Chibamba warns over falling copper prices

Chibamba warns over falling copper prices
Written by Joan Chirwa
Monday, November 24, 2008 10:08:12 AM

LOCAL economist Chibamba Kanyama has warned that declining copper prices on
the international market will derail a lot of mining activities in Zambia.

And University of Zambia (UNZA) Development Studies lecturer Dr Francis Chigunta has said falling copper prices will put a lot of pressure on the government to borrow more money for socio-economic programmes.

Kanyama argued that most mining companies in Zambia were operating under difficult circumstances considering escalating production costs against low commodity prices.

Kanyama added that the mines had borrowed huge sums of money from international lenders to develop the mining sector in Zambia.

He said the implications of the current low copper prices should be placed under a proper context to avoid suspension of major mining activities by companies.

Copper for March 2009 delivery edged down to US $1.52 per pound while that for three month delivery on the London Metal Exchange dipped to US $3,375 per tonne on Saturday, its lowest since July 2005.

Metals analysts say until there is a turnaround in the physical demand picture, it seems unlikely that these rallies will be sustained for any significant period of time. Others say by looking at historical data, the copper price could fall as far as US $2,000 per tonne in the near future.

"The current price of copper may appear to be far higher than it was eight years ago. However, for the mining companies, the production costs have equally gone up such that at the current price, most mining companies are barely operating above," Kanyama said. "This may no longer be the case in the coming few months and it is true that there is panic among the investing companies. One source of worry is that the companies had overcommitted themselves and based all their huge investments on anticipation that the balance sheets will remain strong owing to the high price."

Kanyama further said the equity crisis on most stock markets had already raised levels of panic among the investors who saw an opportunity in copper.

"The new mines had to borrow from the international market at a huge cost so as to speed up production schedules and some even stretched the lifespan of the mines by a further 15 years; and this was because the price was cost effective. Many mines explored and commenced operations in non-commercially viable areas but the attractive copper price was good enough for the investors and shareholders," Kanyama said. "Sufficient equity was mobilised by Greenfield mining companies from overseas stock markets as the pay-back period was shortened."

Kanyama said Zambia should however remain positive that the global economy would rebound by April 2009.

"The government should engage mining companies to assess their real concerns on declining copper prices and probably make necessary adjustments," said Kanyama. "Some mining companies are very likely going to exaggerate the crisis to avoid meeting certain obvious obligations. This is a win-win situation and the better the economy stays strong, the better for everyone."

Vice-President George Kunda on Friday told Parliament that the government was concerned about the falling prices of copper because that would reduce Zambia's foreign exchange (FOREX) earnings. Vice-President Kunda further said he had directed finance minister Dr Situmbeko Musokotwane to issue a ministerial statement this week so that the issue of falling copper prices, resulting from the global financial crisis, could be discussed in detail.

And Dr Musokotwane yesterday was quoted as saying the declining copper prices were not a complete disaster for Zambia because the current prices were still three times better than they were in 2000. Dr Musokotwane said there was still hope for improvement although the declining copper prices were a setback for Zambia's economic growth.

The government this year implemented a new fiscal regime for the mines which saw an increase in corporate tax to 30 per cent; mineral royalty tax on base metals at three per cent of gross value; withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the sector at the rate of 15 per cent and a variable profit tax of up to 15 per cent on taxable income, which is above eight per cent of the gross income.

A windfall tax was also introduced at different price levels for different base metals. For copper, the windfall tax is at 25 per cent at the copper price of US $2.50 per pound but below US $3.00 per pound, 50 per cent at a price for the next 50 cents increase in price and 75 per cent for a price above US $3.50 per pound. The government hoped to earn an additional US $415 million from the windfall taxes, but this money will not be collected since the current price of copper is way below the windfall threshold.

And Dr Chigunta said the declining copper prices would affect all the sectors of Zambia's economy.