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Recovering copper prices to positively impact Zambian economy

Zambia‘s economy went through a difficult patch when the global crisis hit and the demand for commodities fell with the resultant impact on prices.

This was not surprising given the country’s dependence on copper (approximately 60% of the country’s workforce is linked to the copper industry).

Many jobs were lost during the peak of the crisis, which had an impact on the exchange rate, tax revenues and aggregate demand as disposable incomes shrank. Banks were also hit, with a rise in bad debts seen by many.

With the world now seemingly on the road to recovery, the copper price has been firming again, with Bloomberg reporting on Friday that the copper price closed the month having recorded its biggest monthly gain in a year.

The Zambian kwacha has responded accordingly, hitting a two month high last week of US$1: ZMK 4,880 on the back of strong metals prices and investor appetite for riskier emerging and frontier market assets.

Investments that were hitherto put on hold are back on the go, with copper output now expected to increase to 750,000 tonnes in 2010 and 1 million tonnes by 2012, from 700,000 tonnes in 2009.

An example of this changing sentiment came from London-listed Vedanta Resources, which reported a 28% increase in output to 55,000 tonnes at its Konkola Copper Mines (KCM), Zambia’s largest mine, in its first quarter to June 2010 period. It expects output by 2012 to reach 500,000 tonnes.

Copper production in Zambia rose by 16% to 321,132 tonnes in the first five months of 2010, shored up by rising global metal prices, central bank data showed this month.

We expect this turnaround in the mining sector to filter through to the rest of the economy, given the role copper plays as a key driver of economic performance. This should in turn filter through to the financial performances of counters listed on the Lusaka Stock Exchange, with the mining, banking, and consumer driven companies in particular expected to benefit.

Article produced by the Imara Africa Securities team. Imara is an investment banking and asset management group renowned for its knowledge of African markets.

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