Zim commodities sector 2021 outlook

BY RESPECT GWENZI

Zimbabwe is a landlocked country with huge reserves of some of the world’s most valuable minerals including nickel, diamond, gold, platinum, and palladium. As a result of the structural make-up of the country, mineral exports contribute a large bulk to foreign currency earnings annually. Latest Zimbabwe Treasury statistics indicate that of the US$4,39 billion exports receipts generated in 2020, minerals alone have contributed about US$3,2 billion —  a staggering 72,9%. Historically, gold has been the top foreign currency earner for Zimbabwe, a position which is now being threatened by one of the rarest mineral commodities in the Earth’s crust — the platinum group metals (PGMs). For starters, platinum deposits are found alongside five other key minerals: palladium, gold, rhodium, ruthenium and iridium and are referred to as platinum group metals (6E). Zimbabwe holds the world’s third-largest reserves of platinum after South Africa and Russia. In 2020, the country produced 5% (470 000 ounces) of the total world output.

According to the Reserve Bank of Zimbabwe (RBZ) statistics, in 2020 PGMs toppled gold to become the country’s top forex earner. They generated about US$1,7 billion, a 47% increase from US$1,2 billion recorded in 2019. On the other hand, gold generated about US$994,7 million in 2020, a 5,1% increase from about US$946 million attained in 2019. However, gold produced and delivered by miners to Fidelity Printers and Refiners (FPR) in 2019 was 31,1% higher than 2020 deliveries of 19,05 tonnes. The 2020 gold receipt value was higher thanks to the outbreak of the Covid-19 pandemic. Gold acts as a haven during periods of high uncertainties, a characteristic it gained from its historical use as a medium of exchange and store of value. International gold prices were 25% up throughout 2020 but deliveries to FPR domestically tumbled as a result of increased side marketing activities emanating from a large disparity between FPR and global price offers. Since the abandonment of full dollarisation in 2018, gold deliveries are nosediving and the smuggling of gold has reached new highs. Equity Axis projections have the country losing gold worth at least US$1,5 billion yearly due to rampant smuggling.

In what seems to be a consolidation of a downward trend in gold production, cumulative gold deliveries to official points fell by 30,5% to 3,98 tonnes in the first quarter of 2021 relative to 5,72 tonnes achieved in the same quarter of last year. Also, the latest statistics show April 2021 gold deliveries to FPR at 138 tonnes, a 5,5% percent from about 1,46 tonnes recorded for the same period in 2020. In my view, the decline in gold output so far this year is equally linked to side marketing.

This is a response to FPR’s payment delays as well as the Reserve Bank’s forex retention thresholds of 40% eating on miners’ profitability given exchange rate disparities between the interbank and the parallel market. One of the country’s largest gold producers, RioZim, recently announced that it would engage with the RBZ to increase its forex retention threshold so as to meet its operational expenditure requirements. Also, gold production in the early part of the year was greatly affected by the heavy downfall of rains affecting small-scale and artisanal miners. These two groups of miners contribute a large share of total deliveries to the FPR relative to large-scale miners.

It remains to be seen if the gold output will sharply recover in the second half of the year to compensate for lost production. We believe there is potential for recovery, but with limited upside, given a tilt in policy stance. On the domestic front, the government has introduced some production and productivity sweeteners in the form of increased forex retention thresholds on all incremental gold delivered. The RBZ used to take 40% of forex on all export receipts at the interbank rate with exporters retaining 60% in their books. Now, the RBZ will continue to take 40% but miners who exceed their monthly gold deliveries to FPR are now entitled to retain 80% of foreign currency earned on that incremental delivery.

If the miner decides to list on the Victoria Falls Stock Exchange (VFEX), they will retain 100% forex earned on incremental gold production. Also, all large-scale gold miners are now allowed to export their incremental gold directly abroad via the facilitation of FPR. This policy adjustment will likely induce gold miners to produce more to meet their operational expenditures as well as giving them more room to hedge risks associated with the fragile Zimbabwean dollar. Furthermore, in the last quarter of 2020, the government announced its intentions to unbundle and partially privatise FPR to allow private sector participation in its operations. If the move is completed, gold delivery to FPR will also likely improve significantly as the entity would be now run with the added voice of private players.

The gold price outlook for 2021 is mixed. On one hand, the current global vaccination campaign is helping to moderate the spread of the virus in some key parts of the world. For instance, the United States which suffered the worst from the virus last year is now recording significantly lower infections and deaths. To date, 39,3% of its population of about 332 million is fully vaccinated while 49,5% have received at least one dose and the country is expected to fully reopen by July. In China, daily new cases of the virus are now insignificant and economic activity is nearing its pre-pandemic level.

All these signs of a return to normalcy have affected the gold price which since the beginning of the year to date is down 0,7%. On the other hand, the Covid-19 infection rate which is on the rise in Asia particularly in India is providing some support for gold. India is the fourth largest consumer of gold in the world. Also, the world is facing rising inflation risk coming from increased liquidity as governments pumped billions in stimulus packages last year. Increased inflation expectations provide support for gold since investors use the yellow metal as a hedge against inflation. Overall, gold is under pressure to decline from last year’s highs as benefits from expected economic recovery will outweigh the cost.  Consequently, given low domestic production and tight international prices, Zimbabwe will likely realise lower gold earnings in 2021 for the second year in a row.

In my view, PGMs will retain their position as the top forex earners this year. Zimbabwe Statistics Agency (Zimstat) statistics show PGMs exports for March 2021 were up 202% to US$168,9 million – their highest export earning since 2009. This has helped the country’s total exports for that month to spike 35,5% to US$461,8 million. Q1:2021 monthly trend shows PGMs gaining momentum, surging 789,5% from the February level of US$19 million, an upward movement likely to persist throughout the year. The price of PGMs as powered by palladium and platinum continue strengthening further since the year began (platinum is up 8,2% and palladium 14,7% year-to-date).

The World Platinum Investment Council (WPIC) estimates that global platinum demand exceeded supply in 2020 by a mouth-watering 937 000 ounces and another huge deficit of the metal is expected in 2021. This year’s deficit will be for the third year running and is being driven by an expected 25% automobile production recovery mostly in China. In economics, when product demand outstrips its supply, the price will have to rise until an equilibrium is attained. This is what is currently happening in the PGMs sector as world producers are yet to fully recover from the 2020 production halt. Also, the commitment by advanced economies to move away from fossil fuels to attain carbon neutrality by 2050 is exerting upward pressure on PGMs prices.

Looking at global trends, PGMs sub-sector will emerge as the top driver of export value and help the government in its quest for a US$12 billion mining sector economy. According to the Zimbabwe Treasury, Great Dyke Investments’ US$3 billion platinum mine under development in Darwendale is expected to be fully operational in 2022. It will become the country’s largest PGMs producer overtaking Zimplats and increase the national platinum output by 866 000 ounces per year at its peak. The benefits for Zimbabwe will be enormous from PGMs production if it also starts to develop processing capacity instead of relying upon South Africa.

Gwenzi is a financial analyst and MD of Equity Axis, a financial media firm offering business intelligence, economic and equity research. — respect@equityaxis.net