The Center for Trade Policy and Development (CTPD) has welcomed the decision by the Bank of Zambia to increase the Monetary Policy Rate (MPR) by 50 basis points to 8.5 percent from the previous 8.0 percent.

CTPD Researcher for Public Finance Wakumelo Mataa has disclosed that the decision is expected to reduce the aggregate demand pressures and moderate inflation in the medium-term.

Mr Mataa explained that implying that commercial bank lending rates will go up, money supply will contract resulting in a slow-down in demand-pull inflation.

“CTPD welcomes this decision as the rise in the policy rate is expected to subdue aggregate demand pressures and moderate inflation in the medium-term, implying that commercial bank lending rates will go up, money supply will contract and there will be a slow-down in demand-pull inflation,” he said.

He explained that in the short-term, prices of basic commodities, such as groceries and food items, are expected to remain high due to the lagged effect of the weakening kwacha but they will slow-down in the medium-term when the MPC decision takes full effect.

He however, expressed concern with the sustained fiscal pressures that have continued to inhibit the effectiveness of targeted monetary policy measures.

Mr Mataa said to this effect, there is need for government to re-align fiscal and monetary policies to ensure a coordinated approach to the restoration of the macro-economic stability.

“There is need for supplementary efforts that will target to address cost-push factors that have continued to drive inflation. long-term measures to moderate inflation should largely revolve around increased production and productivity in the Agricultural Sector, which seems highly likely given the good rain season,” he stated.

He also added that this would go a long way in string food supply and moderate inflation, stemming from rising food prices, adding that efforts to stabilize the kwacha will greatly underpin the moderation of non-food prices in the long-term.

He further advised government to succeed at securing an extended credit facility program from the on-going discussions with the International Monetary Fund as this will be a big step towards navigating the debt restructuring process, reducing debt to sustainable levels and restoring fiscal fitness.

Yesterday the central bank announced a rise in the Monetary Policy Rate following the escalation in inflationary pressures, which drove inflation further away from the upper bound of the 6-8 percent target range.

This is according to a statement availed to the media in Lusaka today by Center for Trade Policy and Development Researcher for Public Finance Wakumelo Mataa.

First Quantum Minerals sees no risk of nationalization in Zambia following the sale last month of Mopani Copper Minesto the country’s mining investment arm ZCCM-IH, the Canadian miner’s chief operating officer, Tristan Pascall, said on Wednesday.

“We don’t see any contagion or any element or risk in that more broadly in Zambia,” he said on a call.

Zambia became Africa’s first pandemic-era sovereign default in November, but ZCCM-IH in January agreed to take on $1.5 billion in debt for Glencore’s Mopani stake, making it the sole owner of the mine.

ZCCM-IH has said it expects to find a new investor for Mopani by the end of the year as it looks to boost copper output from a little more than 34,000 tonnes to 150,000 tonnes.

First Quantum, which previously held 16.9% of Mopani, operates the Kansanshi and Sentinel mines in the country.

The miner aims to resolve talks with the Zambian government over expansion of the smelter at Kansanshi before August elections, Mr. Pascall said.

First Quantum wants a deal that allows it to deduct royalties from costs, he said.

He said efforts to sell minority stakes in the Zambia mines continue, but the company has to take rising copper prices into account.

“That’s the challenge for copper producers looking to embark in M&A,” he said.

The Bank of Zambia Governor (BOZ) Christopher Mvunga said that the Central Banked remains resolute to purchase more gold deposits to enhance the country’s reserves. Mr Mvunga explained that BoZ has since purchased 47 kilograms of gold from the Zambia Gold Company Limited, under the auspice of ZCCM Investments Holdings.

He told journalists at a media briefing in Lusaka yesterday that the purchased gold is in the vault of the Central bank. Mr Mvunga emphasized that the purchase of gold is an ongoing process.

“We have so far bought 47 kilogrammes of gold and this is a continuous process. This is being done under the ZCCIMH and it is key to our foreign reserves,” he said.

And BoZ Deputy Governor for Operations Francis Chipimo said the Central Bank will purchase more gold from Kansanshi mines before the end of February. Dr Chipimo further explained that the purchase of gold has just begun, and will go on for a long period of time. In December last year, the Bank of Zambia signed a Gold Purchase Agreement with Kansanshi Mining PLC, a subsidiary of First Quantum Minerals.

BoZ Governor, Christopher Mvunga, signed the agreement on behalf of the Central Bank while, Director of Operations at First Quantum Minerals, Mr Rudi Badenhorst, signed on behalf of Kansanshi Mining PLC. As at end of 2019, the BoZ’s gold holding had risen to 34,000 tonnes from a low of 28,000 tonnes recorded in 1997.

Meanwhile, Zambia has scaled back, postponed or cancelled projects to reduce the country’s debt exposure as it holds talks to secure a programme from the International Monetary Fund, the central bank governor said on Wednesday.

Zambia, which became Africa’s first pandemic-era sovereign default late last year, began discussions with the IMF last week and has requested debt relief under a new common framework from the Group of 20 major economies.

“Our understanding is that actions are being taken to scale down and reduce the debt exposure of the country, if not stop it for now,” Bank of Zambia Governor Christopher Mvunga told journalists, adding that discussions with the IMF had been “cordial”.

“If I look at the disclosure of the debt portfolio, it’s not moving upwards other than probably existing disbursements. So my reading of that is that the matter is being addressed,” he said following a meeting of the monetary policy committee.

The bank raised lending rates by 50 basis points to 8.5% on Wednesday, saying it was ready to tighten policy further to tame rising consumer inflation driven by “cost-push” pressures and a sharp depreciation in the currency.

Mr. Mvunga said annual overall inflation accelerated to a four-year high of 17.6% in the fourth quarter of 2020 from 15.7% the quarter before. Inflation is projected to deviate further from the 6% to 8% target range over the next eight quarters, he said.

The partial easing of COVID-19 restrictions, meanwhile, saw a softer deterioration of private-sector business in the second half of 2020.

“Indicators of domestic economic activity point to a less severe contraction, but weak recovery is projected in the medium-term,” Mr. Mvunga said.

Gross international reserves declined by $117.7 million in the fourth quarter to $1.2 billion, or the equivalent of 2.4 months of import cover, caused mainly by foreign exchange interventions and debt service.

A rise in the price of copper is likely to continue in 2021 on low inventories and a bullish demand narrative, though at a slower pace, industry analysts said.

The red metal has found support on the back of upcoming elections and labor negotiations in Chile and Peru, an anticipated rebound of the global economy, sustained growth of industrial activity as well as robust metal demand by China, global COVID-19 vaccination rollout, and a weaker dollar.

“This provides a lot of confidence,” said ABN AMRO Group senior economist Industrial Metals Markets Casper Burgering.

“As a result, total long positions are high, but this also brings a downside price risk because it increases the likelihood of profit-taking by speculators. In 2020, the market has taken a substantial advance on the good news of 2021. The copper price will rise further in 2021, but in a lower gear.”

The coronavirus pandemic’s impact on the global supply chain and logistics have resulted in year-on-year supply of the metal from Chile and Peru to tighten, said Global Commodity Research analysts at Bank of America.

“While we have factored in an increase of mine production and also scrap supply this year, this is unlikely to be sufficient to prevent the copper market flipping into a deficit,” Bank of America said.

“We lift price forecasts especially for copper, which we see averaging $9,500/mt ($4.31/lb) in 4Q21, with the market likely flipping into a deficit, as inventories are low.”

Market appetite

Canaccord Genuity mining analysts expect Chinese stimulus to support copper demand in combination with an expected global economic recovery in 2021.

“We now expect copper prices to average $3.50/lb ($7716/mt) in 2021, an approximate 17% increase on our previous forecast of $3.00/lb ($6,614/mt),” Canaccord said.

In terms of copper supply, two aspects that are also hindering supply are the lower grade and deeper deposits as well as market appetite and availability of projects, Stifel Financial analysts said.

“Due to the cyclicality of the copper market, we have looked across the sector at mega projects currently board greenlighted to get a sense of downside price protection for the red metal. With a copper market in excess of 22 million mt Cu annually, only major projects (we define as those greater than 200,000 mt/year Cu produced) have the ability to materially swing the needle on the supply/demand balance,” Stifel said.

“Based in part on capital costs, operating costs, and a minimum acceptable return on investment, we estimate that current major projects require a minimum price in excess of $3.20/lb ($7,055/mt) Cu, globally.”

Sustainable energy

The expected increase in copper demand is also a result of the sustainable energy generation and consumption agenda, part of the green energy drive by governments.

“Of all the metals used in the generation, transmission, storage, and consumption, copper remains the common denominator,” Stifel said. “Electricity generation, transmission infrastructure, energy storage, and consumption all require copper.”

Copper’s long-term demand is backstopped by green energy and the push toward it, “as it is significantly more copper intensive than traditional, fossil fuel-based infrastructure,” Stifel said. “We are updating our LT [long-term] Cu price to $3.40/lb ($7,496/mt). We believe a combination of short- and long-term market support in pricing.”

This was echoed by Bank of America. “Given the increased focus on tackling climate change, the focus of government spending will be worth following as de-carbonization is bullish

metals.”

“Linked to that, we believe copper could once again rise above $10,000/mt ($4.54/lb) at some stage. What are the risks? Vaccine efficacy, delays to opening up economies and tighter monetary policy.”

On Jan. 18, the copper price stood at $8,012/mt ($3.63/lb), up 0.7% on Jan. 11.

Source:S&P Global