Document 6523194

Transcription

Document 6523194
ZIPAR Policy Brief
Why Adding Value to Copper does NOT make sense for Zambia
Alan Whitworth, DFID/ ZIPAR Technical Advisor
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September 2011
Why Promoting Value Addition to Zambian Copper is Unlikely to Succeed
Many Zambians believe that the country can significantly increase its income and job
creation by adding further value to copper before it is exported. During the 2011 election
campaign many politicians promised to increase value added and diversify the economy by
promoting the fabrication of copper products within Zambia. This brief argues that faith in
fabrication is based on a poor understanding of the copper products industry and that,
unless the fundamental causes of low productivity in the economy are addressed, Zambia
actually has very little scope for efficient value addition.
The attraction of value addition is easy to understand. Zambia is a major copper producer.
Currently, nearly all exports are in the form of copper cathode, the standard form of the
internationally traded commodity. Less than 5% of Zambian copper output is fabricated
domestically. Meanwhile, many finished goods containing copper are imported. Surely,
given that the copper is mined here, Zambia can get a better price for its exports, create
jobs, diversify its economy and reduce imports by increasing the fabrication of copper
products prior to export?
The copper fabrication industry lies between copper mining on the one hand and the users
of copper in finished products on the other. It involves the fabrication of products such as
wire rod, wire, low-voltage cable and other copper based semi-manufactures that are used
in the production of electronic goods and construction, etc. In 2010 a leading international
expert on copper fabrication was engaged to assess the potential for increasing fabrication
in Zambia. His report1, which is summarised here, concluded that there is actually very little
scope for adding further value to Zambian copper once it has been processed into cathode.
The faith in value addition is based on the fundamental misconception that being a copper
producer gives Zambia a competitive advantage over non-copper producing countries when
it comes to fabrication. The actual situation is as follows:
1

Internationally, most copper fabrication takes place not where copper is mined but
where products that use copper are made – usually close to final markets. Whilst the
main copper producing countries are Chile and Peru, the main copper fabricators are
the major industrial countries, such as China.

With the exception of wire rod, the copper refining and copper fabricating industries
are almost entirely separate. Whilst many mines refine their copper concentrate
into cathode, few are involved in any process further downstream. The
technologies, skills required and economics are all quite different.

What matters most in the copper fabrication industry is proximity and access to the
final market (or the next stage in the process chain), the reliability and cost of power
and transport, cost of finance and availability of skills. These far outweigh local
availability of copper as a source of competitive advantage.
‘How can Zambia increase the fabrication of copper products?’ Simon Payton (2010). It forms the
basis for the forthcoming World Bank report ‘What is the Potential for More Copper Fabrication in
Zambia?’

There is actually little cost saving, if any, from producing copper locally. The price of
copper is set by international commodity exchanges and varies little throughout the
world. A fabricator based in Zambia will pay almost as much for copper as one based
in, say, China. While it will save the cost of transporting cathode to China, transport
costs to China for fabricated products are likely to be higher than for cathode
because they are combined with other inputs, take up more space and have a higher
value.

Many copper products are made from copper alloys, i.e. copper mixed with other
metals. Zambia only produces a few (e.g. nickel) of the other metals used so most
would have to be imported and then re-exported after fabrication. So transport
costs would be incurred twice.

Many copper containing products (e.g. castings) use cheaper scrap rather than
newly refined copper. Zambia lacks sufficient quantities of scrap to sustain a major
copper fabricating industry.
These factors explain why Zambia has not become a major location for copper fabrication.
The Zambian Fabrication Industry
Zambia’s small fabrication industry currently produces a narrow range of products for
domestic use and for export to regional markets, where it benefits from market proximity.
However, these markets are small and Zambia faces competition in them from larger South
African copper fabricators. The industry is led by Zamefa whose American parent has
enabled it to develop an internationally competitive product that is exported mainly in the
region but also, in small quantities, as far away as India.
Employment in copper fabrication is less than 1,000 people. Being a capital intensive
industry, even if it grows substantially it will never be a major employer.
The domestic and regional markets for copper products are far too small to justify the
establishment of additional copper fabricating capacity in Zambia on any significant scale.
Domestic demand will remain limited by Zambia’s general lack of competitiveness in
manufacturing. Regional markets are growing, but from a small base, and South Africa is a
formidable competitor. Meanwhile, Zambian competitiveness in copper semi-manufactures
or products (e.g. low voltage cables) in Asian markets, where there is strong local production
capacity, is hampered by high transport costs, long lead times and difficulties in transiting
borders.
Expansion Prospects
There may be modest scope for expansion to existing capacity by building on Zamefa’s
market competitiveness. Also Zambian users of copper based semi-manufactures (e.g. El
Sewedy Transformers) may wish to reduce their current dependence on imports because of
logistical difficulties caused by slow border clearance, etc. Greater use of copper products in
the construction industry (e.g. copper pipes for plumbing) in Zambia and the region would
also help increase demand. Some entrepreneurs might also cater for small, local needs for
engineering products on a more or less artisanal scale; however, these products may focus
on alloys rather than pure copper and use scrap as a raw material rather than copper
cathode.
While some modest expansion can be anticipated, significant additional domestic processing
of Zambian copper is unlikely unless there is a substantial increase in industrial activity which
creates a large enough market for fabricated products. The Government is keen to promote
manufacturing. However, this will require overcoming the well known fundamental factors
which undermine Zambian competitiveness (e.g. low labour productivity and skills, high fuel
and transport costs, unreliable power, high finance costs). While industrial growth in the
region can help, Zambia will face strong competition from South Africa in particular.
Zambia is not alone in failing to develop a major copper fabricating industry despite the
availability of copper. The world’s largest copper producer, Chile, has been one of the
world’s most successful economies in recent decades. Yet it is not a major fabricator. Chile
produces 34% of the world’s copper, but only 1% of the world’s fabricated copper products
– reflecting the difficulty of accessing final markets.
Zambia already adds value - by refining copper
It is little appreciated that Zambia already adds significant value to its copper prior to export.
Following substantial investment in smelting and refining capacity in recent years, virtually
all Zambian copper concentrate is processed into cathode before being exported. One
tonne of cathode is worth roughly three tonnes of concentrate. The smelting / refining
process adds more value to the copper as a proportion of output price than the first stage of
fabrication.
By contrast, DR Congo, which produces nearly as much copper as Zambia, has little
processing capacity. As a result, most DRC copper is exported in (much bulkier) concentrate
form. Some of it is smelted / refined in Zambia. This suggests that the greatest scope for
adding value to copper may possibly be for Zambia to invest in further smelting / refining
capacity in order to process concentrate from DR Congo.
Conclusion
Contrary to the popular view, most of the value that can be efficiently added to Zambian
copper concentrate is already being added – by processing it into cathode. Fabrication is
most efficient when it takes place in a location with good access to the market for fabricated
products. Because it is a long way from markets, having its own copper is of little real
benefit to Zambia for fabrication.
There is nothing to stop firms investing in fabrication inside Zambia. The reason so few have
done so is that it is not expected to be profitable. Government attempts to actively promote
fabrication through tax incentives and other measures could be costly and are probably
doomed to failure, since most Zambian products will simply not be competitive. Rather than
pin its hopes on value addition to copper, the Government needs to address the
fundamental causes of low productivity and competitiveness in the Zambian economy.