The mining and trading group announced early in September that it was halting production at both its Katanga mine in the DRC and its Mopani operation in Zambia for the next 18 months, in a move that would take 400,000 tons of copper production out of the market and, hopefully, help prices.
Chief executive Ivan Glasenberg has noted the decision is in line with his view that mining companies should cut production when there is too much supply. He has chided iron-ore producers for continuing to churn out the steelmaking ingredient despite a collapse in prices.
“We’ve introduced supply discipline,” Glasenberg said.
Despite rising concerns over potential layoffs at both mines, Glencore says the suspension of the copper operations is just transitory, adding that the plan is to ramp up production again in 2017, after cutting costs to return the mines to profitability.
The move, however, comes at a particularly bad time for both countries, particularly for Zambia. The Mopani mine is vital for Zambia’s economy as the nation relies on copper for about 70% of its foreign exchange earnings and 25% to 30% of government revenue. This mine alone produces about 110,000 tonnes of the metal a year, equal to 15% of the country’s total output. Without its support, the Zambian government is likely to have an even harder time trying to narrow a wide fiscal deficit, which has worsened as a result of the country’s currency dropping to all-time lows against the US dollar.
Aside from Glencore, other major firms such as Vedanta Resources, China's NFC Africa and CNMC Luanshya Copper Mine have all said they will shut down some operations in Zambia, as a result of power shortages and policy uncertainty coming from the recent change to the country’s mining tax regime.
The combined effect of such decisions, according to a report by rating agency Moody's, will be added pressure on the country's "increasingly precarious fiscal and external positions" as it will depress growth and proceeds from exports.
Just a week before Glencore's announcement, Zambia's Ministry of Finance reduced its 2015 real GDP growth forecast to 5.0% from the 7.2% growth expectation in the October 2015 budget.
The suspension of some mining operations now, says Moody’s, introduces downside risk to these revised growth projections. Zambia's growth, which averaged at more than 7% per year over the past decade, is now at risk of falling to the Sub-Saharan Africa median, it says.
Shot to Congo’s political heart
Mining is also a key driver of economic growth in the DRC, which counts with a more diverse industry than Zambia, producing cobalt, gold, tin and diamonds.
But the suspension of Katanga will still be deeply felt. The mine, which employs almost 5,000 people, generates about 200,000 tonnes of copper per year, the equivalent to almost a fifth of the DRC’s copper output.
Katanga Mining is also a major taxpayer in the Congo, with its operating subsidiary Kamoto Copper Co. declaring $298.8 million in combined taxes in 2013. That made it the single largest taxpayer in the mining industry that year, according to a report by the Oslo-based Extractive Industries Transparency Initiative.
Analysts believe that with presidential and legislative elections slated for late 2016, the Congolese government will be extremely concerned about the fallout from worsening economic expectations and potential job losses.
The government has already urged Glencore to "respect its commitments" to the project and resume production.
There may be “underground” negotiations between DRC authorities and the company, a local banker said. “However, one of Katanga’s ventures — Kamoto Copper Company (KCC) — has been bleeding for a while so I don’t think Glencore can strengthen its balance sheet without shutting the mine down,” he told M&B.
So far, Glencore has not vowed to pressure in that respect. It did commit, however, to keep at least 80% of the jobs at Katanga, even if the production halt goes ahead. The company also promised to invest $900m to develop and modernize the mine and raise output to about 280,000 tonnes per annum while also cutting costs. The investments are meant to lead to cost savings on production, which Glencore now estimates at more than $2.50 per pound of copper.
At its Zambia unit, however, the Swiss miner and commodities trader will cut about 4,300 jobs, while injecting about $500 million to the mine over the next 18 months as it develops three new shafts. The improvements, says Glencore, should raise Mopani’s output to about 140,000 tonnes per annum while reducing production costs.