Both the Democratic Republic of Congo and Zambia have made drastic changes to their mineral tax regimes, overcoming the entrenched opposition of some of the world’s biggest mining houses.
They both bet that the world’s need for their resources, particularly copper and cobalt, will keep the tax receipts flowing.
However, the current push for a greater share of the wealth lying beneath the African Copperbelt is causing supply-chain disruption for both copper and cobalt.
Glencore, last week confirmed media reports that it will be cutting production at its Mutanda mine in the Congo sparking a rally in the copper market, which highlights just how important these two African countries, have become to the global supply picture.
The current supply turbulence, however, promises more volatility ahead for cobalt as well as copper.
The Congo and Zambia have for some time been slugging it out with mining companies about proposed tax changes but the miners have lost the contest.
Congo signed its new mining code into law in June last year.
Copper royalties were raised from 2.0 to 3.5 percent and those on gold from 2.5 to 3.5 percent. A new “super profits” tax, set at 50 percent, was introduced. It kicks in when profits exceed 25 percent of those forecast in a mine’s original feasibility study.
Miners took another blow in December, when Congo declared cobalt a “strategic” mineral, nearly tripling the royalty rate to 10 percent.
Zambia’s tax hits on miners came into effect at the start of this year, lifting the sliding royalty scale by 1.5 percentage points to between 5.5 to 7.5 percent, depending on the copper price.
If copper exceeds $7,500 and $9,000, the royalty rate will go up to 8.5 and 10.0 percent respectively.
A new 15-percent royalty on gold and gemstones has also been introduced, while mining companies are waiting nervously to see the details of the Zambian government’s plan to replace value added tax with a non-refundable sales tax at the start of April.
Operating in both the Congo and Zambia just got more expensive.
However, it’s a smaller change in Zambia’s tax system that has caused the immediate supply chain disruption.
A new 5.0-percent import tax on copper concentrates has halted the flow of raw materials from Congo to smelters in Zambia.
The latter has excess smelting capacity, the former too little.
Smelters such as Vedanta’s Nchanga and ERG’s Chambishi have historically relied on Congo for part or all of their feed.
The reaction to the new import tax has been swift, Nchanga reducing output and Chambishi closing. Each has generated knock-on effects.
The smelter produced 135,000 tonnes of refined copper in the first nine months of 2018, including 67,000 tonnes from third-party, for which read Congolese, feed.
Lower output at the smelter means less sulphuric acid for the Nchanga copper mine, where the acid is used to leach concentrate into metal.
KCM therefore suspended mining operations at the start of January.
ERG’s cross-border flow included cobalt raw materials for refining at Chambishi, putting another kink into this market’s volatile supply side.
Mining companies fear that this may not be the last assault in either country, given both are burdened by heavy national debt and creaking budgets.
They are also, however, key sources of two metals expected to see fast-accelerating demand from the electric vehicle revolution, cobalt for lithium-ion batteries and copper for the infrastructure that will enable that revolution.
Cobalt’s dependence on the Congo is a well-understood problem for both lithium-ion battery manufacturers and their automotive customers.
Copper, by contrast, must learn anew the potential for central Africa to instil unpredictability into the price.
Only time will tell if Congo and Zambia are right in their belief that miners will accept, however reluctantly, the new costs of doing business.
But the short-term outlook is for more supply-chain turbulence.