Minews - Zambia copper dispute could pressure market

(Minews) - Windfall taxes usually work best when prices are rising.

Zambia has taken a different approach. The price of copper is in free-fall and in January, the government hiked royalties to try to shore up its finances.

The Copperbelt that stretches across southern Congo and northwestern Zambia accounts for 15% of total global copper production. Zambia was ranked the seventh-largest producer of the red metal in 2014. Output has been growing; the southern African nation could move into sixth place if new mines come online this year as planned, according to data from Australian bank Macquarie.

The copper price has rebounded 7% since touching five-and-a-half-year lows in mid-January, but is still down almost 10% since the start of the year. The dispute in Zambia may start to feed through into higher global copper prices if more mines shutdown.

“If you start to see a tightening a market and you see production coming offline in Zambia due to taxes and economics then I think that could be impactful on sentiment about the marketplace,” said Vivienne Lloyd, a base metals analyst at Macquarie.

Copper futures on the London Metal Exchange are currently trading down 1.6% at $5,740.00 a metric ton – down from $6,250 a ton at the start of the year.

Zambia knows that it cannot upset foreign investors and mining companies so much that there is a mass exodus. Already, Barrick Gold Corp. has said it will shut its Lumwana mine, and other closures have been threatened.

Newly-elected Zambian President Edgar Lungu has expressed a desire to work with miners to resolve the standoff. But in late February he appeared to take a firmer position, saying that if Barrick shuts the mine, he would find a strategic partner to work with the government to take over mining operations.

“It should be noted that copper production performed poorly in 2014 even before the new mining tax regime was introduced,” the president said in a statement on Feb. 23.

Anecdotal evidence suggests that despite the entrenched positions, behind-closed-doors conversations between the Zambian government and mining companies are apparently more diplomatic. Falling tax receipts may nudge the government to be more conciliatory.

“Publicly, the view of the government is quite intransigent, it’s a very strong view … Privately, there is a degree of flexibility,” said Raj Kohli, global head of mining and metals at Standard Bank, in a panel discussion at the 28th International Copper Conference in Brussels last week.

Some market participants believe that had the hike happened when red metal prices were healthier, mining companies might not have been so vocal. As it is, mining companies are coping with soaring power and labor costs, as well as the negotiations with the government.

“It’s difficult” but we’re positive, said Somnath Ghosh, general manager of sales and marketing at Konkola Copper Mines, the country’s second-largest copper producer, in a speech at the conference. KCM, a unit of London-listed Vedanta Resources PLC, recently settled a separate dispute with the Zambian government over value added tax refunds worth around $130 million.