Vedanta: copper pie in the Zambian sky?
Vedanta is "ramping up" its copper production at Zambia's biggest mine despite rising costs, in the hope that it can drive down prices from its suppliers.
This is virtually certain to result in lay-off of workers. And - according to a World Bank expert - despite the expansion, new orders just won't arrive.
Meanwhile - despite recent reports to the contrary, the Zambian government says it still plans to impose higher taxes on companies - such as Vedanta - which have benefited from cut-price privatisations in the recent past.
Copper's fall takes shine off Zambia's ambitions
By Tom Burgis in Chingola
18th November 2008
Africa's biggest copper smelter, a space-age contraption towering over rickety dwellings and pot-holed roads in Chingola, northern Zambia, whirred into life this month.
The $500m (€395m, £333m) temple to Zambia's industrialisation hopes might still be a tract of mud, however, had Vedanta, the Indian miner that is the majority owner of the nearby concession, predicted the steep slide in commodities prices.
Two years ago, copper traded at highs close to $9,000 a tonne. By October this year, the impending global recession had driven the price below $4,000.
At least five exploration projects have been mothballed, says an industry executive. Another says: "There are big underground mines that just can't go on at this price indefinitely."
Labour unions are braced for job losses and forecasts for future orders are bleak.
"Zambia has done very well for five or six years when it rode the international wave of copper prices," says Kapil Kapoor, the World Bank's country manager. "That will no longer be possible." He estimates that Zambia's government stands to lose out on annual revenues equivalent to at least 2 per cent of total economic output, which it had hoped to channel into infrastructure investments.
Across much of sub-Saharan Africa, the story is the same. The region's mineral resources have fuelled its recent growth, analysts at Absa Capital wrote. They now foresee depreciating currencies, widening deficits and evaporating mining investment in at least 11 countries. Mozambique's fortunes are inextricably linked to its bauxite seams, as are Namibia's to its diamond fields. Each relies on commodities for two-thirds of their exports..
In Zambia, a landlocked country of 12m poor and the continent's biggest copper producer, the dependency is even more acute. Copper, used mainly for electrical wiring, and cobalt accounts for 85 per cent of exports and one in 10 of all formal jobs.
In Chingola, at the heart of the Copperbelt region that stretches over the Congolese border, roadside purveyors of giant mushrooms rely on a steady flow of passing mineworkers. Waiters attend to thirsty foreign mine managers. Illicit miners have enough perils to contend with without a collapse in their incomes.
"Copper is the backbone of Zambia," says Kabange Tamyano, who lost his job as a miner in 2001. He touts for work as a driver for former colleagues but remains preoccupied with the mood of commodity traders 8,000km away.
"When copper is not doing well on the London Metal Exchange, we get very, very worried."
Kalombo Mwansa, mining minister, is anxious too. While some 20 exploration projects are in various stages of development, he says, "those that will be raising money now are fearful".
But he is not ready to back down on plans to impose stricter terms on the foreign mining companies that bought prime assets in cut-price privatisations at the start of the decade. "The tax regime is designed to keep mining companies viable but the government has to take a bit more to support our own social and economic investment," he says.
Mining investors - many now operating at close to the cost of production - are threatening legal action and warning of damage to Zambia's reputation. "The government will have to negotiate or there will be serious job losses," says Moses Banda, a mining executive and former economic adviser to the presidency.
Over the border in the Democratic Republic of Congo, several miners have suspended or delayed operations. Katanga Mining is reviewing plans to revive the country's biggest underground copper mine.
Mineral-dependent countries pin their hopes on continued demand from fast-growing Asian giants. Yet price declines could distort the terms of the $9bn commodities-for-infrastructure deal Congo struck with China at the height of the boom a year ago.
In Zambia, decisions by the Indian groups who control the biggest mines will be all-important. Deb Bandyopadhyay, resident director at Vedanta's Copperbelt venture, says rising costs are forcing him to ramp up production while driving a harder bargain with suppliers and entering talks with unions on "restructuring".
The government aims to double copper production to 1m tonnes a year by the end of the decade by attracting investments such as the Chingola smelter.
But Zambia can only control one side of the supply-demand equation. "Making more of the stuff assumes a market," says the World Bank's Mr Kapoor. "They will have the capacity for 1m tonnes but the orders will not arrive."
Copyright The Financial Times Limited 2008