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Zambia Market Watch – Mines minister confirms copper output drop

December 2, 2021by Nicholas Kabaso
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Local Market Commentary

  • The Mines Minister Paul Kabuswe told lawmakers yesterday that the country’s copper output to drop to 800 000 tonnes from 868 671 tonnes in 2020. Zambia’s copper output has fallen by 5.5% y/y in the first 9 months of 2021 and this trend is something that the current administration will be working tirelessly to fix. The trend towards lower output has been embedded in the industry and finger pointing across the various interests has been a regular feature of the industry. This is something that will need to change if the trend is to be reversed.
  • Keeping with base metals, the price of copper is around 0.25% down this morning in Asia as the Omicron fears result in the bears having the upper hand on a tactical basis. The red metal is currently changing hands at $9426.00/oz as we enter the start of the EU session and these losses could well reverse should traders choose to focus on the dollar index which has broken below the 96.000
  • On the news front, copper industry veteran  Diego Hernandez, head of Chilean mining society Sonami stated that he expects copper to remain underpinned throughout the economic uncertainties of a new COVID-19 variant given that the metal has widespread industrial applications and there is currently tight supply. Copper inventories at the LME warehouses remain at near 16-year lows and this keeps cash prices at a premium to the forwards. This is unlikely to fade any time soon. “The world is slowly learning to live with Covid. We don’t expect measures as drastic as we saw early on in the pandemic,” Hernandez said.
  • Internationally, Data released yesterday highlighted the strength of the U.S. economic recovery. The manufacturing data was strong, and the labour market appears to be steadily improving. Although the Fed has said that there is room to improve before full employment is achieved, the pace of improvement is now robust, and it will not be long before labour market constraints become more problematic. Against this backdrop, today’s weekly jobless claims numbers will be important, as will tomorrow’s non-farm payrolls data. Should they both reflect further improvement, U.S. stock markets and the USD will likely enjoy further support.
  • On the political front, Democrats and high-ranking Republicans are scrambling to put together a deal that the Senate can pass and keep the government funded for a few more months. The effort to extend the debt ceiling has found resistance from Senators who refuse to support an administration that wants to impose vaccine mandates on the population. It has made the bill a little tricker to pass, although there does appear to be a concerted effort to get it done before the deadline on Friday.
  • Finally, the Omicron variant has been discovered in the U.S. However, as the WHO has indicated in the past, imposing border restrictions do not work. The system for containing a virus is imperfect, travel still takes place, testing accuracy has improved but is not foolproof, and the virus’ transmissibility implies it is difficult to contain. Then there is the probability that viruses will mutate in every country over time, typically to become more transmissible but less dangerous. For now, the discovery has placed U.S. authorities on high alert and sounded global alarm bells.
  • With reference to the point above, if there is a mistake people are making, it might be in assuming that the Omicron variant is a bad enhancement of the virus. If it turns out to be highly transmissible but far less dangerous, it may result in an enormous global rally in financial markets and could signal the beginning of the end of the pandemic. The globe must learn to live with the virus, and the virus needs to weaken to co-exist with its host. However, until scientists complete their studies to learn whether current vaccines will effectively prevent severe illness and gather insight into the severity of the illness caused by Omicron, financial markets will remain on high alert.
  • Taking a glance at the FX markets, we have the USD Index pivoting around the 96.00 handle this morning. The Asian session has been characterised by tight ranges and a reluctance to add to risk and we expect a similar tone to be evident at today’s local open.

Rand and International FX Commentary

  • The ZAR’s recovery was questionable. It happened against the backdrop of disappointing domestic data, highlighting a rising unemployment rate, a narrowing trade surplus, a weak credit cycle, and government finances deteriorating again. Add to that the correction weaker in commodity prices, and there really were no good reasons for the ZAR to stage a recovery. At best, one could argue that the ZAR’s recovery was merely a market positioning correction that will soon pass once profit-taking and re-positioning have taken place.
  • This morning, the ZAR finds itself back above 16.00/dlr after testing the mid 15.70s yesterday. As SA enters its fourth wave heading into the December festive season and infections rise rapidly, with the Omicron variant becoming dominant, investors will likely err on the side of caution and refrain from selling the USD just yet. On the contrary, many might prefer to purchase USDs even at these ZAR undervalued levels.
  • The higher prevalence of the Omicron variant in SA and its rapid spread mean that travel bans will likely persist for a while to come. The first Omicron case has been identified, and it now appears that it is far more prevalent across the globe than first thought. As we await the scientists’ studies to know whether this is a more or less aggressive variant, concerns will drive market sentiment and enhance global levels of volatility. The ZAR’s behaviour is a case in point. The danger is that we are heading into the end of year festive season domestically, where trading volumes are traditionally much thinner and where volatility can be enhanced.

Nicholas Kabaso

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