ZAMBIA: Lower copper prices will hurt the poor

Tuesday, November 11, 2008

The fall in international copper prices is causing unease in Zambia, one of the world's largest producers, whose impressive economic growth in recent years has been based on copper exports.

Frederick Bantubonse, general manager of the Zambia Chamber of Mines, told IRIN: "It's causing a lot of concern; we are selling, well and good, but the pricing is not as profitable as we would like it to be. This is not good for the Zambian economy."

Since the beginning of the credit crunch in the US, copper prices have tumbled from the record highs of nearly US$9,000 per metric tonne between 2005 and 2007, to around $5,000 per tonne, amid concerns that the global economic slowdown will puncture demand. Copper is a key metal in the electronics and building industries.

"We are foreseeing a situation where our mining companies may begin to cut down on further investment programmes because of [making] less money and, ultimately, this may not just affect their profits but even their employment base," Bob Sichinga, an economist and former MP who served on Zambia's parliamentary mining committee, told IRIN.

"We now have some mining companies advocating for the cancellation of the new tax regime [introduced by the government this year] because they feel the market is no longer favourable for such taxation, which is very unfortunate for the country."

Copper accounts for 80 percent of Zambia's foreign earnings, and has helped drive healthy economic growth of five percent over the last six years. The government had projected additional revenue of $415 million in 2009 after raising the mineral royalty tax from 0.6 percent to the global norm of 3 percent, and the introduction of a windfall tax on mining companies as a result of record copper prices.

Social services

Oliver Saasa, a consultant economics professor at the University of Zambia, said falling copper prices would affect the delivery of social services. "It's putting a lot of pressure on the new government. As it is now, there is a reduction in government revenue, and also no windfall profit because of the low prices; the windfall tax is only applicable where prices are high," he commented.

Newly elected President Rupiah Banda is keen to make a positive impression after narrowly winning the 30 October presidential election, in which urban voters in the capital, Lusaka, and the central Copperbelt region, Zambia's economic heartland, voted overwhelmingly for opposition leader Michael Sata. In his inaugural speech Banda pledged to fight poverty and improve social spending.

"Because of the reduced resource base, government will face problems in social investments for such critical sectors as education and health," Saasa said. "Already, even before the fall in copper prices became an issue, we had overshot our national budget because of the [October 30] elections."

The International Monetary Fund's (IMF) October survey projected that growth in sub-Saharan Africa was likely to slow to 6 percent in 2008 and 2009, down from 6.5 percent in 2007, but the deceleration in oil imports could be sharper, dropping to 5 percent.

Food and fuel prices are likely to remain substantially above their 2007 levels, the IMF said. This means deeper poverty for households in sub-Saharan Africa, which typically spend about half their income on food. The World Bank has estimated that 44 million people worldwide will fall into poverty in 2008 as a result of price increases.

The prices of key commodities have rocketed over the last three years in Zambia: a 25kg bag of maize-meal now sells for $18.00, up from $11.00 in 2006; a litre of petrol (gasoline) has risen US 75 cents over the same period.

But all is not gloom, according to Mathias Mpande, head of the mining engineering department at the University of Zambia. "The price of around $5,000 per tonne is not very low - it is still four times higher than the all-time average of copper, which is about $1,200 per tonne. In any case, the former prices were very high, and unsustainable because copper is traditionally a cheap product."

The three-year record copper prices were triggered by strong demand from the fast-industrialising Asian countries, especially China and India, the biggest foreign investors in Zambia's Copperbelt mining region.

"What we should realise is that this credit crunch has mostly affected the US and the European Union; China and India have not been that much affected. The demand for copper in China and India will not drop and, therefore, prices are slowly going to stabilise, which is why we should not tamper with the new tax regime," Mpande said.

Kalombo Mwansa, Zambia's mines minister, said the government was working on policy measures in the event of a long-term price slump. "Our hope is that this fall in copper prices won't last long, because the whole world is very much united to find a lasting solution to the credit crunch," he told IRIN.

"But even if it lasts longer than anticipated, government is currently working on measures to ensure there is a steady flow of investment ... and that the situation does not ground our economy."

At its peak in the 1980s, Zambia produced about 750,000 tonnes of finished copper annually, before output dropped to 200,000 tonnes in the 1990s. Current production is around 600,000 tonnes per year, but the government had projected this to rise to one million tonnes by 2010.