Copper Minning in Zambia

Copper Mining in Zambia
Norman Mulimbwa Shachile
WHUT, Luoshi Rd., International students building No.8, Wuhan, 430070, PR China

Abstract
The mining industry has been the economic and social backbone in Zambia since the first major phase of exploitation of the Copperbelt 's Cu-CO deposits commenced in the early 1930 's. Since that time a wide spectrum of other metalliferous and non-metalliferous resources have been discovered in Zambia and although exploitation of these has been limited, they clearly demonstrate the considerable opportunities for further exploration and mining. At the same time, however, there might be a threat to the prosperity of Zambia’s development process due to its dependency on this single natural resource. As such, it is the purpose of this academic paper to demonstrate the comparative advantage of Zambia’s abundant copper resource while at the same time focus on the implications of slumping copper prices for the Zambian mining industry in an attempt to elucidate the poor economic performance of Zambia’s local economy over the last few decades.

Keywords:
Natural resources; comparative advantage; international trade; poverty;

Date:
May 2013

Table of Contents Abstract 2 Keywords: 2 Date: 2 Table of contents 3 1. Introduction 4 2. Background 5 3. Global economic situation and outlook 5 3.1 Inflation 7 3.2 Continued volatility in commodity prices 7 4. The prospects of copper 8 4.1 Global copper production 9 4.2 Global Copper Demand 10 4.3 Copper pricing 10 5. Conclusions 11

1. Introduction
According to Papyrakis and Gerlagh (2004), Sachs and Warner (2001), Rodriguez and Sachs (1999), there is recent empirical evidence and theoretical work that provides strong support to a resource curse hypothesis; i.e. natural wealth tends to retard rather than promote economic growth. These scholars base their argument on the occurrences that the OPEC countries experienced between 1965-1998, which reflected a disappointing annual growth rate of –1.3% on average despite the significant injections of petrodollars into their local economies from the oil extractive industries.

The expectations of many early development economists (Nurkse 1953, Rostow 1960, Watkins 1963) that natural resource endowments could potentially support economic expansion by attracting funds from foreign creditors and investors, channelling the primary sector rents into productive investments and escaping “poverty traps” proved to be wrong. Similarly, any positive linkages between resource abundance and economic prosperity observed during the origins of the industrial revolution in Great Britain, Germany and the U.S. or more recently in countries, such as Botswana, Norway and Iceland appear to be exceptional cases rather than belong to a general applicable rule (Sachs and Warner 1995, Wright 1990).

This academic paper attempts to shed some light onto this paradoxical relationship between resource affluence and economic performance while going against traditional ideology that purported in favour of comparative advantage. That is, it attempts to challenge the line of thinking that all nations must concentrate or specialise their efforts in those areas and on those natural resources, goods ad services which it can produce more efficiently (at lower opportunity cost) than other goods and services (which it should import). Comparative advantage results from different endowments of the factors of production (capital, land, labour) entrepreneurial skill, power resources, technology, etc. It therefore follows that free trade is beneficial to all countries, because each can gain if it specializes according to its comparative advantage. Basic concept of international trade theory, it is founded on the work of the UK economist David Ricardo (1772-1823) on comparative cost.

I purposely explore the structure of the Zambian economy in order to obtain additional insights in this direction. That is, as a result of Zambia’s dependence on copper mining, factors such as the falling world copper price and the possible withdrawal of investment from the mining sector might seriously threaten economic growth and stability. Also, the general slumping of the global economy as a whole contribute to this stagnation and instability. An additional factor is the rise of substitutes for copper in a global economy that is looking for higher quality at a cheaper cost.

Section 2 provides a background to the Zambian economy and its dependence on this single commodity. Section 3 of the paper affords a global economic situation and outlook while section 4 sheds light on the copper prospects for the world at large and Zambia as a whole. Finally, Section 5 concludes the paper while offering some recommendations. 2. Background
The structure of Zambian production is described in the country’s 1995 social accounting matrix (SAM) (Hausner, 1999), and a summary is presented in Table 1. Several important features of the metal mining industry can be seen from this table. The mining sector is the second largest sector in the Zambian economy, accounting for over 17 percent of value-added and 12 percent of total production. Perhaps more importantly, the mining sector generates over 78 percent of the country’s total export earnings, with 97 percent of domestic mining output being sent abroad. Of the remaining sectors in the economy, those with significant export-intensities include tourism, tobacco, coffee, and energy.

Source: Republic of Zambia (1985). National conservation strategy

Despite the importance of mining, both in terms of its contribution to production and to export earnings, this sector does not account for a large portion of total labour employment. This under-representation is explained by the high capital-intensity of mining production. As shown in Table 2, over 86 percent of total factor income in this sector is attributable to capital (including returns to the natural resource).

Table 3 shows the distribution of factor incomes across the different sectors of the economy. From the table it appears that a majority of unskilled and primary-skilled labour and all of land incomes are concentrated in the agricultural and agro-related sectors (with the exception of trade and transportation services). Conversely most secondary and postsecondary- skilled labour incomes are generated in the services sectors (with the exception of metal mining). Although most of the country’s capital incomes arise in the tertiary sector, the mining sector is the largest individual sector in terms of capital income.

Source: Republic of Zambia (1985). National conservation strategy

Tables 4 shows that metropolitan high income households are largely dependent on the returns they receive from their non-agricultural and mining resource capital endowments.

Source: Republic of Zambia (1985). National conservation strategy

Furthermore, Table 5 shows that these households are the largest recipient of the returns to non-agricultural capital and high-skilled labour. In contrast, despite being the only recipients of returns to agricultural capital and land, rural households derive a majority of their income from their endowment of the two least educated labour categories.

Source: Republic of Zambia (1985). National conservation strategy

Zambia’s reliance on the mining sector raises obvious concerns regarding the sustainability of this dependence, as well as the stability of an economy whose foreign earnings are dominated by trade in a single commodity. In the last decade there was a substantial decline in world copper prices and since copper mining accounts for most of the Zambian metal mining sector, the fall in prices by almost 50 percent since the 1995 peak placed significant strain on the Zambian economy.

3. Global economic situation and outlook
Following several years of anaemic and uneven recovery from the global financial crisis, the world economy is teetering on the brink of another major downturn. Output growth slowed considerably during 2011, especially in the developed countries.

According to UN research (2011), a serious, renewed global downturn is looming because of persistent weaknesses in the major developed economies related to problems left unresolved in the aftermath of the Great Recession of 2008-2009. The problems stalking the global economy are multiple and interconnected. The most pressing challenges are the continued jobs crisis and the declining prospects for economic growth, especially in the developed countries. As unemployment remains high, at nearly 9 per cent, and incomes stagnate, the recovery is stalling in the short run because of the lack of aggregate demand. But, as more and more workers remain out of a job for a long period, especially young workers, medium-term growth prospects also suffer because of the detrimental effect on workers’ skills and experience.

The rapidly cooling economy is both a cause and an effect of the sovereign debt crises in the euro area, and of fiscal problems elsewhere. The sovereign debt crises in a number of European countries worsened in the second half of 2011 and aggravated the weaknesses in the balance sheets of banks sitting on related assets. Even bold steps by the Governments of the euro area countries to reach an orderly sovereign debt workout for Greece were met with continued financial market turbulence and heightened concerns of debt default in some of the larger economies in the euro zone, Italy in particular.

The United States economy is also facing persistent high unemployment, shaken consumer and business confidence, and financial sector fragility. The European Union (EU) and the United States of America form the two largest economies in the world, and they are deeply intertwined. Their problems could easily feed into each other and spread to another global recession.

Developing countries, which had rebounded strongly from the global recession of 2009, would be hit through trade and financial channels. The financial turmoil following the August 2011 political wrangling in the United States regarding the debt ceiling and the deepening of the euro zone debt crisis also caused a contagious sell-off in equity markets in several major developing countries, leading to sudden withdrawals of capital and pressure on their currencies.

Developing countries and economies in transition continued to fuel the engine of the world economy, growing on average by 5.6 per cent in 2012 and expected to increase slightly to 5.9 per cent in 2013 in the baseline outlook. This is well below the pace of 7.5 per cent achieved in 2010, when output growth among the larger emerging economies in Asia and Latin America, such as Brazil, China and India, had been particularly robust.

Even as economic ties among developing countries strengthen, they remain vulnerable to economic conditions in the developed economies. From the second quarter of 2011, economic growth in most developing countries and economies in transition started to slow notably to a pace of 5.9 per cent for the year. Initially, this was the result, in part, of macroeconomic policy tightening in attempts to curb emerging asset price bubbles and accelerating inflation, which in turn were fanned by high capital inflows and rising global commodity prices. From mid-2011 onwards, growth moderated further with weaker external demand from developed countries, declining primary commodity prices and some capital flow reversals. While the latter two conditions might seem to have eased some of the macroeconomic policy challenges earlier in the year, amidst increased uncertainty and volatility, they have in fact complicated matters and have been detrimental to investment and growth.
3.1 Inflation

Inflation has increased on a worldwide scale since 2011, driven by a number of factors, particularly the supply-side shocks that have pushed up food and oil prices and strong demand in large developing economies as a result of rising incomes and wages. Reflationary monetary policies in major developed economies have also contributed to upward pressure by, among other things, increasing liquidity in financial markets, which has kept interest rates down but has also increased financial investment in commodity futures markets, inducing an upward bias in commodity prices and enhancing volatility.

In developed economies such as Japan, the disruption caused by the earthquake in March 2011, along with other factors, pushed up the general price level, ending a prolonged period of deflation. Even so, inflation should not be a major policy concern for most developed economies. Inflation is expected to be moderate in the outlook for 2012-2013 with the weakening of aggregate demand, subdued wage pressures in the face of continued high unemployment and—barring major supply shocks—the moderating of international commodity prices.

3.2 Continued volatility in commodity prices
International prices of oil and other primary commodities continued to rise in early 2011, but declined in the third quarter. The pattern resembled that of 2008, although the reversal has not been as drastic. Nonetheless, average price levels of most commodities for 2011 remained well above those in 2010, by between 20 and 30 per cent.

The reversals since mid-2011 have been driven by four key factors: a weaker global demand for commodities resulting from bleaker prospects for the world economy, positive supply shocks in a number of markets, a sell-off in markets for financial commodity derivatives that occurred in concert with the downturn in global equity markets, and an appreciation of the United States dollar.

Brent oil prices averaged $111 per barrel (pb) in the first half of 2011, compared with an average of $79 for 2010 as a whole (figure I.7). The surge was mainly driven by the political unrest in North Africa and Western Asia, which caused disruptions in oil production, especially in Libya. However, oil prices dropped sharply in the third quarter of 2011 amidst weakening global demand, the anticipated resumption of oil production in Libya as well as a rebound of the exchange rate of the United States dollar.

In the outlook for 2013, demand for oil is expected to weaken because of slower economic growth in developed countries. Yet, total demand is expected to remain sustained because of the increased energy needs of developing countries, as well as the restocking of oil inventories.

Oil production is expected to resume progressively in Libya, while Saudi Arabia may keep its production at the current level. All things considered, the Brent oil price is expected to decline by 6 per cent, to $100 Pb, in the baseline forecast for 2013. Nevertheless, price uncertainty and volatility will remain high because of, among other things, the influence of financial factors. These include, in particular, fluctuations in the value of the United States dollar and unpredictable trends in financial derivatives’ trading in commodity markets.

4. The prospects of copper
After falling to 6000 USD/tonne in June 2011, the price of copper has quickly risen over 8000 USD/tonne at the beginning of October. Tightening fundamentals, a high level of liquidity and the return of risk appetite fuelled an upward trend in copper prices. According to the World Bureau of Metal Statistics, in the first eight months global consumption increased 6per cent y/y. China’s consumption remained relatively high on 5 million tonnes (+5per cent y/y), despite the government efforts to cool the domestic housing sector, one of the main end-users.

Moreover, in the developed countries refined consumption improved given restocking across the copper industry and a soft recovery of economic growth. Among the OECD countries, the European Union and Japan (+15 per cent and +30 per cent, respectively) were the best performers. On the other hand, the US consumption showed a slower growth rate (+5 per cent) as a consequence of the weak infrastructural and residential market. Hence, the world copper consumption contribution is confirmed to be robust.

In the same period, global copper production rose about 5per cent, with Chinese refined production growth more than offsetting output losses. After the shortfall in refinery output in the first half of 2010 the major copper miners reported drops in their output as a consequence of low ore grade at some of the largest mines and other disruptions: rainfall in Indonesia and closure for maintenance operations.

Chinese copper producers have finally reacted to satisfy an increasing internal demand. Strong domestic consumption and lower concentrate and scrap prices – due to higher availability – fuelled domestic refined output and increasing input demand (+10 per cent in the same period). Despite accelerating domestic production, strong demand spurred a deficit in the global copper market. LME warehouse inventories are indeed currently 30per cent lower with respect to the beginning of 2010. Strong physical demand is also confirmed by increasing cancelled warrants (a proxy for physical demand) which remained high in terms of total registered LME stocks (7 per cent in October). In the short run strong fundamentals should maintain their support for copper prices. Supply is struggling to keep up with demand and inventories are falling. Moreover, a weak dollar is expected to be another bullish factor.
4.1 Global copper production
There has been an accelerating growth trend in the production of copper the last three centuries, indicating the rapid expansion that the copper mining industry went through at a global level. At the beginning of the eighteenth century, the annual global production of copper did not exceed the amount of 2.4 thousand tones. Towards the beginning of the twentieth century, this amount was more than 2000 times higher. Graph 1 provides rough estimates of global copper production per year between 1725 and 2000 (see Schmitz 1979 and World Bank 2004).

Graph 1: World Production of Copper 1725-2976
Source: Republic of Zambia (1985). National conservation strategy

Through time there has been a radical change in the geographical pattern of copper production. Through the eighteenth and nineteenth centuries, most of the world demand for copper was met by copper mines in the UK (mainly Cornwall and the island of Anglesey later on), Sweden (Falun) and Germany (Saxony). In fact, it has already been claimed that the industrial revolution that took off in Great Britain and Germany was supported to a large extent by vast deposits of ores and coal in an era of high transportation costs (Sachs and Warner 1995).

New discoveries in remoter areas outside Europe shifted the geographical distribution of copper production. Before the First World War, much of the copper production was originating from large open-pit mines in Utah, Arizona and Montana. In the 1920’s, some of the world’s largest deposits of copper (and much higher grade ores compared to the ones extracted in the U.S.) were discovered in the Congo-Northern Rhodesia (Zambia) border Nowadays, the most important copper producers are by far the U.S. and Chile, which account for almost half of the global production.

Concerning the prospects of copper production, it is likely that the future major key players will be located in the South America region. Chile’s success in attracting foreign investment for its mining industry (initiated by the relaxation of its mining law at the beginning of the 1980’s) created a paradigm that other countries in the region attempted to imitate. Peru, Bolivia and Argentina offer a high potential for extensive extraction of high-grade copper. A hostile economic environment to foreign investment has discouraged the adoption of extensive mining projects till the 1990’s. New legal codes allowing for repatriation of profits and a more generous taxation scheme instigated interest in mining projects in those countries. In fact, according to Thompson (1997), steep increases in copper supply are expected to create a large surplus at a global level.

Evidently, this perspective evokes vague prospects for Zambia’s copper supply Further still, the long history of Zambia’s mining industry (dating back to the late nineteenth century) indicates a declining trend in the grade of Zambian copper (and thus a larger energy input in its production) and a small potential in increasing Zambia’s copper production. Therefore, Zambia’s role in the international copper arena is likely to be continuously downgraded and outweighed by more promising (in terms of production) countries.

4.2 Global Copper Demand
In order to make an inference on the trend of future copper demand, it is crucial to address the nature of industries that consume copper globally. Most of world’s copper is consumed in electrical and general engineering, building and transport. Less importantly, copper is also utilized in the production of domestic equipment and issuing coins. The majority of copper (more than half) is consumed globally within the electrical engineering industry in the production of electrical generation appliances.

Therefore, the most important use of copper lies in electrical wiring. In that respect, copper demand is closely linked to the global need of electrification. If electrification is one of the first steps in the process of economic development, one may expect that as economic development keeps on, the need for electrical wiring and copper may not remain robust for too long.

Copper demand is mainly driven by exports towards either the industrialized or newly industrializing countries. This is also a significant characteristic of the global copper demand. Historically, the establishment of mines in developing countries was meant to cater for the needs of the colonial powers rather than those of the local markets. To some extent, this has not substantially changed over time. Copper in developing countries such as Zambia is almost entirely intended to reach foreign markets as exports (Henstock 1996).

In addition, Zambia lacks the industrial inputs to utilise its own natural resource in the sense that it does not have the factories that produce the final goods of copper that are aforementioned and as such this poses a great disadvantage in the sense that as soon as international demand reduces, the local production (extraction of copper) will slow down drastically.

In this respect, the Zambian economy (and the mining industry in particular) is dependent on demand mainly from other parts of the globe. A third significant component of copper demand lies in the availability of substitute inputs. To a large extent, copper competes with itself. Much of world’s copper demand is met by recycled copper. The high potential to use secondary copper recovered from scrap significantly influences the global demand level of primary copper and constrains the export capacity of the developing world.

Henstock (1996) estimates the percentage of global copper supply attributed to secondary copper between 30 to 40%. Furthermore, aluminium is an important substitute for copper, especially in electrical engineering. Aluminium (whose laboratory isolation took place in 1825) was rarely exploited commercially until the end of the nineteenth century due to cost factors.

Nowadays, the raw materials for its production are widely and economically available, which makes aluminium broadly used in the manufacturing of electricity cables and wires. For instance, it is estimated that 50% of electricity already flows through aluminium wires (Henstock 1996). To a lesser extent, titanium and steel are used in heat exchangers (for instance used in power plants) instead of copper. Moreover, plastics substitute for copper in water pipes and plumbing appliances. An extensive availability of substitutes (often at a lower cost) is undoubtedly creating negative repercussions on the global copper demand.

4.3 Copper pricing
To a large extent, copper supply is inelastic and rather fixed for short-term time spans. In order to achieve increases in the stock of copper, long-term preparation is required. Often this involves high set-up costs and a large time gap between the moment the decision is made to invest in copper exploration and the time extraction takes place.

A fairly inelastic supply of a commodity implies that its price is largely determined by the demand conditions. In the case of copper, this implies that the price of copper (and the economic situation thus in countries like Zambia) is much dependent on the economic behaviour of developed and newly-industrializing countries (the main copper consumers).

According to this intuition, Figure 4 depicts the determination of world copper prices. The vertical line at Qw depicts the world supply of copper, which is assumed to be rather inelastic in the short run. The negatively-sloped Dw line represents the global demand for copper respectively. The crossing point of the two curves determines the international price (equilibrium), at which copper is traded. Despite the vital role of the copper industry in her local economy, Zambia produces a small share of the global copper output (around 5%). This implies that Zambia cannot affect prices significantly through influencing world copper supply, but rather takes the world level of copper prices as given. Assuming that Zambia’s copper supply amounts to Qz (depicted as fairly inelastic as well), the shaded rectangular represents the level of local mining revenues.

Figure 1: Copper Pricing.

The world price of copper will depend inter-temporally on the prospects of both the demand and supply side. Increases in global supply, mainly by new mines in Latin America, will exert a contracting effect on the international level of copper. In the same direction, as more recycled copper from scrap and aluminium replaces primary copper, demand for copper exports is likely to become weaker and prices will fall. In fact, Schmitz (1979) explains that copper supply between the end of the nineteenth and the twentieth century grew by a factor of 20, while aluminium production increased by more than 7000 times (which nowadays exceeds the annual production of copper.

Furthermore, as the grade of copper extracted falls over time for some countries, such as Zambia, low-grade copper is also prone to experience more drastic price adjustments. Prices of copper, volatile as they tend to be from time to time, they seem to follow a negative trend. Schmitz (1979) calculates that the real price of a tonne of copper in 1976 was more than 30% lower compared to the price of copper 100 years earlier on when adjusted for inflation.

5. Conclusions and Recommendations
Having shed some light into the disappointing performance of mineral-based economies, the analysis exposes a phenomenon often referred to as the “resource curse hypothesis”. This phenomenon significantly challenges the traditional theory of comparative advantage.

Mineral-dependent countries such as Zambia, Sierra Leone, Mauritania, Liberia and Niger are often deemed as prominent development failures. They all lag behind in terms of infrastructure, social capital and educational standards even when compared to resource-scarce countries of similar welfare level. Recently, there has been an invigorated interest on resource affluence and economic performance in the economic growth domain. In this direction, there has been a great interest in novel attempts to expound the contradictory underperformance of resource-affluent regions.

A claim can be made that a stagnated mining industry is likely to have negative repercussions. A mining industry in decline, irrespective to whether this originates from slumping world prices or increased operational costs, is most likely, in the long-run to lose out due to various factors which include the introduction of substitutes such as aluminium and recycled copper. As well, other disadvantages include the fact that most of the market for the single commodity is located and determined by developing or newly industrialised nations that are foreign to Zambia. This means that at one point in time in the future, there may be no market for Zambia’s copper.

A counter measure would be to diversify Zambia’s dependence on one mineral resource. That is, rather than concentrate on the single mineral; Zambia can begin to exploit its other mineral deposits by investing in their exploration and extraction (this would make sense in the view that Zambia has got deposits of aluminium and other minerals which it currently only extracts as by-products of copper mining).

Simultaneously, Zambia may consider investing in developing its economy in a way that introduces new industries (factories) that focus on the processing of copper into finished good rather than concentrating on the intermediate good (copper cathode).

Zambia may also consider introducing policy reforms that cater for the by-products of copper mining. In this sense, the government can take advantage of its already existing infrastructure and charge royalties to these by-products considering the fact that most of the mineral endowments are concentrated in the same area as the copper locations while multinational companies are taking advantage of this and are being charged close to nothing for these minerals.

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--------------------------------------------
[ 1 ]. Papyrakis et al.
[ 2 ]. http://www.businessdictionary.com/definition/comparative-advantage.html#
[ 3 ]. http://www.un.org/en/development/desa/policy
[ 4 ]. Ibid.
[ 5 ]. Op. cit
[ 6 ]. http://sites.uclouvain.be/aiece/password/WCP-10
[ 7 ]. http://www.un.org/en/development/desa/policy
[ 8 ]. http://www.un.org/en/development/desa/policy/wesp/wesp_current/2013wesp_pr_eastasia_en.pdf
[ 9 ]. http://www.lme.com/metals/non-ferrous/copper/
[ 10 ]. Papyrakis et al.

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