Zambia Weekly Wrap – January 17 Edition

Halfway into the first month of 2015, here are the key stories and events you need to know from this past week:

Fuel pump prices reduced

The Energy Regulation Board (ERB) has reduced the pump price of petroleum products by K2.29 for petrol; K2.59 for diesel; and K2.08 for kerosene, which translates into 23.13%, 28.22% and 30.76%, respectively. In a statement made available to the media, ERB said that the wholesale prices of petroleum products have been reduced by 35.93%, effective midnight 16th January 2015. Click hyperlink to read the rest. (Source: Lusaka Times)

It is no secret that global oil prices have fallen by close to 60% from highs of around $110 per barrel to trade at as low as $45 per barrel this year. Here’s a quick recap on why:

• The USA (the biggest importer has increased domestic production through a process known as ‘fracking’ – leading to a reduction of import demand and increased supply 
  
• Other non-OPEC members also increased production leading to increased global supply
  
• Oil demand has slowed because slowing global economic activity 
  
• OPEC has decided not to reduce production (major members like Saudi Arabia have $900 billion in reserves and oil production costs of ONLY $5 per barrel, so they can more than handle the drop!) in order to maintain their market share
  

The latest reduction by ERB (with possibly more to come) will have a more meaningful impact on inflation and generally the cost of doing business in Zambia. Consumers will have some relief after the two years of upward price pressure. This could also see Bank of Zambia reducing the policy rate after increasing it to a record high of 12.5% - relief for borrowers.

 There is no telling how long low global oil prices will last but it gives the Government a golden opportunity to reform the fuel importation system which is currently inefficient and fraught with middlemen. Whoever is elected the new president has a chance for an immediate win prior to the 2016 elections which could also benefit future generations.

Global copper prices rocked

Copper tumbled the most in almost six years, leading a collapse in commodity prices that’s keeping a lid on global inflation. Copper for delivery in three months dropped 5.3 percent to settle at $5,548 a metric ton ($2.52 a pound) at 5:51 p.m. on the London Metal Exchange, after dropping as much as 8.6 percent, the biggest intraday loss since October 2008. Click hyperlink to read the rest. (Source: Bloomberg)

Global copper prices have been on the decline since their all-time highs in February 2011 coinciding with strong Chinese (accounts for 40% of global demand) economic growth as well as an investor movement from stocks to commodities which are a good store of value during tough times. Chinese growth is slowing and US stock prices have rebounded tremendously. This week’s aggressive 8.6% drop was more due to short-selling in Shanghai than major changes in fundamentals.

Copper production within the country is set to go beyond one million MT mark this year as new projects from major miners like First Quantum Mineral (LUSE: FQMZ). However, risks to Zambian economy still remain because copper brings in 70% of forex earnings from exports and accounts for 11% of GDP (2013). Additional significant reductions in global copper prices will weed out mining companies which are solely dependent on high prices and don’t adequately control production costs. It will be interesting to see whether the potentially poor performance from this sector of the economy will be offset by the positive impact of low fuel prices in 2015.

Zambia Railways copper transport contracts cancelled

Zambia Railways (ZRL) had their contract to transport copper to the port of Dar es Salaam cancelled because movement was taking as long as 21 days instead of the expected 10 days. The miners under contract reverted to using trucks instead. (Source: ZNBC News 16.01.15)

This will be a blow to the revenues of up-and-coming ZRL who need to invest more a lot more capital into their operations. They received $120 million from the $750 million Eurobond (no word on what they got from the second) but need probably 3 to 4 times more. The Government is heavily committed to road infrastructure spending so until that changes (or a third Eurobond is issued), ZRL will have to bootstrap their growth and be more strategic in where they invest their limited funds.

TAZARA resumes operations after strikes

Train operations by the ailing Tanzania-Zambia Railway Authority (TAZARA), which were suspended on Monday following an employees’ strike, resumed on Friday. TAZARA said in a statement the resumption of the train operations between Dar es Salaam in Tanzania and New Kapiri-Mposhi in Zambia followed the High Court of Tanzania's Labor Division's ruling declaring the strike by TAZARA workers in Tanzania unlawful. Click hyperlink to read the rest. (Source: Africa Xinuanet)

The strike was centred on employees’ salary arrears (a strong sign of their liquidity problems) which TAZARA is said to have managed to source. This is another railway line in need of major capital and reinvestment in operations. Zambia and Tanzania (co-owners of the 1,860Km line) injected $25 million at a meeting last month - so that is a start.  The line is important for transportation of goods (cheaper than road) to port and to some extent tourism. Could China come in to help technically and financially on a line which they built over 40 years ago? They certainly have the resources. This will be something to keep an eye on.

What to watch next week: Elections and their effects on the Kwacha

Key stats

LME 3-month Copper cash buyer closed the week at $5,655 per MT