Last year it was the Democratic Republic of Congo. This year it is Zambia.
Both African countries have driven through draconian changes to their mineral tax regimes, overcoming the entrenched opposition of some of the world’s biggest mining houses.
Both are betting that the world’s need for their resources, particularly copper and cobalt, will keep the tax receipts flowing.
Right now, however, the push for a greater share of the wealth lying beneath the African Copperbelt is causing supply-chain disruption for both copper and cobalt.
Operating in both the Congo and Zambia just got more expensive.
One Zambian copper smelter has closed, another has reduced operations and Glencore last week confirmed media reports it will be cutting production at its Mutanda mine in the Congo.
The news sparked a rally in the copper market underlining just how important these two African countries have become to the global supply picture.
Cobalt barely reacted because last year’s “hot” metal is still digesting the production glut that followed the 2017 price surge.
The current supply turbulence, however, promises more volatility ahead for cobalt as well as copper.
Miners lose rumble in the jungle
The Congo and Zambia have for some time been slugging it out with mining companies about the proposed tax changes.
The arguments were still playing out at the Mining Indaba conference in Cape Town earlier this month.
But the miners have lost the contest.
Congo signed its new mining code into law in June last year.
Copper royalties were raised from 2.0 to 3.5 percent and those on gold from 2.5 to 3.5 percent. A new “super profits” tax, set at 50 percent, was introduced. It kicks in when profits exceed 25 percent of those forecast in a mine’s original feasibility study.
Miners took another blow in December, when Congo declared cobalt a “strategic” mineral, nearly tripling the royalty rate to 10 percent.
Zambia’s tax hits on miners came into effect at the start of this year, lifting the sliding royalty scale by 1.5 percentage points to between 5.5 to 7.5 percent, depending on the copper price.
If copper exceeds $7,500 and $9,000, the royalty rate will go up to 8.5 and 10.0 percent respectively.
A new 15-percent royalty on gold and gemstones has also been introduced, while mining companies are waiting nervously to see the details of the Zambian government’s plan to replace value added tax with a non-refundable sales tax at the start of April.
Operating in both the Congo and Zambia just got more expensive.
However, it’s a less headline-grabbing change in Zambia’s tax system that has caused the immediate supply chain disruption.
A new 5.0-percent import tax on copper concentrates has halted the flow of raw materials from Congo to smelters in Zambia.
The latter has excess smelting capacity, the former too little.
Smelters such as Vedanta’s Nchanga and ERG’s Chambishi have historically relied on Congo for part or all of their feed.
The reaction to the new import tax has been swift, Nchanga reducing output and Chambishi closing. Each has generated knock-on effects.
Nchanga operations have been “rationalised” because the new import duty makes smelting Congolese concentrates “commercially unviable”, according to local operating unit Konkola Copper Mines (KCM).
The smelter produced 135,000 tonnes of refined copper in the first nine months of 2018, including 67,000 tonnes from third-party, for which read Congolese, feed.
Lower output at the smelter means less sulphuric acid for the Nchanga copper mine, where the acid is used to leach concentrate into metal. KCM therefore suspended mining operations at the start of January.
ERG has shuttered its smaller 50,000-tonne per year Chambishi smelter because it was wholly reliant for feed on concentrates from the company’s Boss Mining and Frontier operations in the Congo.
This too has caused a ripple effect, Fastmarkets reporting that ERG is now placing Boss Mining on care and maintenance as the company studies the feasibility of adding more processing capacity to treat the concentrates previously headed for its Zambian processing plant.
ERG’s cross-border flow included cobalt raw materials for refining at Chambishi, putting another kink into this market’s volatile supply side.
Glencore is facing a similar dilemma to ERG at its Mutanda mine, where the ore body is transitioning from oxide, suitable for straight-to-metal leaching, to sulphide, which generally requires processing by a smelter.
Such ore body changes are not uncommon in copper mines as early operations deplete the near-surface oxide deposits which overlay the deeper sulphide deposits.
A new mine plan will halve Mutanda’s production to 100,000 tonnes going forward, “pending an investment decision on whether and how to process the now increased sulphide reserves/resources,” Glencore said.
An investment decision that has been made more difficult by Congo’s tougher tax regime and the potential for more changes ahead.
Another key proviso of last year’s new mining code was a reduction in operating contract stability from 10 to 5 years, meaning more frequent potential shifts of the goal-posts by the government.
Glencore’s investment decision at Mutanda will be a micro play-out of a broader theme. Have Congo and Zambia pushed the redistribution of resource wealth too far by stifling investment in future production?
Too big to lose
Mining companies fear that this may not be the last assault in either country, given both are burdened by heavy national debt and creaking budgets.
They are also, however, key sources of two metals expected to see fast-accelerating demand from the electric vehicle revolution, cobalt for lithium-ion batteries and copper for the infrastructure that will enable that revolution.
Cobalt’s dependence on the Congo is a well understood problem for both lithium-ion battery manufacturers and their automotive customers.
Greater assertiveness by Congo’s government joins a long list of supply stability issues.
Copper, by contrast, must learn anew the potential for central Africa to instill unpredictability into the price.
Congo’s copper production collapsed over the 1990s and early 2000s to the point that it lost its former preeminent role in the global production picture.
But now it’s back. National output has grown from under 30,000 tonnes in 2005 to 1.2 million tonnes in 2018. Along with Zambia’s output of 800,000 tonnes, the two countries account for around a tenth of global production.
Only time will tell if Congo and Zambia are right in their belief that miners will accept, however reluctantly, the new costs of doing business.
But the short term outlook is for more supply-chain turbulence.
(By Andy Home; Editing by Jane Merriman)