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Zambia Market Watch – Copper production falls in H1 2021

September 16, 2021by Nicholas Kabaso
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Local Market Commentary

  • The Ministry of Mines and Minerals yesterday reported that Zambia’s copper production dropped 4% in H1 2021 as some miners struggled with operational disruptions. Specifically, from January to June, production fell to 393,114 metric tons from 407,807 tons produced in the same period last year. Miners operating in the Copperbelt province, which include Konkola Copper Mines and Glencore PLC’s Mopani Copper Mines, accounted for around 34% of the country’s total output after suffering output losses. A workers’ strike affected produc-tion at Konkola Copper mines for several days in March, piling more pressure on the assets that have been a subject of an ownership dis-pute between the government and London-listed Vedanta Resources PLC since 2019. The overall drop in production is likely to dampen Zambia’s prospects of raising copper output above 900,000 tons this year. Note the country is banking on recovering copper production and stability in the mining sector to rejuvenate its economy.
  • Speaking yesterday, President Hakainde Hichilema said that bringing the coronavirus pandemic under control will be crucial to his gov-ernment’s aspiration to transform the economy. The President, who appointed a coronavirus Advisor, added that all efforts to revive the economy will not materialise as long as the country continues to grapple with the pandemic. The appointment of the advisor is a circum-stantial appointment by the government aimed at dealing with the challenges brought by the pandemic, and Hichilema added that he will take advantage of the United Nations General Assembly to seek support from cooperating partners to bring the pandemic under control.
  • On the base metals front, China announced this morning that it will be selling more copper, aluminium and zinc from its reserves, NDRC official Li Hui stated at a press conference this morning. This would be the third tranche of sales from the state reserves which is aimed at stabilising prices following sharp spikes to the topside across the base metal complex.
  • Meanwhile, trading in Asia has been mixed this morning with copper falling marginally while aluminium remains bid on the threat of Bei-jing adding fresh output curbs in the top producer.
  • Stateside, yesterday’s industrial production data showed that activity levels had recovered to pre-pandemic levels, expanding a further 0.4% in Aug vs the 0.5% expected. The data held up despite the disruptions caused by Hurricane Ida and therefore should not be taken at face value. It confirms that the economic recovery remains firmly intact and will extend through the months ahead, especially with the fiscal and monetary authorities still stimulating. Today, the focus will shift across to the consumptive sector of the economy to see whether the softer patch dragged on a little longer thanks to infections and Hurricane Ida.
  • Politically, Biden continues to press ahead in trying to promote the $3.5trln spending bill. Yesterday, he met with moderate Senators Manchin and Sinema to chart a path forward for the bill to pass. The former recently indicated that he would favour a slimmed-down ver-sion of the programme. The bill will likely be moderated significantly given that other Democrat Senators are also likely to baulk at the size, while the Republicans will naturally resist any spending programme this large, especially when it comes attached to a range of tax in-creases.
  • In the FX markets, the Zambian Kwacha closed on the back foot yesterday along with its Southern African peers and moved north of the 16.300 mark. Although the USD retreated yesterday, there is no significant directional momentum. It remains largely range-bound and awaiting a fresh catalyst. It is unlikely that the catalyst will be this week’s data, although the releases today do have some market-moving power. Retail sales and weekly jobless claims are both important readings, especially ahead of next week’s FOMC decision and guidance that holds the potential to be market moving. In the lead up to the Fed’s decision, position-taking will be kept well-contained for the most part unless any of the data deviates significantly from market expectations.

 

Rand and International FX Commentary

  • In terms of domestic data, retail sales expectedly fell in July as the reintroduction of lockdown restrictions took its toll in addition to the damage to consumption dynamics from the civil unrest seen in parts of the country. Retail sales figures contracted 11.2% on a month-on-month basis, taking sales back to pandemic levels of last year. Specifically, sales declined 0.8% y/y, ending four months of positive annual growth. According to Stats SA, negative annual growth rates were recorded for all retailers across the subcomponents, the worst hit being household furniture, appliances and equipment retailers. The relaxed restrictions will likely offer some support to the sector going for-ward, but with waning consumer confidence, sluggish economic growth and high unemployment levels, a strong rebound remains far off. 
  • While the ZAR largely shrugged this off, in fact trading weaker post the release, it would ultimately play into strength for the local curren-cy. Subdued domestic demand will continue to delay imports from reaching pre-pandemic levels, while South Africa’s exports remain buoyed on solid mining output and higher commodity prices. All in all, the ZAR traded with mixed direction yesterday, swinging earlier gains into losses to close the session 0.90% weaker at 14.4500/$. However, this was reflective of broader currency markets that have been trading on the tetchier side as the USD shifts without much definitive bias.
  • With yesterday being a second consecutive daily loss for the ZAR, the local unit is looking markedly more vulnerable as fears of a potential reversal set in. Furthermore, the SARB’s next policy meeting is scheduled for next week, which will come a day after the US Fed decides on policy. Being one week away from the domestic policy meeting, the market may begin to expect some near term turbulence for the ZAR. Explicitly, one-week at-the-money implied volatility on USDZAR options has risen in early morning trade today to their highest since Aug 23, which marked the start of the ZAR’s recent bull run.  
  • As for the SARB meeting, while it is largely expected that SA’s central bank will remain dovish given Q3’s weaker consumption dynamics, the ZAR will be left to take the brunt of the pressure in the coming months should there be continual justification for the SARB to push rate hikes further out. Externally, the dollar has taken a breather following slightly softer than expected industrial production data yester-day. While this saw a return of risk appetite on Wall Street, it has not been able to filter through significantly into this morning’s Asian trading session. The day ahead sees an update on US labour market dynamics in the form of jobless claims data, while most focus will fall on US retail sales figures. Should the softer hiring dynamics in August have weighed on US consumption more than the market is anticipating, this could weigh on the greenback in the session ahead and offer some reprieve for the local currency.  

Nicholas Kabaso

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