Commodity Risk

It started with crude oil which dropped from a high of about $120 per barrel to nearly $38 per barrel in the last few days, and prospects of ever reaching above $100 per barrel are very slim if not non-existent.

Countryies like Ghana which expected a great economic boost from the discovery of oil must now face the International Monetary Fund for economic support because of the increasing budget deficit.

We are facing a similar decline in our copper prices which have sunk to 1999 levels.

Companies like Glencore which owns Mopani copper mine borrowed heavily on account of the high copper and commodity prices which depended on the Chinese economic boom, which has now collapsed, leaving the company in a deep rut as copper prices continue to decline.

Glencore has a huge debt overhang which will drive Zambia’s economic fortunes or misfortunes.

So far Glencore has lost more than $45 billion in market value this year. This total debt has nothing to do with Zambia and yet it is a factor that is affecting our Kwacha and economic peformance.

The value  of our Kwacha will be closely tied in with the performance of Glencore, which owns 70 percent of Mopani, one of the largest employers in the mining industry.

The truth is that the unprecedented fall of the Kwacha closely mirrors Glencore’s 29 percent stock fall.  Because of this stock fall and its burden of more the K20 billion the company has been forced to take remedial measures including suspension of operations in Zambia and DRC.

This has resulted in the 40% plunge of the Zambian Kwacha because of the phanthon demand of the dollar.

The economic fundamentals may be strong and yet the perception is driving the value of the Kwacha.

It is therefore understandable that the International Monetary Fund, IMF, has warned of slower economic growth for commodity exporters such as Zambia.  The warning spans 2015-2017 and if anything alerts commodity exporters of even lower prices before the situation is corrected.

It is imperative therefore that as a country we must make the best use of whatever resources are at our disposal to generate our real effective exchange rate by generating alternative exports to generate revenue for capital and recurrent expenditure.

While the Government may tighten monetary and fiscal policies, there is no doubt that an aggressive and well planned diversification programme will stand us in good stead.  This is demonstrated by Brazil whose currency has performed worse than the Kwacha and yet has given advantage to sectors of the industry to benefit from the decline.

The currency rout has benefitted beef exporting companies which are now earning several times more than they did before the devaluation.

Supported by a risk management team, the companies have undertaken a currency hedging exercise that has made them withstand a measure of the decline.

Therefore it is no longer an energy problem.  It is a real financial problem that must be managed and as a nation we must find ways and means to mitigate the situation.