Downstream Linkages in the Zambian Copper Industry
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Resource extraction is often regarded by governments and people of resource-rich countries as a solution to poverty alleviation, ranging from tax revenues, technology transfer, and employment creation, export enhancement to upstream and downstream linkages. Downstream linkage industries do promise the widening of employment opportunities and high foreign earnings as a result of value-addition. Western resource intensive economies such as Australia, Canada, US and the like are examples of well-managed, resource-rich economies in which the mineral sectors spurred knowledge-intensive processes, created jobs and foreign exchange earnings and resulted in spill-overs into new industrial and service sectors.
The scope of downstream linkages is often considered an important determinant of the extent to which a mineral-rich nation stands to gain additional economic benefits that come with it. This explains the continuous pressure that is always mounted on mining companies by host governments to engage further in downstream activities. However, downstream activities irrespective of their location are influenced by global market dynamics and competitive elements. Therefore, in an attempt to grasp the benefits that come with downstream activities, it is extremely imperative to examine the opportunities, risks and possible ways of striking a balance taking cognizance of the global demand and supply interplay to ensure that the highest possible net positive benefits are achieved and sustained. In focus is Zambia which has been an active copper mining country since 1900s though performed poorly along the line but revamped barely in the last decade. In 1968, Zambia held an important position as a copper producer, with peak output at 815,000 ton and a 15% share of world output, but the abysmal performance of its state-owned enterprises that took over after the 1969 nationalisation resulted in a drop of output to a trough of 250,000 tonnes in 2000 (Radetzki, 2009p.182). Nevertheless, the copper industry has been revitalised with the privatization of the mining sector which occurred between mid-1990s and early 2000s. In the period 2000-2005, copper exports contributed to around half of total foreign exchange earnings, but from 2006 onwards, this share increased to 73.5% - 83.2% ( Fessehaie, 2012 p.3). Copper also provided 10% of formal employment and its contribution to GDP in the last decade increased on a yearly basis, reaching 9.1% in 2009. Copper mining has and continues to be one of the largest economic activities in Zambia, comprising approximately 10 percent of GDP and more than 60 percent of exports (Wilson, 2012pp798-799). The paper therefore examined downstream or forward linkages to copper production in Zambia by first exploring the scope of downstream linkages and examined the risks, opportunities and risks mitigation measures in the downstream sector of Zambia's copper industry. The rest of the paper is structured as follows; section two introduces the background and established the theoretical framework. Section three examined the scope of downstream activities, the risks, opportunities and possible measures for risks mitigation and section four concludes with recommendation.
2.1 A Brief Overview of Global Copper Production and Consumption
The global cumulative annual growth in global mine output of copper has gone through significant changes over the period 1750 to 2007. It stood at 0.8% in 1750-1800, rose to 2.6% in 1800-1850 and from 1850 and until 1900, the annual growth of copper production accelerated to 4.5%. Output expansion subsequently reduced to an average of 3.3% between 1900 and 1950, and remained at this level until 2007 (Radetzki, 2009p.182). In 2011, global copper production reached an output level of 16100 metric tonnes from 15900 metric tonnes in 2010 with a total reserves value of 690000 metric tonnes (USDSp. 49) (2012). On the other hand, growth rates in global copper consumption fell from 4.48% in the period 150-1973 to 0.65 covering 1973-1983 largely explained by the oil price shocks of the 1970s and 80s and picked up again, reaching 2.51% for period 1983-2003 (Nishiyama, 2005p..132). The period following 1990 saw a significant increase of Asia, especially China's share of global copper consumption, currently about 40% (ICSG) which gradual spurred up copper prices in the mid-2000s. The interplay of China's demand growth and appropriate timing of additions to production capacity speaks a lot about the future global trends in both production and consumption.
2.2 Overview of Copper Mining in Zambia
Copper mining in Zambia dates back to the 1900s under the control of two mining companies, Rhodesia Selection Trust and Anglo-American Corporation (AAC)( Fessehaie, 2011p.16) .The industry came to be nationalized in the late 1960 and was operated under state ownership and control, a typical characteristic of mining operations in mineral exporting countries in the decades following the Second World War. The government, following years of significant losses, privatized its copper mines, which were later consolidated into the Zambia Consolidated Copper Mines (ZCCM), majority-owned by Government (60.3%), with a minority share owned by AAC (27.3%)( Fessehaie, 2011p.16). For instance, Kansanshi mine, the largest copper project in Africa is 80% owned by First Quantum Minerals Ltd and 20% by the state run ZCCM Investments Holdings which replaced ZCCM (ARB, 2012). The mining sector is regulated primarily by Act No. 7 of 2008 (the Mines and Mineral Development Act of 2008).
The Zambian copper industry is not insulated from the acquisitions and mergers characteristic of the global mining industry. In 2011, Barrick Gold Corp. of Canada acquired Equinox Minerals Ltd. of Canada (USp43.1). Newshelf 1124 (Proprietary) Ltd. of South Africa, an indirect subsidiary of the Jinchuan Group Ltd. of China acquired Metorex Ltd. of South Africa and its underground Chibuluma copper mine (Metorex Ltd., 2011, p. 8). Konnoco Zambia Ltd., a joint venture of African Rainbow Minerals Ltd. of South Africa and Vale, continues with the development of the Konkola North underground copper mine (African Rainbow Minerals Ltd., 2012, p. 70). Mining companies equally undertake joint ventures in explorative activities in Zambia. Argonaut Resources NL of Australia's subsidiary Lumwana West Resources Ltd. in a joint venture with Mwombezhi Resources Ltd. of Zambia set to explore in Northwestern Province (Argonaut Resources NL, 2012, p. 2).
Zambia's economy is heavily reliant on mining, particularly its copper and cobalt, and the mining sector makes significant contribution to Zambia exports and economic growth. Copper output rose dramatically following the copper price rise in the mid-2000s with annual copper production increased from 335,000 metric tonnes in 2002 to over 569,000 metric tonnes in 2008 (Wilson, 2012) . From 2007, copper exports contributed 73.7-80.5 per cent of total foreign exchange earnings, 10 per cent of formal employment, and in 2010 Zambia was the largest copper producer in Africa and the 7th largest in the world ( Fessehaie, 2012). Copper exports jumped from $474 million in 2000 to almost $4 billion in 2008. In 2010, the mining and quarrying sector accounted for 9.9% of Zambia's real gross domestic product (at constant 1994 prices) compared with a revised 9.3% in 2009. Copper exports earnings increased by 15.5% to US $6,660.2 million from US $5,767.9 million in 2010 (Bank of Zambia, 2012, p. 23,) and in 2011, copper exports were valued at $6.9 billion (Mobbs, 2012 p.43.1).
2.3 Theoretical Framework
The concept of linkage development in the academic discourse has its root from early works of Leontief (1936) who applied an input-output analysis to static quantity modeling (Lenzen, 2003 p.1), modified by Rasmussen (1956) for inter-industrial analysis as setting the basis for structural interdependence. In determining the key sectors of an economy, Hirschman (1958) argued that above-average linkages are pre-requisites for economic development and structural changes within an economy or a region (p1-2). Contrary to this argument, Bharadwaj (1966), Panchamukhi (1975) and McGilvray (1977) highlighted that international comparative advantages, technical and skill endowment, final demand structure are among the driving forces of economic growth and concluded that linkage interconnectedness is a weak rod to rationalising a development policy(1-2)
According to Hirschman as cited in Morris et al (2012), there are three main types of linkages in the commodity sector thus, fiscal, consumption and production linkages. In his view, fiscal linkage encompasses royalties and taxes which together form mineral rents; consumption linkage entails the consumption demands of workers of the commodity sector, whereas the production linkage encapsulates both backward and forward linkages. Authors such as Sonis and Hewings (1989, 1999) and Sonis et al. (2000) in their works on the dynamics of backward and forward linkages, and economic landscapes of multiplier product matrices pushed further the arguments of Hirschman and Rasmussen (Lenzen, 2003 p. 2).
The linkage thesis has been applied in a number of studies in attempts to examine the impact of mining on economies. Lenzen (2003) utilised the input-output application in his analysis of the key environmentally important factors of production, linkages and key sectors in the Australian economy and concluded without a factual basis that strong forward linkages are characteristic of primary industries like grazing and mining whereas strong backward industries characterized secondary industries (p.29). Similarly, Cristobal and Biezma (2006 p1,5) analysed the forward and backward linkages of mining and quarrying in ten EU countries to determine whether the industry constitute a key sector and came to a conclusion that the mining and quarrying industry has a strong backward link to regional economy's production more than other sectors and otherwise holds for forward linkages. Though not a metal mineral, the Southern Louisiana offshores oil fields is the most apparent successful linkage capture identified throughout the 20th century. The ability to sustain pre-existing competition and the availability of the commodity in large quantities were largely responsible for the successful linkage capture (Freudenburg and Gramling (1998p 575-576). Moreover, Aroca (2001p 131) employed the input-output Leontief matrix to determine the impact of the mining sector on the Chilean II region and analysed the driving forces to the extent of the impact. With regards to the volume of production, his analysis indicates that the mining sector is very important but loses its importance in developing forward and backward linkages in the economy. Lydall (2009 p.2, 119) investigated backward linkage capture of South Africa platinum group metals and found different categories of supplier firms, ranging from base, medium to large able to satisfy the needs of the various PGM mines, concentrator plants, smelters and refineries. She however cautioned the existence of market-related and firm-specific factors militating against the growth and expansion of such linkages. Morris et al (2012 p 1-2,14) examined the underlying factors to linkage capture in the commodity sectors in low income countries in Sub-Saharan Africa with much attention on backward linkage capture and recommended for strategies to be mapped to propel industrial sector upgrading especially in commodity exporting countries. Also, Fessehaie (2012p 2,7) examined the determinants of upstream linkages to copper production in Zambia. She noted that backward linkage was growing and copper mining presents opportunities and recommended that in order to broaden backward linkage to utilize such opportunities there is the need to eliminate barriers to upgrading through an industrial policy which takes care of supplier competitiveness constraints.
From the preceding literature reviewed, much attention on linkage capture studies has been directed at the backward linkage capture. The few works on linkage development in Zambia copper (Fessehaie, 2011 and 2012; Morris, 2012), the emphasis has been on the backward linkage. Therefore, the existence of paucity of studies that investigate forward linkages in the mineral sector particularly the copper industry in Zambia exposes a gap which the study aims to contribute to.
3.0 ANALYSIS AND DISCUSSION
3.1 The Scope of Downstream Activities
Forward linkages encompass the establishment of downstream activities, at least processing and refining of copper ore and concentrates into primary metal, the fabrication of primary metal into semi-fabricated products and possibly, induced industrialisation. For the purpose of this study, mining ends with primary metal production and downstream activities begins with semi-products fabrication and beyond. Zambian copper industry has long history of existence but became more active and copper mine production of ore, anode and cathode increased following the privatization of the mining industry through the 1990s to early 2000s. The majority of copper ore mined in Zambia is smelted locally before being exported to foreign markets (Fraser and Lungu, 2007 Wilson). Fig 3.1 confirms that though greater share of mine output is refined locally, very less of it is used in the country. The graph covered a short period due to lack of access to up-to-date quality data.
Zambia's copper is mainly exported as cathode or blister, the standard forms of the internationally-traded commodity. Zambia uses less than 5 percent of its copper output to make fabricated products (World Bank, 2011 p ii). However, finished goods containing copper are mainly imported into the country. Zambia has developed a small copper fabrication industry that produces a narrow range of products for domestic use and for export to regional markets, largely informed by proximity to customers guided by profitability. However, these markets are small, and yet the industry competes with larger and more developed industries especially that of South African copper fabrication industry. Zambia's fabrication industry is growing rapidly, but from a small base, led by Metal Fabricators of Zambia Ltd (ZAMEFA), a subsidiary of the US-based General Cable Corporation followed by others such as the Cast Product Foundry Non Ferrous Metals, Kavino and Central African Recycling in the scrap metal business (World Bank, 2011p ii). ZAMEFA which has a domestic, regional and international market orientation produces wire rod, wire, cable, and a few other products. Its product portfolio is growing. Kavino, wire and cable manufacturer has a domestic market orientation whereas Central African Recycling is well positioned to utilized opportunities as they arise. Total number of employees falls below 1000. In 2008, Zambian mine, smelter and refined copper output in tonnes stood at 546 600, 232,000 and 416,900 respectively. The fabricated metals production sector contribution to GDP grew at an annual average of 0.2 percent for the period 2002 to 2008.(World Bank, pp 18).
3.2 Risks Associated with Downstream Activities
The resource-based industrialiation that characterized the development process of resource-rich developed economies is often quoted to back resource-rich developing countries quest for resource-driven industrialisation which in their view masterminded the in dustrialiation process of some mature economies. However, the growth strategy of the Nordic countries, United States and Canada for instance did not based entirely on mineral extraction but span from a low-technology based on low-cost labour to highly sophisticated knowledge-intensive activities (Walker and Jourdan, 2003. P.30.). Nevertheless, risks, largely economic, abound alongside the potentials of further downstream activities.
Downstream activities beyond primary processing are capital intensive and require less skilled labour. Guided by profit motive, firms seriously consider capital cost in securing capital to finance assets. Backed by the electronic revolution, market efficiency sets the ground for capital and skills to be deployed to most productive locations (Walker and Jourdan, 2003p 30) and countries without traditional comparative advantages like Zambia are less strategic in competing for foreign direct investment. Again, the capital intensive nature of further processing of copper questions the employment multiplier and rather breed associated risks of either expanding or contracting employment opportunities. Moreover, the fabrication industry uses 37 percent of copper that is derived from scrap metal which is limited in the country (World Bank, 2011p.iii). Therefore, importing other raw materials including scrap for fabrication may not make any comparative advantage sense in the short to medium term and highlights the risk associated with an uncompetitive and injudicious allocation of the nation's scarce economic resources.
The ability to compete and access adequate market, both regional and global to justify downstream activities on any significant scale comes with a risk. Committing resources into fabrication without any competitive market edge exposes the copper mining sector to possible collapse and the entire economy to possible shocks. This is because upon the small size of the sub-regional market (less than 1 percent) of the global total for fabricated copper products (World Bank, 2011p ii) better established firms in South Africa have captured a greater portion of the regional market. Internal demand for fabricated products is woefully inadequate and therefore, the promised job expansion, high foreign earnings and associated growth potential are easily erodible, if even attained. Walker and Jourdan, 2003p 33 noted that domestic demand was instrumental in Sweden's initial resource-oriented industrialisation.
Closely linked is tariff escalation that discourages exports of higher value-added products from Low Income Countries (LICs) (IMF, 2011p.16). Tariff escalation and high physical transport cost jointly further accentuate the risks to Zambian copper downstream activities. Consuming countries of copper metal and semi-fabricated products especially the newly industrializing countries and roaring developing countries of China and India, in their industrialization drive, have in one way or the other resort to restrictions in the form of differential tariffs (varies directly with the value already added) on raw materials imports for their industries. Dimaranan et al, (2006 p. 13) note that Indian policy measures in this regard include more effective duty exemptions for intermediates used in the production of manufactured exports. The high transport cost and tariffs imposed on value-added products together can cancel completely if not negate the often expectant high profits and associated employment multipliers.
The prices for both the primary and fabricated products of the mining industry are characterized by troughs and peaks. However, the existence of terminal markets such as London Metal Exchange (LME), the Commodity Exchange Division of the New York Mercantile Exchange (COMEX/NYMEX) and the Shanghai Metal Exchange (SHME)(ICSGP.33factbook) provides mitigation to the risk on primary metal resulting from price volatilities. On the other hand, high-value added downstream products are more prone to price shocks as there exist no such terminal markets in that sub-sector of the industry. Therefore, the often envisaged employment multipliers and high foreign earnings that motivate pressure for further downstream processing places the entire economy at risk in the event of weak prices without any competitive edge.
Mainstream fabricated metal products are largely low margin items. However, high level of capacity utilization and throughput is required to generate sufficient margins which are currently in non-existence in Zambian copper industry. This is largely informed by the uncompetitive and comparative disadvantages to the downstream sector of Zambian copper industry. The situation exposes the downstream copper fabrication industry to the risk of at best earning low margins. In 2008 for example, First Quantum Ltd, a leading European copper rod producer made profits of 12.2% and 49.6% from large Cap Cast Copper Rotors (CCR) rod mill and Oxygen-free High Conductivity (OFHC) rod fabrications respectively (World Bank, 2011p.13) but earned a profit of 85.4% from primary cathode production. Such low margins in fabrication gives the signals that even internationally competitive manufacturers of range of specialist copper products rather earn high margins in primary metal production.
3.3 Opportunities in Downstream Value-addition
The existence of copper deposits in substantial quantities is a basic requirement for mining in the first place and possibly, further downstream processing (Freudenburg and Gramling, 1998). The existing domestic and regional market does not incentivise further copper fabricating on any significant scale, but some localised small-scale opportunities may emerge. In this regard, there may be a scope for some gradual scaling-up of existing output and/or product diversification by existing operations especially ZAMEFA and for some small-scale artisanal processing, probably based on scrap metal. Sectorial opportunities could be enhanced if the basic and mainly infrastructural bottlenecks are remedied. One of such opportunities is the World Bank support to revamp Zesco's existing distribution networks in selected areas to reduce losses and improve supply quality (World Bank, 2011p.33,34). Depending on the roll-out of electrification extensions, there may be some demand for low and medium voltage. Moreover, the global copper industry has identified a potential market which could exploit the known biocidal properties of copper in combating Methicillin-resistant Staphylococcus aureus (MRSA,) spread by its use in touch surfaces and all fixtures and fittings in hospitals and clinics.
The international competitive nature of the downstream activities of fabrication limit these opportunities as well established firms are ever ready and prepared to cease any market opportunities as they arise and compete out less competitive ones. China's dominance in the recent global copper consumption forecloses in comparative and competitive terms, any opportunities of developing an internationally competitive further copper processing in Zambia at least, for the short to medium term. For instance, Chinese refined copper consumption expanded by an annual 15.3% in the 1998-2007 period and by 2007, China's share of global copper usage rose from 10.5% to 26.9% (Radetzki , 2009. P. 177) in a decade. Though very important, the geological potential does not itself guarantee comparative and competitive advantage in any appreciable further downstream processing. For instance, Chile, the world's largest copper producer, accounting 34 percent of world mined copper output and 17 percent of world refined copper output, yet its use of refined copper is less than 1 percent of the world total (World Bank, 2011.8)
3.4 Mitigating Downstream Activities-Associated Risks and the Way Forward
Value-addition is critical to ensuring greater benefits and competitiveness for countries incorporated in the global economy (Mtegha and Minnitt, 2006 p. 236) hence further downstream processing should be encouraged and driven by state incentives taking cognizance of the external environment. A strong manufacturing base has to be developed if any significant expansion of copper value-addition activities is to grow.
In order to grow and sustain a downstream fabrication sector and even beyond, new sources of accessing competitive foreign direct investment and the continual adaptation and innovation of technology which is critical to maintaining technological competitive edge globally are ideal prerequisites.
Moreover, demand is indispensable in industrial development and therefore any effort in that regard must first address the market end of the value chain ranging from local, regional to global levels. The ability to create a clear niche advantage is required if the copper downstream activities are to undergo substantial growth.
Ideally, attaining global competitiveness is the single most important driver in mitigating risks ranging from further downstream processing or fabrication. While this may possibly be a long term growth and development goal in the downstream sector, the provision of adequate energy, communication and other infrastructure coupled with the effective and judicious use of economic returns from copper mining for diversification in new comparative advantage industries would in the paper's view set the foundation for any competitive industrialisation in the long run. From table 1 below, South Africa is better positioned to cease any downstream copper fabrication and market opportunities at regional level and at the global level, China.
4.0 CONCLUSION AND RECOMMENDATION
The study explored the scope of downstream linkages in the Zambian copper industry and examined the risks of engaging in downstream fabrication as well as the opportunities and suggested ways for mitigating the risks. The study reveals a small and modest fabrication activity producing a narrow range of products for domestic use and for export to regional markets, largely informed by proximity to customers guided by profitability. The decision in going downstream beyond primary metal processing encapsulates political and economic dimensions hence, requires striking a balance between both dimensions. Shaping a competitive mining industry alongside conscious efforts to diversify into other industries which gradually grow to shake off the initial copper-based dependence is a policy option and at the same time revitalizing the national science, technology and innovation policy to provide the foundation for long term skills and knowledge development. Chile, having built a competitive mining industry, diversified its economy into other competitive sectors which propelled its growth. In the short to medium term, developing a competitive copper mining industry is plausible and more realistic in comparative advantage terms while mapping out strategies to attain competitiveness from national, regional to global scales which will mitigate further copper processing or fabrication risks.
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