• Crossed wires

    Although copper mining in the DRC has surged even more impressively than Zambia in recent years, both countries face similar threats – the price of the red metal is falling and future investment is uncertain.

    Crossed wires

    In 2013, for the first time in many decades, the DRC produced more copper than the traditional African powerhouse Zambia. Both countries, however, need to hedge against weakening market conditions in the foreseeable future.

    The problems are the now all too familiar set of contemporary African mining issues: poor infrastructure, which leads especially to irregular electricity supply and high costs, as well as the bugbear of resource nationalism. How the two jurisdictions deal with these issues will determine which does better in future years.

    In January 2014, the DRC government told mining companies to put new projects on ice as the state-owned power producer could no longer guarantee supply. Although the country has massive hydroelectric potential along the Congo river, especially at the Inga Falls, its prime minister has admitted that it will take ‘several years’ to rehabilitate and extend existing infrastructure.

    The problem is not insoluble but it adds to the costs of mining in the DRC. The two biggest copper miners in the country (Freeport and Glencore-Xstrata) have both pledged to invest more than US$600 million in electricity infrastructure. But anyone who has watched the various attempts to rehabilitate, expand and develop the various Inga projects for the last three decades will surely consider this to be a major political risk.

    In 2011, for example, hydroelectric production at Inga also fell by 350 MW because of the low water flow of the river as a result of failure to dredge the channel.

    The DRC, in fact, has to import around half of its electricity from its neighbouring copper mining rival Zambia. Zambia’s power-generation industry is more established and includes private producers, yet its state-owned Electricity Supply Corporation is also struggling.

    In April 2014 it announced a 29% hike in electricity prices. Zambia’s Chamber of Mines responded by arguing that: ‘Mining companies will not be able to absorb this cost, especially the high-cost producing companies. The tariff increase is not sustainable.’

    Copper has traditionally been one of the great bellwether commodities. The legendary former chairman of the US Federal Reserve Alan Greenspan considered the copper price to be a ‘key barometer of global economic health’. The red metal’s use in wiring and plumbing means that more is consumed when manufacturing, vehicle production and construction go through boom periods.

    Some observers have suggested that the rapid rise of China as the planet’s greatest manufacturing power has ‘delinked’ the copper price from the health of the global economy. While there is perhaps a case to be made for this view in the US, a glance at longer-term graphs tells a different story when it comes to the global economy.

    Copper has traditionally been one of the great bellwether commodities … a ‘key barometer of global economic health’

    After spending the 1990s at levels not much over US$1 per pound (US$/lb), the copper price surged after 2003, on Chinese demand, to peak at over US$4 in 2010. It tracked the 2009 economic crisis, falling to nearly its 1990 levels that year but has subsequently recovered with the global economy (to a June 2014 price of US$3.10/lb).

    China is now centre stage in everything to do with copper, accounting for about 40% of global demand. But its growth is slowing. The country’s period of double digit growth rates is now a thing of the past as it runs into what economists call ‘weak external demand’ – the stagnation of the developed economies that buy its manufactured goods, in other words – as well as its own particular structural issues.

    Inadequate economic governance (simply put, corruption) is one of the structural issues that has affected the copper market in 2014.

    It recently became apparent that numerous Chinese companies had taken multiple loans by repeatedly pledging the same copper stockpile. Copper futures fell 10% in March when the news broke.

    To its credit, the government is clamping down on the practice. But this may be the measure that sends copper prices into a longer-term downward spiral as borrowing against copper stock piles is restricted and Chinese companies dump their reserves.

    A lower copper price will affect both Zambia and the DRC. The two countries share the Central African Copper Belt, which runs across central Zambia and the southern DRC state of Katanga. Copper mining goes back a long way in both countries, to the 1930s in Zambia and even further in the DRC. In fact the DRC – then called the Belgian Congo – was the major supplier of the metal (used in shell cases) to the Allies during World War I.

    Neither country has seen a continuous development of its copper mining industry. The DRC has been the scene of massive political instability, both as it achieved independence (1959 to 1961) and later, during the civil war and overthrow of dictator Mobutu Sese Seko (1997 to 2001).

    The war shattered copper production. State-owned mining company Gécamines had produced 450 000 tons of copper in the mid-1980s. In 2003 it was able to mine only a meagre 10 000 tons.

    Inadequate economic governance (simply put, corruption) is one of the structural issues that has affected the copper market in 2014

    While politically stable, Zambia on the other hand has suffered from what South African journalist David Mwanambuyu describes as ‘a global case study in mismanagement’. The country nationalised its copper mines between 1970 and 1974, just in time to run headlong into the global recession initiated by the Organisation of the Petroleum Exporting Countries’ (OPEC) 1973 price hikes.

    Zambia had also followed another dubious development orthodoxy of that era – attempting import substitution industrialisation. The policy failed, leaving the economy almost entirely dependent on something it could not control – the international market price of copper. Copper still accounts for 75% of Zambia’s export earnings.

    Mismanagement and dependency on a single natural resource ruined the Zambian economy. From a peak of over 700 000 tons in the 1960s, its copper production plummeted to just 226 000 tons in 2000.

    The country’s recovery has come on the back of the ongoing re-privatisation of copper mining since 1997. Well-known international mining and resources companies have invested in Zambia, including First Quantum Minerals, Glencore Xstrata, Vedanta, China Nonferrous Metals, Vale and South Africa’s African Rainbow Minerals. But the industry in the DRC has grown much faster.

    In 2013, it produced more than 900 000 tons of copper, according to the IMF. Although the Zambian central bank announced the country’s output to be 916 000 tons, this figure is widely believed to be inflated by double-counting. Many analysts, including the authoritative US Geological Survey, believe the DRC out-produced Zambia in 2013.

    It is difficult to predict the future of copper mining in both countries. The unexploited potential of the Central African Copper Belt is thought to be enormous. Miners in Zambia claim there are some 2 billion tons still to be extracted and Katanga is thought to hold a similar promise. However, resource nation-alism is reason for caution in both cases.

    All resource-rich countries face a common problem: how to extract the maximum benefit from the minerals they are lucky enough to have under their soils. The common solution is to require that mining companies do some processing before exporting minerals. But the requirement often spooks investors as mining companies tend to argue that they are better at extracting resources than processing them.

    All resource-rich countries face a common problem: how to extract the maximum benefit from the minerals they have under their soils

    In any case, local requirements can be unrealistic. In April 2013, the DRC government banned all exports of copper and cobalt, giving mining companies just 90 days to clear their stocks. After that all exports would be required to have been refined.

    However, the ban has already been delayed three times, having originally been expected to come into force in July 2013 and is now scheduled only for December 2014. But the same policy has been announced twice before – in 2007 and 2010 – and reversed on both occasions after protests from mining companies that poor electricity supply made processing impossible.

    The initiative has also been opposed by the governor of Katanga who told Reuters that he was ‘fully aware that mining operators have electricity problems’.

    In 2013, Zambia tried to impose a 10% tax on unprocessed copper but was forced to repeal it after complaints from the industry. The country’s attempted tax increase, however, is less blunt an instrument than the DRC’s efforts to regulate by decree.

    This lies at the heart of what has to be seen as competition between the two jurisdictions. Both have big copper-mining projects that are still at the developmental stage.

    In Zambia, a green fields development – First Quantum Resources’ Sentinel open-pit mine with a potential of 250 000 tons a year – is expected to begin production by the end of 2014.

    In the DRC the incremental development of the Tenke Fungurume concession, north of Lubumbashi, by a consortium comprising Freeport, Lundin and Gécamines, is ongoing. It started in 2006, includes what is currently the country’s biggest copper mine and is said to have a potential of 500 000 tons a year. It currently produces 195 000 tons a year.

    Beyond these big projects, however, the future is cloudy. The ability of the two states to create secure mining jurisdictions will be the critical factor. Their history shows that having a resource in the ground means very little unless the enabling environment satisfies investors.

    By David Christianson
    Image: Gallo/GettyImages