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First Quantum Minerals Ltd. plans to power its copper mines in Zambia through a $500mn solar and wind energy installation

March 22, 2022by Nicholas Kabaso0
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Local Market Commentary

  • In a bid to address electricity shortages that have in the past decade hurt mining operations in Zambia, which relies almost completely on hydro power, First Quantum Minerals Ltd. plans to power its copper mines in Zambia through at $500mn solar and wind energy installation funded by a TotalEnergies SE-backed company and Chariot Ltd. A 230-megawatt solar plant and 200-megawatt wind farm will be built to supply the Kansanshi and Sentinel mines, which collectively produced 434,847 metric tons of copper last year, more than half of Zambia’s total output. According to First Quantum, Total Eren, almost 30% owned by TotalEnergies, and Chariot Transitional Power, a unit of London- listed Chariot, will fund, build and operate the project. Meanwhile, construction is expected to start next year.
  • The base metals counters are keeping a close eye on developments in China. Fears of a Chinese economic slowdown is gathering  pace given the rising COVID-19 cases in the country. China has adopted a zero COVID-19 policy and this has resulted in Beijing taking a harsh stance towards people movement prompting lockdowns which will undoubtedly impact economic dynamism.
  • The sell-off in global bonds deepened on Monday after the Federal Reserve Chair delivered his most hawkish message during the Covid-era as the US economy continues to battle soaring inflation. Powell said that the Fed is prepared to raise interest rates by 50bps at the next policy meeting if conditions require. Recall that the Fed hiked rates by 25bps at its March meeting and signalled that it would deliver six more hikes of the same magnitude in the remaining months of this year.
  • The hawkish rhetoric of Powell’s comments overnight has added to the bearish bias in the global bond market, with the 2yr US Treasury yield surging to its highest level in almost 3 years this morning. At the time of writing, the 2yr US Treasury yield was trading at 2.18%. This means that the shorter-dated 2yr US Treasury yield has climbed 145bps since the start of the year, reflecting the marked shift in US monetary policy as inflation pressures continue to surge.  
  • Following Powell’s comments, the US derivatives market priced in seven and a half 25bps rate hikes at the remaining six FOMC meetings this year, implying that the market is baking in the risk of more than one 50bps rate hike. While traders scaled up their bets for a more hawkish policy path in the US, expectations are mounting that China will loosen monetary policy to support its ailing economy.
  • That said, we have seen a shift in monetary policy in Africa, with both Egypt and Ghana hiking rates aggressively on Monday, moves aimed at curbing inflation which has been amplified by the crisis in Ukraine. Note that Russia’s invasion of Ukraine has triggered massive dislocations in the global commodity market and supply chain.
  • Given that inflation is proving to be stickier than central banks had anticipated and the shift in policy from central banks around the globe, the bear flattening bias in bond markets across the world is expected to persist. Adding to this noting is lingering growth concerns, which should continue to anchor longer-dated bond yields.
  • Comments from Fed Chairman Powell, who addressed the National Association for Business Economics, have sparked some market reaction in U.S. Treasuries and in the USD. U.S. Treasury yields launched higher in response, with the 10yr yield nudging up to 2.3369%, while the trade-weighted USD index has risen to 98.793. The USD gained ground against the majors, most notably the JPY and the EUR, both now seen as funding currencies with central banks unwilling to tighten monetary policy. The JPY has collapsed through ¥120/dlr, while the EUR has dipped back below 1.1000/dlr. While the Fed continues to hold such a hawkish tone, it seems likely that the USD will remain well supported.

Rand and International FX Commentary

  • As we start the shortened week, investors have turned cautious about taking clear direction on anything. Events that historically might’ve triggered a significant response from emerging markets don’t seem to be doing so anymore; it may have a lot to do with the fluidity of the situation and the inability to predict market dynamics from one hour to the next. A case in point were the comments from Fed Chairman Powell yesterday, where he was quoted as saying that “The labour market is strong, and inflation is much too high” further adding that “we will take the necessary steps to ensure a return to price stability.” Powell was addressing the National Association for Business Economics.
  • The real point of clarity came when Powell clarified that “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.” This is a central bank indicating that it will prioritise inflation before growth and that it believes that the economy is strong enough to warrant such robust language. The risk was that such language would send financial markets into a tailspin. Interestingly, they didn’t.
  • However, they did translate into a jump in US Treasury yields and a further flattening in the curve, with the 10yr vs 2yr spread dropping to under 16bp. As a reliable measure of an impending recession, many are now looking to a possible yield curve inversion and debating whether that might imply a major correction on equity markets to price in a much softer growth outlook and possibly even a recession. The USD too, has regained some lost ground. Still, interestingly, neither move was much of a shock to markets with Asian equities a little firmer this morning and emerging market currencies not correcting weaker.
  • On the contrary, the USD-ZAR remains relatively range-bound, trading at 14.9500 at writing and briefly traded below 14.9000 yesterday. Although these comments and the resultant rise in US Treasury yields might restrict ZAR appreciation in the short term, it is not obvious that they will spark a sharp bout of ZAR depreciation that might break the current ZAR bullish bias. One possible reason is the expectation that the SARB will take heed of the Fed’s comments and respond with a rate hike and a more hawkish tone of its own when it meets later this week. The SARB’s meeting will be the main event of the week. It will offer a fresh perspective on how aggressive it may turn in dealing with inflation threats amid rising commodity prices, a resilient ZAR and a weak economic backdrop.

Nicholas Kabaso

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