Investors in copper have been smiling with glee in the last 18 months following the surge in the global price of copper from US$4,830/MT on April 5, 2020 to US$9,139/MT on September 21, 2021. The reopening of the global economy in the months after global vaccine rollouts amid copper supply shortages underpinned the surge in the demand and, in turn, the price of the metal. The metal has traditionally been used in electronics and semiconductors, building and construction, transportation equipment, machinery, and consumer products. In addition, the rise in electric vehicles in many developed economies has further warranted firmer demand for copper, among other metals, over the coming years.
The high demand has outweighed short-term supply because of Covid-related disruptions, but the global copper market is expected to overturn the current deficit in 2022. As a result, the temporary shortage of copper has led to backwardation in one of the commodity’s futures markets, Commodity Exchange (Comex). Comex is one of the largest metals exchanges in the world and it operates under the New York Mercantile Exchange. Backwardation manifests in futures markets when the spot price is higher than future prices.
This happens when there is a benefit to owning the physical material, such as keeping a production process running. This is also known as a convenience yield, which is typically high when stocks are low and vice versa. The short-term shortage of copper has been a major driver of its firm prices but the softening in the price since May 2021 strongly suggests that the global market is anticipating an easing in copper supply constraints and this subsequently underpins the backwardated futures market.
However, the softer copper price expectations in 2022 and beyond remain well above US$7,500/MT, according to IMF, World Bank, and International Strategic Analysis (ISA).
The current dynamics in the copper industry are also expected to impact some of the major producers of the metal. Among these is Zambia which accounted for 790 000 MT of the total global production of 20,310 million MT in 2020, according to statistics by the United States Geological Survey (USGS).
Zambia’s economy is largely dependent on copper mining more than anything else. Exports of unrefined and refined copper made up 73% of the country’s total exports valued at US$7,8 billion in 2020.
A study on the relationship between copper prices and Zambia’s economy by Chikalipah (2018) revealed a positive and strong relationship between 1960 and 2015. In addition, a study by Ndlovu and Schaling (2017) found evidence of a long-run equilibrium relationship between copper prices and Zambia’s financial market variables such as short-term interest rates and the Lusaka Stock Exchange main board index.
Zambia has been struggling under the weight of unsustainable international debt levels with a national debt-to-GDP ratio of 118% in 2020 and it made headlines when it defaulted on a US$42,5 million payment on a Eurobond late last year on the back of several factors that include weak copper prices in the years preceding the default.
However, the change in leadership following Zambia’s recent presidential elections was construed as a positive sign for the economy, as illustrated by the sudden and positive change in the Zambian kwacha’s exchange rates shortly after President Hakainde Hichilema’s victory.
In his first address as president, Hichilema promised that his new government would implement policies to reduce the fiscal deficit, restore economic growth and review mining policies. We opine that the outcome of these policies will be complemented by copper price forecasts which are above the 10-year average copper price of US$6,707/MT.
The optimistic outlook for copper also means that businesses in the country will also benefit from the strong copper prices, both directly and indirectly, to a larger extent. Among these are subsidiaries of Victoria Falls Stock Exchange-listed SeedCo International and Zimbabwe Stock Exchange-listed companies Delta Corporation, Art Corporation, and Axia Corporation. Delta operates National Breweries in Zambia which contributes less than 10% to the group’s total revenues. An influx in illicit alcohol in the country has affected National Breweries’ market share and profits in Zambia but we anticipate the firm copper prices and fresh policies from the new president to turn the business back into profits in the medium-to-long term.
SeedCo International’s largest business unit is the Zambia and DRC unit, which contributed US$28,7 million of the group’s total FY21 sales of US$88,5 million. The seed supplier could indirectly benefit from calls to diversify Zambia’s economic drivers through additional government investment in agriculture. Axia Corporation distributes fast-moving consumer goods to Zambia under its Distribution Group Africa subsidiary.
The subsidiary recently acquired the Nestle and Blue Band distribution agencies in Zambia and recorded a 11% growth in real dollars in FY20. However, Axia’s operations in the region only contribute less than 15% in revenues and less than 5% in before-tax profits.
Art Corporation is a diversified entity that generates the bulk of its revenues from batteries. Revenues from Zambia’s batteries division, however, account for less than 5% of total group revenues.
We note that the new government in Zambia will be key in driving a turnaround in the country, and that local investors who want to play into Zambia’s potential can consider the above-mentioned stocks on the ZSE and VFEX.
Mtutu is a research analyst at Morgan & Co. — +263 774 795 854 or email@example.com