sata, and opposition alignments also remain to be seen, with Banda possibly entering the fray again.
On the positive side, some critics believe the end of Sata’s rule may be good for the copper industry, as the former president was known for his sharp tongue (he was accordingly called “King Cobra”), and was often a divisive factor in the industry.
Sata was a populist leader, often attacking the foreign mining companies and making ad hoc policy decisions that made life difficult for the mining companies. Sata was also unafraid to use his position to threaten companies whose decisions he disapproved; in 2013 for instance he threatened to revoke the mining licence of Konkola Copper because the latter was planning large-scale retrenchments, and in the battle that ensued Sata revoked the work permit of the company’s chief foreign executive. The hope is that a steadier leader will take Sata’s place and will help to marry the interests of both mine workers and investors.
20% royalty hike may be reduced
A key issue in the Zambian copper mining sector of late is the planned hike in open pit royalty rates, which would take the current rate of 6% and reposition it at 20% as of January 2015. Underground mine rates would also be increased, from 6% to 8%. Explaining the decision, Zambia’s Finance Minister Alexander Chikwanda said the Government is aiming for a more “equitable distribution of the mineral wealth between the government and the mining companies”.
International mining companies such as Barrick, First Quantam Minerals, Vale, Glencore, Vedanta Resources and China Nonferrous Metals have proved critical to the Zambian economy, injecting more than US$6 billion through their investments. They have reacted to the planned royalty hike by appealing to the Government to reconsider, stating the planned rates will prove prohibitive, possibly making their Zambian activities economically inviable.
“The new tax regime is entirely unsustainable” said president of the Chamber of Mines Jackson Sikamo. “Our sincere appeal to the government is that the industry needs to be nurtured so that it continues to generate revenues to diversify our economy.”
The royalty scare has come on the back of controversy over the Government choosing to withhold refunds of value-added tax (VAT) to international mining companies. The withheld refunds amount to over $600 million, negatively impacting the operations and sentiments of the likes of Barrick, Vale and Glencore, among others, all of whom have copper projects in Zambia worth billions of dollars. Mining companies have intimated that reduced investment, retrenchments, and diminished social corporate responsibility may be the unfortunate spinoffs of unpaid VAT refunds and the steep royalty hike.
There is however hope within the copper mining industry that the Government may be backing off its stated 20% royalty hike; Sata’s death and national mourning has interrupted affairs, but Barrick co-president Kelvin Dushnisky has said he is cautiously hopeful that Chikwanda is going to review the figure. “Our sense is that the government realises that the numbers they have imposed will be very challenging for the industry,” said Dushnisky.