FOCUS: KCM liquidation order – what is at stake, what will happen to Zambian copper industry?

The liquidation order issued by the government of Zambia, that would allow it to take control of the copper-producing assets held in the African country by global metals producer Vedanta, has sent shockwaves through the global industry.

The order marked the first government takeover attempt in the country, which is Africa’s second-largest copper-producing region.

Customers of Konkola Copper Mines (KCM), Vedanta’s copper-producing arm in Zambia, will initially be most concerned about whether a declaration of force majeure will be made during the transition period and disrupt copper supplies.

But the government’s apparent takeover, which would force a major investor out of the country, also sent a chill down the spines of other Zambian copper producers, sources told Fastmarkets.

On Tuesday May 21, the Zambian government filed an official document with the country’s High Court for liquidation of the assets of KCM, which runs the country’s largest copper smelter, Nchanga, as well as the Konkola and Nchanga mines.

The liquidation order stipulates that the liquidator will have the power to carry on the business of KCM, to take possession of assets, to dispose of assets by public tender, and to sell properties.

Milingo Lungu, a lawyer, has been appointed to serve as provisional liquidator to take over the running of the operations during the transition.

While no overall value has been estimated for the assets, Vedanta said on May 21 that its total investment in KCM since its acquisition in 2004 has been in excess of $3 billion.

The principal asset under the spotlight is KCM’s Nchanga smelter, whose capacity for 310,000 tonnes per year makes it the country’s largest primary copper smelter by capacity. It mainly processes copper ores and concentrates and smelts them into blister copper, an intermediate product containing about 98-99% copper.

‘Who will pay the bills?’
“It was shocking,” a trader source familiar with KCM’s situation said about the liquidation order. “It’s very likely that KCM will declare force majeure during the transition period. But who will pay the bills for production now? The takeover [process] can be painfully long.”

Certain trading houses still have long-term contracts with KCM for supplies of blister copper, with the amounts yet to be delivered ranging from “negligible” to as much as 10,000 tonnes, Fastmarkets has learned from multiple major trading houses.

KCM’s contracted deliveries were still running as normal this month, according to sources.

“The market should have adapted to the unstable KCM supply already,” a second trader source said.

The Nchanga smelter has been operating at reduced capacity since the beginning of 2019 due to rising raw material costs, following the implementation by Zambia of a 5% import tariff on copper concentrates. But several Chinese end-users of KCM blister copper have still expressed concern about the total absence of the major Zambian producer when supplies of copper concentrates and copper scrap remain tight.

Zambia supplies about 40% of China’s imports of blister copper, a material which can be used as a substitute for copper concentrates and copper scrap.

“Supply of blister copper has been tight since the beginning of this year, reflected by the low spot refining charge [RC],” a refinery source based in Jiangsu province said. “It is on a par with the benchmark level now. We genuinely don’t want the RC to fall further.”

The blister copper RC on a cif China basis remained at its lowest level since the assessment was launched in February last year. The spot RC was $160-170 per tonne on April 30, close to the benchmark level of $165 per tonne set by Zambian producer Chambishi and China’s major buyer, Jiangxi Copper.

KCM’s total copper output for the financial year ended in March 2019 was 177,000 tonnes, down by 9% year-on-year, according to an annual report published by Vedanta Resources.

Extent of disruption
The extent of the disruption to the copper market hinges entirely on how the takeover scenario develops.

Vedanta has been calling for “urgent meetings” with Zambian President Edgar Chagwa Lungu and his government’s mining ministry since May 20, according to a statement, but no progress has been heard so far.

Local sentiment against KCM has also soured because a group of Zambian villagers were granted permission to sue the company for alleged water pollution through courts in the United Kingdom, adding a populist element to the takeover. Vedanta has its headquarters in London.

If the takeover proceeds, there will be many uncertainties ahead. For example, would KCM’s entire assets be sold in one package? And how long would the transition period last?

“The assets are big in size, and their operating costs are high. It could take more than a year to study whether it’s possible to reverse the losses. The takeover would be a very long process,” a copper-producer source based in Zambia said.

“This is the first time the Zambian government has taken such action,” a third trader source said. “Nobody can tell whether it’s an empty threat to maximize the pressure on Vedanta, or how long a takeover would be.”

Most important question
Also on the list of uncertainties was the most important question of all: will any corporate entity have enough confidence to take over KCM’s assets after the government tried to get rid of one of the country’s largest private-sector employers?

“If Vedanta were unable to make money under the new tax regime [in Zambia], surely it would be difficult for another company to do so. The answer, from the Zambian government’s perspective – as I see it – is clearly within the realm of mines or tax policy,” a second producer source based in Zambia said.

The relationship between the country’s copper miners and the Zambian government has been heavily strained by disputes over the country’s new tax regime. Global financial advisor EY has estimated that the effective tax rate for miners under this new system could rocket to 86.3%.

Zambia is the world’s sixth-biggest copper-producing country, and hoped to lift itself out of debt by reforming its tax structure.

On top of the 5% import tariff, and non-deductible mineral royalties, the miners have protested against the intended launch in July of a 9% sales tax, which has been postponed multiple times due to a lack of infrastructure support.

The new tax regime came into effect despite causing capacity cuts and layoffs at major producers including KCM, First Quantum and China-owned Chambishi.

Market sources gave different estimates for Zambian mined copper production in 2018, ranging from 678,000 tonnes to 861,000 tonnes. According to the World Bureau of Metal Statistics (WBMS), Zambia produced 998,400 tonnes of copper metal contained in mined concentrate in 2018.

This volume made the country second only to neighboring Democratic Republic of Congo (DRC) as Africa’s biggest copper source.
 

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