Swimming downstream: Zambia’s potential for copper beneficiation



Adding value to copper makes sense, to a point. But do recent policy decisions take us towards or away from that aim?

Zambia imposes a Concentrate Import Tax (CIT)

New Year’s Day was no party for copper smelters in Zambia. The government has implemented a duty on imported copper concentrates that it had first announced in the national budget speech in September 2018, but then seemed to abandon. The tax measure did not appear in the original Bill before Parliament, but was introduced by amendment very late in the day, and only circulated to affected parties on New Year’s Eve – the day before it came into force.

It was foreseeable that the duty – at 5% – would discourage beneficiation and lead to job-shedding. This has now come to fruition with Konkola Copper Mines (KCM) announcing that it will shut its Nchanga smelter. The government has retorted that KCM is simply using the import tax as a scapegoat for suboptimal performance. Nevertheless, the introduction of a copper concentrate runs contrary to Zambia’s stated development plans of encouraging ‘value addition’ and economic diversification. Here’s why.

What is beneficiation?

Think of beneficiation as selling banana ice cream instead of plucked bananas straight from the tree. A bunch of raw bananas sells for about US$0.5/kg but banana ice cream sells for about US$4/kg. That is an eight-fold value addition. The old quip about being a ‘banana republic’ was not only a metaphorical reference to a dysfunctional society, it was a literal reference to being trapped into exporting bananas and importing high-value products.

For African countries that are rich in natural resources, the general policy pronouncement is that we should be doing more to make the most of our commodities. We don’t want to be banana republics. The Africa Mining Vision (AMV) is, at least in part, a response to this call. It desires transparent, equitable, sustainable and inclusive development. Minerals and the mining industry can be so-called ‘flywheels’ for development, a catalysing force, not a mere means of earning foreign exchange revenue in the short run.

To realise this vision, the AMV emphasises ‘downstream linkages into mineral beneficiation and manufacturing.’ Whilst it’s economic jargon, the theory is no different to the flow of a river. Imagine a large copper deposit in the middle (being mined) and tributaries feeding into it. Downstream, picture a refinery, turning the copper into something more valuable. Upstream, picture a manufacturing facility that produces truck fleets for hauling blasted copper-bearing rock, mill balls for the rock crushers, and farms that supply food to the mine. These are direct inputs that flow into the mining industry. The tributaries are the infrastructure – finance, roads, electricity, human skills – and technology that support the mine, sometimes called ‘side-stream linkages.’

Each country needs to establish and implement a vision that best identifies its particular advantages and disadvantages to utilise any upstream, downstream and side-stream opportunities. A common error in policy thinking is to assume that the presence of minerals, of itself, is enough to justify promoting all types of beneficiation. It would be unwise, for instance, to go head-to-head with China in producing solar panels (a high-value finished product) just because you have copper. Choosing where to focus on the value chain is a critical development step.

Zambia’s 7th National Development Plan

Zambia has struggled to maximise the upstream, side-stream and downstream components of its copper endowment. The result is that its economy remains overly reliant on mining copper, placing too much pressure on the industry to fund Zambia’s expenditure on public goods.

Precisely because of this diagnosis, the treatment offered in Zambia’s latest national development plan(NDP) is to ‘create a diversified and resilient economy for sustained growth and socio-economic transformation.’ Zambia’s top export to the Southern Africa Development Community (SADC) region is refined copper. Its second-highest import is unrefined copper ore. The government wisely says, therefore, that it will promote ‘the establishment of multi-facility economic zones and industrial parks across different sectors to bridge the infrastructure gap and at the same time promote value addition to raw materials.’ This chimes well with the AMV’s emphasis on adding value to minerals where it makes economic sense.

The most immediate opportunity for such value addition is to refine copper. Substantial capacity for downstream refining already exists, especially in the Copperbelt; it is just not being sufficiently utilised or promoted.

Is Zambia operating at optimal capacity; if not, why not?

According to the Business Monitoring Index (BMI), Zambia will produce 582 000 tonnes of refined copper in 2018. Before the recent tax changes, BMI expected ‘solid production growth of 4.5 percent, the fastest of any major global producer bar India,’ on the expectation of fewer power interruptions. BMI believed that Zambia had an opportunity to become the copper smelting hub for Sub-Saharan Africa, and expected refined copper production to increase to 865 000 by 2027.

BMI believed that Zambia had an opportunity to become the copper smelting hub for Sub-Saharan Africa, and expected refined copper production to increase to 865 000 by 2027.

However, for that to happen, Zambia’s smelters and refineries need easy access to imported concentrates. Current smelting capacity is at 1.2 million tonnes, with a total of four operations, meaning that the three Copperbelt smelters are at the moment significantly under-utilised. This is partly because Zambia’s own copper production, at a little over 800 000 tonnes, is more than 20% lower than where it should be, due to the years of policy instability.

Running a smelter half full is both a waste of income and particularly costly, as the asset value of a plant depreciates regardless of production levels. Idling smelters and refineries undermine the case for future reinvestment or capacity expansion.

With copper prices set to increase over the next decade, there is a clear opportunity for Zambia, as BMI notes, but only if Zambia’s current smelters are empowered and incentivised by every policy instrument available to run at full capacity, or even expand. As Lawrence Hanschar, a lead engineer on the Kansanshi project said recently: “the industry needs to start investing in future smelter capacity now.”

The biggest challenge in this respect is the growing and unpredictable tax burden, which undermines potential future investment.

CIT simply increases the costs of importing concentrate into Zambia, and with the country’s own copper production low, smelters need all they can get from elsewhere. The DRC and other regional suppliers of unrefined copper can simply export their concentrate to other smelting destinations if the costs are too high – indeed according to the online publication Metal Bulletin, the DRC’s copper concentrate could now be diverted to China for smelting.

 As KCM has so clearly stated“The new import duty has an impact on every tonne of copper produced resulting from imported concentrates. The current margins are thin and completely eroded through this impact, resulting in high production costs and operational losses.”

While the government has amended the Income Tax Act to “reduce the company income tax rate to fifteen percent from thirty-five percent for companies that add value to copper cathodes”, this does little to compensate for the negative effects of an onerous upstream tax regime. Moreover, it undermines the profitability that may accrue from vertical integration. According to the Chamber of Mines: “Players that would otherwise have come into Zambia to integrate mining and smelting will now set up elsewhere and import our concentrate. The tax deduction will not be incentive enough on its own to ensure increased downstream beneficiation.”

What can Zambia do?

If Zambia utilised its current smelting capacity, it could indeed become a regional refining and manufacturing hub. The benefit of smelting is in the immediate value-addition to a raw material – remember the banana ice cream. But, there is also huge value in the investment in new technologies that may have positive spillover effects, in addition to encouraging upstream production of inputs like mill balls. This is the ‘flywheel’ – the virtuous cycle – that leads towards a diversified economy. From mining copper, to refining, to manufactured inputs, and then beyond.

If Zambia wants to emulate the good example of other major copper producers, like Chile, it needs to take two immediate steps. First, it should get the initial conditions for investment attractiveness right. Taxing every productive activity may generate short-term rents, but it undermines future investment. Without investment, there is no growth. Growth would broaden the tax base and earn the government more money, more sustainably in the long run.

Second, it has to incentivise the full utilisation of current smelting capacity to avoid wasting its assets. The vision, in line with the AMV, should simultaneously focus on building upstream and side-stream linkages. Successful economic diversification depends on it.

By Mining For Zambia
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