Mineral-reliant Zim buckles under falling global prices

Zimbabwe’s mining executives and economic analysts expect a highly depressed operating environment next year, which will weigh heavily on the economy, due to a number of factors chief among them falling commodity prices, increasing costs and limited access to foreign currency.

The year 2023 has been particularly tough for the sector due to external factors that include lower commodity prices, high global inflation, sluggish Chinese economy while local energy problems, a rapidly dollarising economy, and higher taxes weighed on operations.

The mining industry accounts for 70 percent of Zimbabwe’s foreign direct investment, generates 80 percent of exports, and contributes 19 percent to Government revenues.

The executives in charge of mining companies in Zimbabwe said in a recent survey report they expected the electricity challenges the country has been battling for years to continue in the coming year due to an increase in demand from various new or expanding projects that will require energy.

“On average, mining executives are expecting their operations to consume more power in 2024, compared to 2023.

“Analysis of survey data shows that electricity demand is expected to increase by around 20 percent in 2024 while diesel consumption is expected to increase by 35 percent. Most respondents cited ongoing capital projects as the major drivers of energy,” the report read.

Mining companies said their foreign currency retention ratio declined by more than 30 percent over the past 12 months due to many costs and the rapid dollarisation of the economy.

“The decline is largely on the back of falling mineral earnings (due to softening prices) and rapid dollarisation of the economy,” the executives said in the report released by the Chamber of Mines of Zimbabwe (CoMZ) this week.

The sector claims that effective forex retention is now around 45 percent, compared to the 75 percent announced by the Reserve Bank of Zimbabwe with the platinum group metals (PGM) and lithium sectors the most affected. The PGMs sector’s amount of foreign currency retained by companies slipped from US$1,5 billion in 2022 to around US$1 billion in 2023.

According to the survey commissioned by CoMZ, most of the mining executives expect the situation to further deteriorate next year.

The sector expects mineral revenue for 2023 to decline by approximately 20 percent and further decline by an average of 10 percent in 2024 due to softening GLOBAL commodity prices.

The profitability of mining companies declined by an average of 15 percent this year due to falling commodity prices and high-cost structure.

“Approximately 50 percent of respondents reported that they were now struggling to break even. When interrogated on profitability prospects for their businesses in 2024, most respondents (70 percent) indicated that they are expecting their profitability to worsen compared to 2023. Those that are expecting profitability to remain the same are mostly in the gold sector,” the report read.

Mining companies are partly funding their capital requirements from retained earnings, but they expect access to capital to worsen due to subdued profitability in 2024, therefore reducing retained earnings available for reinvestment.

According to the mining report, the majority (90 percent) of the mining executives are expecting the cost of capital (specifically offshore funding) to remain high in 2024 as was the case in 2023.

However, not all is gloomy as the sector expects to record mineral output growth in 2024. Most of the mining executives (95 percent) are planning to ramp up production in 2024 to compensate for anticipated revenue losses due to prevailing and expected softening mineral prices.

The remaining executives indicated that production for 2024 will remain stagnant.

According to the report, the mining executives also said the projected 2024 production targets will be largely supported by ongoing expansion projects with the gold and PGMs sector being the major growth drivers of the mining industry in 2024.

Despite most mining companies planning to ramp up production to compensate for revenue losses due to low prices, the production increase will be more than offset by the decline in prices.

Economist Tinevimbo Shava said this is a cause for concern given that the source of 13 percent of Zimbabwe’s GDP will remain under weather next year.

“The effects will be felt throughout from tax revenue which has been balancing our foreign currency accounts as well as increasing our trade deficit as we will see an increased drop in revenue even with a stagnant import bill,” he said.

Professor Tony Hawkins reiterated his call for beneficiation saying “We are reaping the fruits of our laziness as we have been talking of beneficiation from 2015 when the ZimAsset document was crafted. The country is in a predicament that needs it to continue to invest in the value addition of our minerals and other products to gain more value and protect ourselves from these situations.”

Commodities Price Outlook for 2024

Analysts and traders have lowered their price forecasts for platinum and palladium in 2024 as concerns about a global economic slowdown could reduce demand.

The median forecasts from a survey of Goldman Sachs’ analysts and traders were for platinum to average US$1 100 an ounce in 2024. That is down from a forecast of US$1 134.5 for 2024 predicted three months ago.

Platinum is down nearly 10 percent so far this year after a rally in April-May when power outages and operational challenges in top producer South Africa inflated risk of limited supply and gold was soaring.

Reuters’ 30 analyst poll thinks that gold prices will rise in 2024 from this year’s average on bets that global central banks would start monetary policy easing and after the Middle East conflict provided a boost to gold’s safe-haven rally above US$2,000.

The poll of 30 analysts and traders conducted in October returned a median forecast for gold at US$1,986,5 a troy ounce for 2024, up from US$1,925 expected this year.

The respondents slightly lowered forecasts since July, when a similar poll predicted gold to average US$1,988 per ounce in 2024 and US$1 944,5 in 2023.

Global nickel production will outpace demand to the tune of 239 000 tonnes next year, according to the International Nickel Study Group (INSG).

It will be the third consecutive year of excess supply and the surplus will be the largest yet.

The INSG, which held the second of its twice-yearly meetings in Lisbon this week, estimates the market was in a 104,000 tonnes surplus last year with the figure set to rise to 223,000 tonnes this year.

Nickel has been the weakest performer among the London Metal Exchange base metals pack this year.

Currently trading at US$18,525 per tonne and that is 60 percent lower than the January price of US$29,640 per tonne.

Macquarie Group expects LME nickel prices to be around US$18 000-US$20 000 per tonne in 2024, noting price forecasts have shifted to the downside due to persistent risks.-ebusinessweekly