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How will the Commodity Supercycle Affect Zambia?

At the end of last year, Goldman Sachs were first to call a structural bull market in virtually all commodities. According to the analysts at Goldman, commodity demand is driving the prices up, not least driven by fiscal stimulus in China, the US and Europe to fight the Covid economic downfall.

Last month I started reading more and more articles about the emergence of a supercycle in commodities. A supercycle is a situation that happens through a disruption of the normal business cycle, which increases demand and drives prices higher for many years.

Commodity supercycles are rare events and we have only seen a few in the last hundred years or so, all of them triggered by transformations in economic development. The last supercycles were triggered by the fast industrialisation of the United States at the beginning of the 20th century, the post-World War II re-build of industry and infrastructure in Germany and Japan in the 1950s, the oil shock in the 70s and the rapid growth of China at the beginning of this century.

The last supercycle was supported by a weakening US dollar. The dollar hit an all-time low in the summer of 2008. Since then, the U.S. dollar has recovered until the start of Covid-19 in March 2020. There is a link between a weak dollar and higher commodity prices. Local production costs increase, which leaves producers with no choice but to increase the prices of their goods. But the price increases to non-dollar countries are less severe as their currency has gotten stronger, prices may even get cheaper, which will then drive up demand.

So why should we enter a commodity supercycle now? In short, the alternative energy revolution is gaining momentum. Reducing demand for oil will boost demand for metals that are needed in the construction of renewable energy sources. According to the IEA (International Energy Association), wind and solar will overtake gas capacity in 2023 and coal in 2024 with 1,123 gigawatt (GW) of additional capacity coming online by then. Additionally, with having seen a lack of big oil infrastructure investments, there is even a good reason for oil prices to increase.

Which Commodities benefit from the green revolution? Batteries, which are essential to the transport transition, need cobalt, lithium or nickel. Aluminium will be needed to reduce the weight of electric vehicles. Silver is widely used in solar installations. And then, of course, copper. Copper’s key role in construction and major appliances is longstanding but in addition, it is essential in everything related to electric vehicles, solar panels, wind turbines, 5G and the energy grid, which will need to link the new renewable sources to the consumer. Francisco Blanch, Global Strategist of Bank of America, sums it up in a Bloomberg interview: “there is a structural deficit that is going to be multi-year as we move on to de-carbonize the electricity sector, but also driving.”

Trafigura, the largest copper trader, sees the copper price passing USD 10,000 a tonne this year before entering into a price range of USD 12,000 to 15,000. Goldman Sachs expects a price of USD 10,500 in the next 12 months and Citi Bank USD 12,000 in the next year.

Glencore Plc, one of the largest copper miners, estimates that the global demand for copper could double in the next 30 years. It also cautions that the capital investment in developing new mines is significantly below what’s needed. And that investment deficit may dent the future supply of copper considerably. Bloomberg Intelligence warns of a dearth of copper projects from 2025 and a deficit of up to 10,000 tons to meet demand.

It takes 7 to 10 years to develop a copper mine. Mining companies have cut their exploration budgets while focusing on increasing the efficiency of existing mines. Higher prices will over time bring new capacity online, but that’s in the far out future, in the short term that does not help to increase production. According to S&P Global Market Intelligence research, 224 sizeable copper deposits have been discovered over the last 30 years, of which only 16 have come online in the last decade and only one since 2015. Mining companies want to avoid mistakes from the past and are weary not to overinvest and create oversupply. There are a few projects in the pipeline, but the gap will not be closed quickly.

So if the copper supercycle depends on the green energy revolution, then we should have a closer look at that.

A total of 1.8 trillion Euros have been pledged by the European Union to rebuild the economy post Covid-19. 30% of that amount is dedicated to fighting climate change, while the USA is working on a $3 trillion infrastructure project that has climate change at its heart. Many countries have clear goals to become carbon neutral by 2050 and to cut emissions much sooner.

Policy driven change is one aspect, and the private sector is following suit. We know that the auto industry is changing at a fast pace. The car manufacturers will be transforming their fleet of combustion engines into electrical ones, this will happen in the next 10 years or so. I hear of energy and oil producers that are going carbon neutral and many companies from other industries are making commitments to reduce emissions and we expect more companies jumping on that bandwagon in the run-up to the COP26, the UN’s Climate Change Conference, that will take place in November in Glasgow.

Companies are also under increasing pressure from investors, the public and other stakeholders. In my view, environmental sustainability will hardly be a choice anymore, but a pressure that will be difficult to avoid. This will also put pressure on the mining companies to be more compliant with environmental issues, so the metals supercycle will be a cleaner one in many aspects.

Copper Charts

One-year chart


What does the Copper Supercycle mean for Zambia?

Copper is essential to the Zambian economy. Copper exports amount to 25% of the GDP and to roughly 85% of the country’s export value. So increased copper prices are good news. Mining activity should resume to peak capacity. Barrick Gold Corporation said earlier this month that its copper sales increased to 113 million pounds during the first quarter of this year, mainly boosted by its Zambian Lumwana Copper Mine’s contribution after it sold a portion of its stockpiled concentrate. This should lead to higher Tax revenues, which in the ideal scenario will boost the country’s dire fiscal situation.

The longer-term outcomes are not as clear as stockpiles don’t last for ever.

According to Mining for Zambia, ten years ago, the annual expenditure on mineral exploration in Zambia was in the region of US$ 100 million slipping to somewhere between US$10-20 million. It is essential for the health of the country’s economy to find new deposits and replace the 750,000 to 850,000 tons of copper that are mined every year. This is the only way to sustain or grow the industry over time and is essential to the future health of the economy. Every year the industry survives and thrives is another year where the income, expertise and opportunities from mining can be used as a stepping stone to diversify the Zambian economy.

The last large scale mine that opened was Kalumbila, owned by First Quantum Minerals, in 2012, which added 4.5 million tonnes to the Zambian copper stock. New exploration and new projects or expansion of existing mines need to come online in order to sustain the industry for more than 20 years. This will need to be supported with solid policies that encourage investment in the country.

There are probably not too many low hanging fruits left for mining. Major deposits can still be found near the surface, but the bigger potential lies probably deeper below the surface, which is more difficult and expensive, both for exploration and mining.

But there is good news as a few smaller copper deposits have been discovered in Mkushi and Mumbwa areas, which are outside of the Zambian copper belt. There have also been some positive announcements from exploration firms recently. Toronto listed Midnight Sun Mining Corp. a mid-stage copper and cobalt exploration company, owns two exploration licences adjacent to First Quantum Minerals’ Kansanshi Mine, the largest copper mining complex in Africa. The project is well funded through an agreement with Rio Tinto. BeMetals Corp., also listed in Toronto, raised funds for underground exploration for a project in North Western Zambia, where they have found copper near the surface. Another firm is Arc Minerals that has a major drilling programme underway that has found copper at two different sites and is currently increasing their drilling efforts.

It’s early morning on 30 April and I just came across a research note from Credit Suisse, from yesterday and it reads: “Our preferred expression of Commodity strength remains Industrial Metals, with Copper having already established a multi-year “double bottom” base in Q4 2020. We stay bullish and look for not only a test of the 2011 high at $10190 but a move above here in due course towards $11,000.“ And, copper topped 10,000 yesterday for the first time since 2011.

It’s almost an oxymoron; a thriving copper industry will give Zambia the opportunity to diversify away from the reliance on its mining industry. For the long-term benefit of the country, there should be a large focus on setting the conditions right for pulling-in funds and skills to find substantial copper deposits, get them into operation and the supercycle in commodities and especially copper should become the catalyst to do so.