Pix:Mr. Shula Shula
The continued copper price slump coupled with the new 2015 tax regime will cripple local mines, says the Zambia Chamber of Mines. Last week, copper prices plunged to a five-year low amid speculation that China’s copper demand growth is slowing down the global economy. The red metal, Zambia’s biggest foreign exchange earner, fell to US$5,353 per tonne last week before recovering to US $5, 762 per tonne on the London Metal Exchange. Mr. Shula Shula, an economist at the Zambia Chamber of Mines, observed that this price slump, coupled with the structural factors, legacy issues and a new tax regime would severely penalise the vast majority of Zambia’s mining operations.
The fall in copper prices and the government’s recent decision to amend the tax system, raising royalties on open-pit mining from six per cent to 20 per cent for open cast mines and eight per cent on underground mines was blamed for exacerbating the country’s mining industry concerns. Shula claimed that over half of Zambia’s copper production were currently in a loss-making position following a consistent decline in the international copper price.
“Profitability is derived from total revenue less total costs. Most of Zambia’s mines are high-cost operations, significantly higher than other copper-mining provinces in the world. At the current copper price, nine out of 11 of the country’s large mines (both open cast and underground) is uneconomic,” he stated. “Considering that the mining industry accounts for over 86 per cent of Zambia’s Foreign Direct Investment and approximately 80 per cent of exports, this is alarming for the state of the country’s economy.” Shula explained that the government’s taxation of the mining industry, let alone any industry, must take into account two strong principles. “Collecting equitable revenue required for national development and ensuring sustainability of the sector as a contributor to national development,” he stated. “The government’s introduction of the new tax regime is, [therefore,] severely contrary to both principles.” Shula stated that an excessive tax burden on the mining industry without taking into account the cost of production and unpredictability of the copper price trend, would inevitably lead to mine closures in both the short and medium-term.
“This will in turn lead to lost revenue for the country. At the current copper price, nine out of eleven mining operations are loss-making, even under the 2014 tax regime,” he stated. “The trend in copper prices has been and will most likely remain highly unpredictable. This is because copper is a base metal, heavy, plentiful and cheap when compared to precious metals such as gold and silver. This needs to be understood when effecting any policies or legislation that could impact the industry in some way.” Shula stated that a downward trend in copper pricing shows that Zambia’s industries were very sensitive and could easily become defunct.
“The current precipitous drop will cause mines to scale back on production. Contrary to the perception that the proposed regime will be simple to administer, it will be very complex as mines have open pit, underground and processing operations sometimes on the same site. At declining copper prices and a new tax regime, Zambia will move into unexplored fiscal territory,” stated Shula. “The government must therefore reverse its decision to introduce the new tax regime that poses a higher mineral royalty as a final tax and instead, institute dialogue with all stakeholders to come up with an equitable fiscal policy which is consistent with promoting mining investment and generating adequate revenues for the treasury on a sustainable basis.”