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KCM looking for a strategic equity investor

June 8, 2022by Nicholas Kabaso
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Local Market Commentary

  • Provisional liquidator of the Vedanta Resources unit, Celine Nair, in a statement, said that Konkola Copper Mines (KCM) has invited local and foreign banks to bid to advise the company on finding a strategic equity investor. The companies invited to bid include Citibank, Standard Bank, Bank of America Merril Lynch, Rothschild, Rand Merchant Bank, InvestEcon, Pangaea Securities, Stockbrokers Zambia, E-Ngoma, and Zanaco. The strategic investor will help guarantee the development of the $1.1bn Konkola Deep Mining Project.
  • Nair also announced the resumption of mining operations at a KCM open pit mine, saying the move was part of broader plans to improve operations before the government finds a new investor. Note that Zambia’s previous government put KCM into the hands of a liquidator in May 2019, triggering an ongoing legal dispute with Vedanta Resources KCM’s parent company.
  • Yesterday, the Zambian government appealed to cooperating partners to help finance the successful holding of the country’s first-ever electronic population census, which has faced financial difficulties. While the government has faced challenges in financing the exercise scheduled to start this month, Finance Minister Situmbeko Musokotwane noted that the government has so far managed to secure various equipment such as motorbikes, vehicles, bicycles, and tablets in readiness for the exercise. The first-ever electronic census has suffered postponements on several occasions. It was initially supposed to have been held in August 2020 but was pushed to 2021 before being pushed to August this year.
  • The benchmark 3m LME copper contract has slipped this morning in the Asian session largely as a result of a stronger dollar which is driving short-term price action. The metal is holding around the $9680.00/tonne mark as the EU open beckons with $9600.00/tonne seen as the floor for now.
  • Copper is supported by concerns around supply at the moment. Yesterday, the Chilean Central Bank announced that exports of copper printed $3.76bn in May, which was down some 18.3% year on year. Equally, stocks of copper held in LME registered warehouses fell by 20200 tonnes to 120775 tonnes which is the lowest level since the 14th April 2022.
  • Moving over to the US and the data card picks up with wholesale inventories and wholesale sales prints on tap. US wholesale inventories have increased by over 2% for three straight months now and four out of the last five months. While the increase in April was slower than that in March, wholesale inventories remain solid and will remain elevated in the near term. That said, with the Federal Reserve raising interest rates aggressively to curb inflation, demand could cool in the coming months. Furthermore, as the economy transitions from buying goods to spending money on services, we could see wholesale inventories start to weigh on the economy as manufacturing to produce new goods may slow. It could, however, alleviate supply constraint issues and bring down the prices of good inflation.
  • In the FX market,  the Zambian Kwacha advanced for a fourth straight session yesterday, supported by an increasing hard supply of currency from corporates buying the local currency to pay taxes.
  • US Treasury yields slid yesterday as global organisations lowered their growth forecasts and gave the impression that central banks would face stagflationary type conditions. Growth would come at a premium, and where central banks would need to develop the stomach for tightening policy amid a slowdown in growth and potential correction in stock markets. In most instances, investors anticipate that the central banks will backtrack on their aggressive tightening guidance and turn a little more sensitive to the conditions they may well generate if not careful. This morning, the USD is slightly firmer on a trade-weighted basis, but underlying solid momentum will remain absent while bond yields are nudging lower. The majors are mostly consolidative against the USD this morning, with no major move evident in the EUR and the GBP. Raising eyebrows is the weakness of the JPY, which has broken through 133.00 this morning as it continues its slide against the USD.

 

Rand and International FX Commentary

  • SA’s GDP growth beat market expectations by quite some margin and elevated nominal, deseasonalised GDP back to pre-covid levels. The data highlights how there is still some life left in the SA economy and that lifting further restrictions, allowing for the private sector to play a larger role, and de-regulating could offer a tremendous opportunity when the global economy is facing some major headwinds. 
  • Increasingly, the notion that the global economy will head into a significant downturn and that many economies could find themselves in a recession is starting to permeate markets. A recent report from the World Bank indicated that it would be very difficult for many economies to avoid a recession in 2022 as inflation remains high and central banks are aggressively tightening monetary policy to rein it in. Even the Atlanta Fed’s GDPnow indicator is pointing to a significant downturn in US growth, with an expansion of just 0.9% forecast in Q2. That is before the Fed started its aggressive tightening.
  • Now comes the real test for central bankers. They could talk tough until now because their respective economies were holding up quite well. It remains unclear whether they will have the stomach to continue hiking rates should global financial markets start collapsing and their economies slip into recession. Most central banks want to control inflation and keep it well contained, but not at any expense. Should recessionary conditions start to impact the labour market, the central banks will likely back off, and history could well repeat itself through 2022 or early 2023.
  • US bond yields slipped overnight, and the 10yr vs 2yr bond spread has flattened. As a result, the USD backed away from yesterday’s highs, and while it may be up slightly in the trading session this morning, it may well struggle to register significant further gains against a backdrop of deteriorating growth expectations where the market is already starting to price in central banks rethinking their aggressive tightening strategy. With so much tightening already priced into the USD, and given its overvaluation, it is especially vulnerable to a correction, something the ZAR could capitalise on.

Nicholas Kabaso

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