In the past, Zambia’s GDP per capita has been closely correlated with the copper price. Should the growing increase in demand for copper be maintained, and the reforms by President Hakainde Hichilema’s administration come to fruition, the country is likely to see strong growth in its GDP per capita. Photo: Getty Images
As the world looks to transition away from fossil fuels, and governments around the world increase investment in low-carbon energy, the security of the supply of critical minerals is top of mind. To meet global net-zero and decarbonisation targets, countries will require stable and significantly larger supplies of minerals and metals critical for the energy transition.
Zambia is in a position to benefit from the growing demand for copper to support the global energy transition. The country is politically stable and it has large reserves of copper, in addition to a long history of copper mining.
However, for Zambia to truly benefit from the opportunities of high copper prices and the growing demand for copper present, it will need to maintain a stable minerals taxation policy and address legacy issues that might be negatively impacting investor confidence.
Zambia is Africa’s second-largest copper producer and the world’s seventh-largest, producing 800 696 tonnes of copper, as well as 247 tonnes of cobalt last year. The price of copper has fluctuated over the last decade, moving from $8 569 a tonne in January 2012, to $4 471.79 in January 2016, before recovering to $9 972.10 a tonne in January.
Historically, the price of copper has been volatile, however, the current increased demand for critical minerals, driven by the increasing investments in green technologies, suggests the current increase in prices will be sustained for some time. Indeed, global demand for copper outstrips the supply.
Meeting this demand requires greater investment from mining companies, which they will only make if there are favourable and stable conditions for the long-term capital investments particular to the industry. Moreover, the tightening of monetary policy globally is expected to weaken global economic outlooks and temporarily place downward pressure on the price of copper in the short term.
All this means it is vital for Zambia to ensure the stability of the minerals taxation policy, as it presents opportunities for it to capitalise on copper and to build a sustainable, diversified and inclusive economy.
In the past, Zambia’s GDP per capita has been closely correlated with the copper price. Should the growing increase in demand for copper be maintained, and the reforms by President Hakainde Hichilema’s administration come to fruition, the country is likely to see strong growth in its GDP per capita.
Reforms by the Hichilema administration must focus on ensuring a stable, attractive investment environment to kickstart the mining industry and connect it to other sectors of the economy, as a matter of urgency.
The government should prioritise reforms and changes. These include the creation and maintenance of a stable and resilient minerals royalty tax; restructuring the country’s debt; addressing conflict between the government and mining, and providing clarity on the nature of the Zambian Consolidated Copper Mining Investment Holdings — whether it is a mining company or an investment holdings company.
Zambia changed its minerals royalty tax (MRT) and minerals taxation regimes 10 times in the 16 years prior to 2019, according to a report by the Southern African Resource Watch. This is in contrast to the Natural Resource Governance Institute’s recommendation that the country should implement a stable MRT which is resilient to changes in the copper price.
Mining companies require regulatory tax stability to make capital investments, as mining is very capital intensive, and takes several years to become profitable. The instability in Zambia’s MRT and mining tax regime has resulted in a loss of potential tax revenue.
Moreover, the comparatively low copper-ore quality in Zambia means extraction and processing requires greater capital investment by mining companies. As such, a profit-based MRT presents opportunities for Zambia to capitalise on the growing demand for copper.
A profit-based MRT would attract greater royalties for the government when the price of copper is high. It also captures more royalties from profit-producing mines, which are often large and established, while allowing smaller miners and early-exploration projects to have a lower tax burden.
However, a profit-based MRT presents the risk of reduced, or nonexistent, tax revenue when the copper price is low.
In addition, it is relatively complex to administer, as it is based on what is reported in a company’s income statements. The risk exists that companies might take advantage of tax loopholes and depreciate their assets to reduce the amount of tax they have to pay, which contributes to the administrative complexity of this form of MRT. It also requires auditors to evaluate the income statements of companies.
However, the implementation of Extractives Industries Transparency Initiative processes in Zambia reduces the risk of abuse and increases transparency.
Restoring investor confidence will be crucial to stabilising Zambia’s mining industry and increasing foreign direct investment.
Indeed, Hichilema’s success in negotiations with the International Monetary Fund to restructure the country’s debt continues to boost investor confidence. However, more must be done.
The position of Zambian Consolidated Copper Mining Investment Holdings needs to be clarified, as in its current form, it is not clear whether it is a mining company or an investment holding company.
The government will also need to resolve conflicts with the private sector, in particular finding a private sector partner for the Mopani mine and resolving the conflict with Vedanta over the seizure and liquidation of the Konkola Copper Mines.
In short, Hichilema has taken steps to improve investor confidence in Zambia, and the 2023 budget speech hints at the use of mining to spur broad-based development and long-term growth.
The development and implementation of a stable and resilient MRT, which is not subject to change in response to fluctuations in the copper price, is critical for sustained broad-based mining-led development in Zambia.
A profit-based MRT is the best way to maximise Zambia’s benefit from the global demand for copper, as it allows for more favourable tax conditions for new mining operations and end-of-life operations. To reduce the likelihood of exploitation by mining companies, the implementation and further integration of the Extractives Industries Transparency Initiative into mining codes will be crucial.
Vincent Obisie-Orlu is a researcher in the natural resource governance programme at Good Governance Africa. The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.
As the world looks to transition away from fossil fuels, and governments around the world increase investment in low-carbon energy, the security of the supply of critical minerals is top of mind. To meet the global net-zero and decarbonisation targets, countries will require stable and significantly larger supplies of these minerals and metals critical for the energy transition.
Zambia is in an opportune position to benefit from the growing demand for copper to support the global energy transition. The country is politically stable and has large reserves of copper in addition to a long history of copper mining. However, for Zambia to truly benefit from the high copper prices, the energy transition and growing demand for copper present, it will need to maintain a stable minerals taxation policy and address legacy issues that might be negatively impacting investor confidence.
Zambia is Africa’s second-largest copper producer and the world’s seventh largest, producing 800 696 tonnes of copper and 247 tonnes of cobalt in 2021. The price of copper has fluctuated over the last decade, moving from $8,569 a ton in January 2012, to $4,471.79 a ton in January 2016 before recovering to $9,972.10 a ton in January 2022. Historically, the price of copper has been volatile, however, the current increased demand for critical minerals, driven by the increasing investments in green technologies, suggests the current increase in prices will be sustained for some time. Indeed, global demand for copper outstrips the supply.
Meeting this demand requires greater investment from mining companies, which they will only make if there are favourable and stable conditions for the long-term capital investments particular to the mining industry. Moreover, the tightening of monetary policy globally is expected to weaken global economic outlooks and temporarily place downward pressure on the price of copper in the short term. All this means it is important for Zambia to ensure the stability of the country’s minerals taxation policy, as it presents opportunities for it to capitalise on copper and build a sustainable, diversified and inclusive economy.
Historically, Zambia’s GDP/capita has been closely correlated with the copper price. Should the growing increase in demand for copper be maintained, and the reforms by President Hakainde Hichilema’s administration come to fruition, the country is likely to see strong growth in its GDP/capita. Reforms by the Hichilema administration must focus on ensuring a stable, attractive investment environment to kickstart the mining industry and connect it to other sectors of the economy as a matter of urgency.
The Hichilema administration should prioritise reforms and changes. These include: the creation and maintenance of a stable and resilient minerals royalty tax; restructuring the country’s debt; addressing conflict between the government and mining and
providing clarity on the nature of the Zambia Consolidated Copper Mining Investment Holdings — whether it is a mining company, or an investment holdings company.
Zambia has changed its minerals royalty tax (MRT) and minerals taxation regimes ten times in the sixteen years prior to 2019, according to a report by the Southern African Resource Watch. This is in contrast to the Natural Resource Governance Institute’s recommendation that Zambia should implement a stable MRT which is resilient to changes in the copper price.
Mining companies require regulatory tax stability to make capital investments, as mining is very capital heavy, and takes several years to become profitable. The instability in Zambia’s MRT and mining tax regime has resulted in a loss of potential tax revenue. Moreover, the comparatively low copper-ore quality in Zambia means extraction and processing requires greater capital investment by mining companies. As such, a profit-based MRT presents opportunities for Zambia to capitalise on the growing demand for copper globally.
A profit based MRT attracts greater royalties for the government when the price of copper is high. It also captures more royalties from profit-producing mines, which are often large and established, while allowing smaller miners and early-exploration projects to have a lower tax burden. However, a profit-based MRT presents the risk of reduced, or non-existent, tax revenue when the copper price is low.
In addition, it is relatively complex to administer, as it is based on what is reported in a company’s income statements. The risk exists that companies might take advantage of tax loopholes and depreciate their assets to reduce the amount of tax they will pay, which contributes to the administrative complexity of this form of MRT. It requires auditors to evaluate the income statements of companies. However, the implementation of Extractives Industries Transparency Initiative processes in Zambia reduces the risk of abuse and increases transparency.
Restoring investor confidence will be crucial to stabilising Zambia’s mining industry and increasing foreign direct investment. Indeed, Hichilema’s success in negotiations with the IMF to restructure the country’s debt continues to boost investor confidence. However, more must be done. The role and position of the Zambia Consolidated Copper Mining Investment Holdings needs to be clarified, as in its current form, it is not clear whether it is a mining company or an investment holding company. The Zambian government will also need to resolve conflicts with the private sector, in particular finding a private sector partner for the Mopani mine and resolving the conflict with Vedanta over the seizure and liquidation of the Konkola Copper Mines.
In short, Hichilema has taken steps to improve investor confidence in Zambia, and the 2023 budget speech shows signs of promise towards the use of mining to spur broad-based development and long-term growth. The development and implementation of a stable and resilient MRT, which is not subject to change in response to fluctuations in the copper price, is critical for sustained broad-based mining-led development in Zambia.
A profit-based MRT is the best way to maximise Zambia’s benefit from the global demand for copper, as it allows for more favourable tax conditions for new mining operations and end-of-life operations. To reduce the likelihood of exploitation by mining companies, the implementation and further integration of the Extractives Industries Transparency Initiative into mining codes will be crucial.
The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.