Copper prices set to boom: Can Zambia emulate Magafuli to benefit?

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Lumwana Mine, one of the mines in North Western province

By Kalima Nkonde

There is widespread expectation by most copper industry experts and commodity investors that the electric car and the renewable energy technology revolution, which was given impetus by 2015 Paris Climate Change Agreement, is set  to spur copper prices through the roof from now on through out  the next  20 years and more.

The news for high copper prices cannot be exciting news to most Zambians except for a few beneficiaries as the last copper boom from 2003 to 2013 with its high GDP growth rates never trickled down and reduced poverty. Copper price increases are considered as a curse by most enlightened Zambians due to the country’s  poor leadership.

Electric car revolution

The expected number one driver of the copper prices boom is the electric car. According to the International Copper Association (ICA), electric vehicles use a substantial amount of copper in their batteries and in the windings and copper rotors used in electric motors. A single car can have up to six kilometers of copper wiring.

While cars using internal combustion engines require up to 23 kg of copper each, the ICA report found that a hybrid electric vehicle uses nearly double that amount at 40 kg of copper, and a plug-in hybrid electric vehicle uses 60 kg. Depending on the size of battery, an electric bus can use between 224 kg and 369 kg of copper.

Without copper you wouldn’t be able to run electric vehicles, it’s that simple,” John Fennell, CEO of the Australian branch of the International Copper Association, was quoted as saying by ABC News.

According to the report by consultancy IDTechEx, commissioned by the International Copper Association, demand for electric cars and buses are expected to reach 27 million by 2027, the bulk of them coming from China.

“Demand for electric vehicles is forecast to increase significantly over the next ten years as technology improves, the price gap with petrol cars is closed and more electric chargers are deployed,” IDTechEx Senior Technology Analyst Franco Gonzalez said in the report.

The International Energy Agency (IEA), on the other hand, estimates that the demand for electric vehicles globally could reach between 9 million and 20 million by 2020 and between 40 million and 70 million by 2025.

The Chinese, strategic and visionary as usual, have become the World’s biggest supporter of electric cars. According to the New York Times article of 10 October, 2017, “Already the world’s largest maker and buyer of electric cars, China is forcing the rest of the auto industry toward a battery-powered future. There is a powerful reason that automakers worldwide are speeding up their efforts to develop electric vehicles — and that reason is China.”

“The world’s major car manufacturers like General Motors, Ford, Volvo, Volkswagen and others have all joined the bandwagon of adding electric cars to their lines and are also moving much of their research, development and production of electric cars to China. China in turn is pressuring them to share that technology with their Chinese partners to their lines fearing that they may be left behind “, the New York Times reported.

In the light of the expected booming prices of copper which currently stands at around $7,100 as at 16 October, 2017, having increased by about  19% this year alone, according to the London Financial Times, copper investors are scrambling to buy shares in mining houses

“But rather than just buy shares in big miners, where copper is often part of a wider portfolio of commodities, they are also backing small companies who offer more leverage to the copper price, albeit with much higher risks,” the paper said.

According to the paper, there are some analysts who believe that the take-up of electric vehicles will be so quick that it will require the mined copper supply base for the whole world — currently 20m tonnes — to double over the next 20 years and this substantial increase in copper supply cannot be met by simply expanding existing mines.

The Financial Times goes on to state that in the light of the expected boom in copper prices, small mining companies like  SoldGold in Ecuador, Ivanhoe Mines, Atalaya Mining, Georgia Mining and others are  attracting investor’ attention. SoldGold which is mapping its copper and gold deposits in Ecuador has had its shares surging by 900% in past one year despite that production is about ten years away.

“ Ivanhoe mines are also developing the Kakula and Kamoa copper deposit in the Democratic Republic of Congo with China’s Zijin Mining. The company says its discovery in DRC is the largest copper discovery ever made in Africa and the fifth largest copper deposit in the world, with indicated resources at more than 30m tonnes of copper. Shares in the company have risen by more than 300 per cent over the past year. It is now valued at $3bn,” the paper added.

In Australia, the huge mining house, BHP Billiton in the past year announced to spend $600 million upgrading and expanding the mine and its infrastructure, with its eye firmly on growing demand and price for copper.

Renewable energy  effect on copper prices

Renewable energy is energy that is generated from natural processes like  sunlight, geothermal, wind, water etc and is the alternatives  to using fossil fuels. Copper conductors are used in major electrical renewable energy components, such as turbines, generators, transformers, inverters, electrical cables, power electronics, and information cable.

According to the 2016 World Copper Association, in setting up  a 15-year Copper Technology Roadmap for Asia, it stated “Along with electric vehicles, the major trends were in areas like renewable energy, There’s four times as much copper used in renewable energy generation than there is in traditional coal-fired power generation”, It said. “And the general trend to less pollution means more efficient appliances, which translates to using more copper, because it reduces electrical and heat energy losses in the system and is cleaner to run.”

Magufuli Mining reforms warning to Zambian Mining houses

There is no doubt that  Zambia will benefit very little  just like in the past if the status quo continues.  Mining houses need to be engaged and warned that if there are uncooperative and not  ready to accept win- win reforms, others can come and take their place or legislation will be passed to revise all development agreements.

Zambia’s neighbour in the north, Tanzania, is an example of  what happens when mining houses take their hosts for granted and takes exploitation to the extreme. President John Pombe “ Bull dozer” Magufuli has introduced draconian reforms  in the mining industry.

When the country’s biggest Gold Mining house, Acacia Mining, was caught  red handed  with10 times more gold in its export containers than the company had declared, as well as undeclared minerals such as iron and sulphur, the president instituted wide ranging reforms for the mining industry. Magufuli instituted an audit of Acacia  which resulted in the imposition of a tax bill on the a company of $190billion for back taxes and penalties. This monster tax bill for all intents and purposes may have been deliberate and intended  to either  chase them  and look for another investor or was a basis for negotiation but it was dire warning to other mining tax evaders and a deterrent.

We must benefit from our God-given minerals and that is why we must safeguard our natural resource wealth to ensure we do not end up with empty mining pits,” Magufuli told a rally in his home village in Chato district, northwestern Tanzania, he was quoted by one of the local papers.

The Tanzanian government has passed laws which require government to own 16% stake in mines. The other laws  require Mining companies to train Tanzanians, give preference to local suppliers and to source from joint ventures between domestic and foreign firms if domestic suppliers cannot be found. The new mining laws also raised royalty tax for gold, copper, silver and platinum exports to six per cent  from four per cent. They also give the government the right to tear up and renegotiate contracts for natural resources like gas or minerals, and remove the right to international arbitration.

On 19th October,2017, the Tanzania government settled its longstanding dispute with Barrick Gold’s Acacia Mines. Barrick gold gave Tanzania 16% stake in three gold mines, 50% share in revenue of mines(like Botswana does with De Beers) and a one off payment of $300million to resolve the dispute which followed the banning of export of unprocessed minerals and the $190billion tax bill.

President Magufuli was happy with settlement adding, “ Now that we are shareholders, we can sit down over a cup of coffee and amicably resolve any outstanding issues”.

How can Zambia benefit from the expected Boom? 

In the light of the high level of debt  that Zambia has accrued partly due to mines not contributing their fare of taxes, this should be sufficient incentive by the Zambian government to make brave and bold decisions as President Lungu has alluded to in his past speeches. Unfortunately, so far the government has  just shown boldness with regard to decisions affecting Zambians like the removal of subsidies on electricity,fuel and reducing prices paid by Food Reserve Agency to farmers by 29% to K60, increasing taxes and levies affecting Zambians. It is time they showed the same zeal towards the Mines.

In his address to Parliament on September 15,2017, President Lungu said, “Mining recovered from a growth rate of 0.2 percent in 2015 to 7 percent in 2016 but the recovery was not accompanied by job creation as the sector laid off an average of 10, 576 workers in 2016.”

Mining justified the 2015 and 2016 retrenchments on the low prices of copper miners but now that prices have increased, nobody in government or the Opposition is putting pressure on the mines to re-hire the workers as the reason for their retrenchment is no longer valid. Is  it because it is not an election year?

This apparent favoritism of mines by government in comparison with Zambian citizens and the fact that Zambians are not benefiting from their resources will sooner or later have political consequences especially if our leaders are perceived as the only ones benefiting.

In the current scenario, Zambia is not benefitting much from employment and neither is country benefiting much in terms of taxes. In addition ,unlike the old private sector mining owners Roan Consolidated Copper  Mines and Nchanga  Consolidated copper mines before nationalization, who helped the mining and local communities with sports facilities, housing, hospitals, craft colleges, roads and all sorts sponsorship, the current ones are just interested in digging holes on our land and have  very low Corporate responsibility budgets. So the question is:whose interests are mining houses saving  in Zambia? What is the costs benefit analysis of having these investors?

It is incumbent upon strategic thinkers in both government and the Opposition  to consider this issue seriously and do something  about it as Mining houses will not make moves on their own. They are not here to do us favours but maximize profits thereby increase their companies’ share prices.

In order for Zambia to benefit from the expected mining boom, the government should not wait but consider the following actions:

  • Bring back and renegotiate the windfall tax and involve people likes former Finance Minister  Ngandu Magande and others  who negotiated and implemented it under Mwanawasa. The major justification by the mines for its removal after intense lobbying of  the Rupiah Banda administration was mainly due to  2008/9 financial crisis which is no longer valid
  • Consider revising development agreements including the unfair retention of 60% of foreign exchange from copper exports  by mines abroad with only 40% coming back to Zambia.
  • Pump money to combat tax evasion and illicit financial flows by recruiting international Accountants, lawyers and Tax experts experienced in mining issues
  • Shop around for investors in car electric batteries to locate to Zambia as raw materials are in abundance for value addition. Encourage and give incentives to companies like ZAMEFA so that industries related to copper can spring up in mining towns and other parts of Zambia
  • Compel mines to instruct their captive foreign suppliers to re- locate to mining towns so as to create employment and transfer technology given that mines themselves are no longer creating many jobs due to automation

The Mining houses should stop denying that they have been involved tax avoidance, tax evasion  and illicit financial flows and it would have been better  for them to keep quiet. The rebuttal to my last article on Lusaka Times on tax evasion and illicit financial flows in which the Chamber of Mines demanded evidence, was offensive to most Zambians to say the least as demonstrated y angry comments from readers. The Chamber of  Mines was effectively saying the  individuals and institutions that i attributed comments to  were all lying: The UN Secretary General,  the Former  South African President Tambo Mbeki, African Development bank, the OECD, Global financial integrity  the African Union, Panama papers disclosures, the former  Zambia Minister of finance, Mr. Alexander Chikwanda and his deputy and the ZRA audits by independent professional Accountants.

There is no doubt that common sense mining reforms- resulting in win-win situation- and not necessarily to  the same extent as those in  Tanzania can be achieved. Zambia and the mines need to cooperate and mines should  desist from being too greedy as that constitutes a short term strategy and will back fire sooner or later.

The key for  Zambia is to constitute a crack team of negotiators regardless of  their political affiliation. There is a big pool of Zambians with expertise and who have served previous administrations whose skills should be drawn on. They should be head hunted locally and in the diaspora. This should not be a partisan issue. It is a nationalistic issue and for the benefit of our children and their children.

In the absence of  Zambia making attempts to milk sufficient milk from our cash cow, the Mines, one cannot see how we will get out the debt trap that we are in now. Also, any reluctance to act with boldness will give credence to critics who are claiming that  there is  a lot of graft in  the current administration.

The populist approach to mining is the way forward as it is the most politically and economically smart thing to do in the current environment to appeal to Zambians. It is time that the government called the mines’ threat bluff  as they will not leave given the fact that the red metal is the mineral of the future. The handling of the inter- related issues of copper, debt and corruption may well determine who wins the  2021 elections.

The writer is a Chartered Accountant by profession and a financial management expert. He is  a retired, independent and non partisan commentator/analyst. He has lived in the diaspora in   England, South Africa and Botswana for over 25 years .

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One Response to Copper prices set to boom: Can Zambia emulate Magafuli to benefit?

  1. Well written Kalima. Unfortunately and as we all know the guys in government would not care less. Their bellies are full. They do not have to worry about where their next meal will come from. They live in a their own world of abundance. Pity my country.

    muntungwa
    October 23, 2017 at 12:55 pm
    Reply

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