COPPER PRICES AND ZAMBIAN REVENUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010017-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 17
• Publication Date: April 1, 1971
• Content Type: IM

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Confidential
Intelligence Memorandum
Copper Prices And Zambian Revenues
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DIRECTORATE OF
INTELLIGENCE
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WARNING
This document contains information affecting the national,
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by, law.
GROUP 1
FKduded from aulemalit
downgrod nq and
dedalar~auan
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1971
INTELLIGENCE MEMORANDUM
COPPER PRICES AND ZAMBIAN REVENUES
Introduction
1. Prices for Zambia's copper fell some 40% from the record levels
of March 1970 to less than 50 cents per pound in early 1971. Moreover,
a major cave-in at the country's second largest mine has cut sharply into
output. Because Zambia depends heavily on the copper industry, which
dwarfs all its other industries, these events have had immediate consequences
for the economy, although its large foreign exchange reserves are absorbing
most of the impact. This memorandum briefly describes Zambia's copper
industry and the related world copper situation and assesses the impact
of continued relatively low copper prices on Zambian revenues during the
next year or two.
Discussion
Background
2. World demand for copper, which has tended to outpace supply
since the early 1960s, topped out in 1970, and a buyer's market is expected
through 1971 and probably beyond. Prices have drifted downward from
a high in early 1970 of more than 81 cents a pound for wirebars on the
London Metal Exchange (LME) to 45 cents in mid-January 1971. US prices,
which are considerably more stable than LME prices, rose to 60 cents in
early 1971 (see Figure 1) but by mid-January 1971 had declined to 50
cents. Prices appear unlikely to return to the highs of a year ago, and the
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Monthly Average
II
..........
..
~
;
Lo don -:1a1 Exchange Price
Annual Average
Annual A~
1959 1960'' 1961 1962' 1963 1964 1965 1966
'+r
519226 4-71 cln No posted price during strike
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1967 ' 1968
1969 1970
25X1
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recent windfall to countries dependent on copper for a significant share
of their revenues apparently has ended.
3. The producing countries most affected are Zambia, Chile, Congo
(Kinshasa), and Peru. These four, which comprise the Intergovernmental
Council of Copper Exporting Countries (CIPEC), mine more than half the
Free World copper -- outt,ide the United States -- and export nearly their
entire production. * CIPEC exports account for 70% to 80% of Free World
copper exports. Zambia now vies with Chile for first place among the CIPEC
group (see Figure 2) and for third place in world production after the United
States and the USSR. All four CIPEC countries, but particularly Zambia,
depend heavily on copper sales for government revenue and foreign exchange
to finance imports and other international transactions, and the finances
of all, but again particularly those of Zambia, are vulnerable to a significant
fall in copper prices. The copper mining capacities of the CIPEC countries
are shown in the following tabulation:
Thousand Short Tons
of Copper Content
Actual
Planned
1969
1973
Zambia
825
925
Chile
830
1,300
Congo (Kinshasa)
400
500
Peru
250
295
Total CIPEC
countries
2,305
3,020
Total Free World
5,830
8,000
4. More so than in any other country, the copper industry dominates
the Zambian economy, accounting for more than 90'% of exports, some
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Growth of Copper Mine Production
CIPEC Countries and Free World Total
Indexes of Copper content
(In percent of Free World Total)
44.0%
Congo
(Kinshasa)
Zambia
,13 OX
Peru L3%
Chile 15.9%
INDEXES f 1960 =100)
1963
13.3%
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970
4_
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60% of total government revenues, and about 40% of gross domestic product
(GDP), including the estimated value of output in the subsistence sector
(see Figure 3). Outside of the copper industry the economy is relatively
Significance of Copper
Amono Major Free World Producers, 1969
Gross Domestic
Product*
Fipurn 3
Tax Employment
Revenue
undeveloped, relying on imports to supply a major share of domestic needs
of all kinds, except basic foods in good harvest years. Copper earnings
traditionally have supported a high level of imports, which in 1970 totaled
nearly $440 million, the third highest import bill in sub-Saharan Africa,
exceeded only by that of South Africa and Nigeria. A major decline in
copper revenues, therefore, is of unusual significance to Zambia.
The Copper Industry
5. The Zambian copper industry is made up of two companies,
Nchanga Consolidated Copper Mines (NCCM) and Roan Consolidated Mines
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(RCM), which produce approximately 52% and 48%, respectively, of
Zambia's copper output. Seven mines located in the Copperbelt bordering
the Congo (Kinshasa) are the principal source of copper ores-Although
these mines have been operating since the 1930s and some even earlier,
unexploited reserves averaging 2.5% copper content are adequat,:% to maintain
current production for the foreseeable future. In addition, large but
unexplored deposits, which are extensions of the Copperbelt, are believed
to exist and could provide the base for a greatly expanded industry. The
companies own three copper smelters and three refineries which produced
825,000 tons of copper metal in 1969 (see the map), as shown in the
following tabulation:
Year
Thousand
Short Tons
Year
Thousand
Short Tons
1965
755
1969
825
1966
646
1970
768 est.
1967
679
1971
760 est.
1968
733
6. The. present company organization was created in January 1970
when the subsidiary mining companies owned by Anglo American
Corporation and the Road Selection Trust were consolidated into two newly
created companies, Nchanga Consolidated Copper Mines and Roan
Consolidated Mines. The government took a, 51% share of each new
company and issued 6% interest bearing bonds in payment, redeemable over
a maximum of eight years for RCM bonds and 12 years for NCCM bonds.
Redemption payments totaling $19.7 million will be made every six months
for eight years. At the end of that time, RCM bonds will have been
completely redeemed, but payments of $10.4 million for NCCM bonds will
continue every six months for four more years. All payments are to be
made out of the government's share of profits. The new companies are
managed under contract by the former operators to whom management
fees are paid. The government also changed the method of collecting revenue
from the companies, abolishing the royalty and export tax system and
replacing it by a single mineral tax of 51% of gross profits and an income
tax of 45% payable on the balance -- a total of about 73% of gross .profits.*
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Oil pipeline
Oil refinery
Barge
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The new system has the merit of being simpler to compute and collect
than the former system and also increases the tax on copper revenues
somewhat.
7. The transition from private to state control was carried out
without interrupting production, but in late September 1970 a cave-in of
disastrous proportions occurred in RCM's Mufulira mine. Mufulira was the
country's second largest copper producer, supplying about 25% of Zambia's
output or more than 15,000 short tons monthly. Although production of
about 3,000 tons a month was resumed in November 1970, the loss resulting
from the cave-in for the year as a whole amounted to an estimated 40,000
tons. Nearly full production at Mufulira is expected by July 1971, but
the cost in terms of restoration as well as lost production will be great.*
Lost production alone could reach 70,000 tons in 1971.
Revenues and Government Finances
8. Zambia has been riding the crest of a prosperity wave brought
about by high copper prices during the past six years. Zambian prices, which
since 1966 have been based on the LME price, rose from an annual average
of 32 cents per pound in 1965 to 63 cents in 1969 and then declined
to 60 cents in 1970. The value of Zambian copper sales nearly paralleled
the change in price, increasing from $480 million in 1965 to $1,035 million
in 1969 and then declining to $930 million in 1970, as shown in the
tabulation below:
Revenues to Government
Year Value of Sales from Copper Industry
1965 480
1966 615
1967 620
1968 720
1969 1,035
1970 930 est.
190
230
205
255
330
300 est.
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Concomitantly, government revenues from the copper industry increased
from about $190 million in 1965 to $330 million in 1969, an average of
15% annually, before declining 10% in 1970 to an estimated $300 million.
Copper production changed little during the period, increasing only 9%
between 1965 and 1969 and then declining in 1970 to less than 2% above
the 1965 level.
9. Rising revenues have permitted Zambia to increase total budget
expenditures by some 22% annually from fiscal year (FY) 1965 through
1971 (see Table 1). In spite of the steady growth of recurrent expenditures,
which in 1970 were 2.4 times the FY 1965 level, the recurrent budget
consistently has shown surpluses ranging from $72 million in FY 1965 to
$235 million in calendar year 1969 and almost that much in 1970 when
accumulated surpluses from past years totaled $105.7 million. The capital
budget generally has been fairly conservative and has been fin:3nced with
little difficulty out of recurrent budget surpluses supplemented by some
domestic and external borrowing. Most capital expenditures have been on
infrastructure, particularly since the Rhodesian Unilateral Declaration of
Independence when Zambia launched a program to decrease its dependence
on Rhodesia. The rather large leficit recorded in 1968 resulted from this
effort. Capital budget expenditures increased more than 60% in 1968 over
the previous year, primarily as a result of investments in power, coal,
railroads, and telecommunications.
Foreign Trade and Balance of Payments
10. Foreign trade plays a predominant part in Zambia's economy,
with merchandise exports and imports equivalent to 64% and 26%,
respectively, of GDP in 1969. Export receipts depend almost entirely on
copper exports, and import payments have risen since 1965 because of
investment outlays on development projects, including those associated with
decreasing Zambia's dependence on Rhodesia. Exports increased an average
2
of
0% annually between 1965 and 1969, reaching more than $1 billion
in 1969, while imports increased less rapidly (9% annually) to $439 million.
The annual trade surpluses, which had averaged $217 million during
1965-68, rose to $627 million in 1969. In 1970, however, the trade surplus
declined to about $545 million, due almost entirely to a decline in receipts
from copper exports (see Table 2).
11. The relatively large surplus on merchandise account is in part
offset by substantial payments for freight and insurance and by remittances
abroad, mostly by copper companies and their employees. During 1965-69,
payments on services and transfers were on the average equivalent to 29%
of export receipts. Private and official capital movements during the
five-year period have been relatively small. Capital movements fluctuate
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Table 1
Zambian Central Government Accounts
FY 1965
FY 1966
Jul-Dec
1966:21
1967
1968
1959
1970
Revised
1971
Estimated
Recurrent account
Revenue
219.9
304.4
199.3
385.7
428.5
561.7
582.8
484.1
Expenditure
147.8
195.2
163.7
243.2
316.0
326.5
354.2
460,9
tij:
Surplus
72.1
109.2
35.6
142.5
112.5
235.2
228.6
23.2
H
Capital. fund account
Appropriation from.
recurrent account
51.8
86.8
56.0
100.8
112.0
196.0
148.4
112.0
Borrowing and other.
receipts
26.9
24.4
17.5
42.7
93.7
72.2
83.7
101.2
Total capital receipts
78-.7
1-11.2
73.5
143.5
205.7
268.2
212.1
213.2
Capital outlays
42.8
91,8
57.3
.167.2
270.6
218.8
231.0
241.6
a. Beginning on 1.January 1967, the Zambian government accounts were shifted to a calendar year
basis instead of the former fiscal year (1 July-30 June].
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Zambia: Summary of Balance of Payments a/
Current account (net)
Goods and services
Trade balance
Exports f.o.b.
Imports f.o.b.
Services (net)
Transfers
Capital movements (net)
Private
Official
Special drawing rights allocation
Errors and omissions
Apparent change in assets
1970
1965 1966 1967 1968 1969 Provisional
87.6 70.7 14.5 -23.8 320.0 155.4
113.5 84.1 14.6 11.1 394.9 294.0
201.0 254.2 185.8 228.1 627.3 544.6
513.5 624.7 651.3 746.6 1,066.7 984.2
312.5 _310.4 465.5 518.6 439.3 439.6
-87.5 -170.1 -171.2 -217.0 232.4 250.6
-25.9 -13.4 -0.1 -34.9 -74.9 -138.6
-18.3 -38.8 37.4 40.6 -91.6 95.2
-0.4 16.9 20.4 40.6 -109.8 128.8
-17.9 -55.7 16.9 -- 18.2 -33.6
-- -- -- -- -- 8.4
69.3
13.2 -33.0 9.1 176.8 259.0
ecause of rounding, components may not add to the totals sh. n.
-18.8 -85.1 -7.7 -51.7
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considerably because direct investments by the mining companies and
variations in their balances held overseas have been the principal components
of private capital movements.
12. The high value of copper sales in 1969 and 1970 created
substantial balance-of-payments surpluses, which increased external reserves
to slightly more than $500 million by the end of 1970, an amount 16%
greater than imports in that year. In 1969, copper exports were 44% above
those of the previous year and, although declining in 1970, remained 29%
above those of 1968. The balance on current account rose from a deficit
of $24 million in 1968 to surpluses of $320 million in 1969 and $155
million in 1970. Although capital movements showed a deficit of almost
$92 million in 1969, mainly as a result of a buildup of foreign exchange
balances held abroad by the mining companies, the deficit was covered easily
by the surplus on current account. The funds held abroad were returned
to Zambia in 1970, accounting for much of the large net private inflow
of nearly $129 million in that year and consequently for the ,urplus of
$95 million on the capital account as well as the unprecedented growth
in assets of some $259 million.
Prospects
13. World copper prices remained well below 1970 highs during the
first quarter of 1971. In January, prices on the LME fell to 46 cents per
pound and remained close to that level until mid-March when they rose
above 50 cents in response to the news that Chile's copper industry was
having difficulties and that Chilean exports might decline. Price behavior
in the second half of the year is difficult to predict because of uncertainties,
including the possibility of a US copper strike when labor contracts expire
oil 30 June. A nine-month strike, such as occurred in 1967-68, is unlikely,
but even a strike of several months would raise prices considerably on the
sensitive LME. Three other potential influences on prices are: an upsurge
of the US economy in the third and fourth quarters; concerted action by
CIPEC countries to raise prices by restricting the supply of copper; and
a continuing shortfall in Chilean output. While none of these factors alone
would be likely to raise prices to the highs of 1970, the three together
might.
14. With prices lower, Zambian government revenues are being
squeezed. The advantage once enjoyed by Zambia as probably the lowest
cost copper producer in the world ended in recent years largely as a result
of Zambian efforts to reduce dependence on Rhodesia. The substitution
of low-grade Zambian coal for Rhodesia's excellent Wankie coal and efforts
to circumvent the Rhodesian railroad, which resulted in doubling
transportation costs, have been two principal factors in the steady rise of
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costs f tom 20 cents per pound in 1966 to 30 cents per pound in 1971.
The rise in costs has narrowed the gross profit margin on which the mineral
tax and income tax are levied (see Figure 4) -- for example, in 1971, with
Zambia: Distribution of Copper Sales Revenue
Million US $
1'0()0----'-.
Figure 4
Company
Profits
700
000 ??-' -?
600 ---
400 ?--`
300-?-
200 -"-
1966
510228 4-71
j... __..
f
Producers
Costs
-.-L-
costs of 30 cents per pound, government tax revenues were roughly $110
million less than they would have been at the 1966 cost level of 20 cents
per pound, Moreover, the government's commitment not to increase taxes
on copper revenues beyond 73% on gross profits until all bonds are
redeemed - presumably- a 12-year period - closes this option as a means
of raising revenues.
15. With the decline in the value of Zambian copper sales in 1971
because of lower prices and reduced production, government tax receipts
will decline and the balance of payments will deteriorate. At the anticipated
1971 production level of 760,000 tons, each I cent variation in the average
annual price received per pound causes approximately a $15 million change
in annual export earnings and an $11 million change in tax receipts at
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iliii:ii i Government
.
Tax Receipts
it~~tt?iiti ~-
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prices above 30 cents per pound (see Table 3). Thus, if the average annual
price received by Zambia were 50 cents per pound in 1971, which
apparently is the average price assumed by Lusaka for planning purposes,
export earnings would decline by roughly $170 million from the i970 level
and tax receipts would fall by about $80 million and probably more.
(Estimates of tax receipts are complicated by the fact that 1971 is the
first full year the new tax structure will be applied to copper industry
earnings.)
16. T, , Zambian government is not letting this decline in revenues
interfere with its economic development and military programs. An increase
of 15% in imports is projected for 1971 which, together with the drop
in export earn;ngs, will result in a current account deficit of around $100
million. The capital account also will probably be in deficit as the large
private capital inflow of 1970, which resulted largely from the return of
copper comppuy carnings held abroad, will not be repeated. In the 1971
budget a decline of $100 million in current government rcvenuas is
anticipated and an increase of slightly more than $100 million 1.1 current
expenditures is planned. A large part of the increase represents military
expenditures and greater spending on education and infrastructure. The
surplus of current revenues over current expenditures thereby will be
reduced to $23 million (see Table 4), the smallest since Zambian
independence. This surplus is too small to cover the planned allocation, of
$1112 million to the capital fund -- the first time the rapital cxpenditures
have ever exceeded the current surplus.
17. In spite of balance-of-paymct'Is and budget deficits should copper
prices remain depressed, Zambia should have little economic difficulty in
1971. Zambian foreign exchange reserves, which totaled slightly more than
$50J million at the end of 1970, are many times larger than any foreseeable
balan.cc-cf-payments deficit in 1971. Budget deficits can be covered quite
readily by domestic borrowing, a device that, given unrestricted imports,
ought to be no more inflationary than financing frr,;, copper revenues.
Even shaul'l unfavorable copper prices extend into 1972, foreign exchange
reserves should be adequate to cover all reasonable contingencies.
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Distribution-=,f Copper Sales Revenue in 1971
at Different Average Yearly Prices 1
Sales revenue
Producers costs
Of which:
Wage bill
Government tax receipts
Company net profit
Of which:
Government ownership profit
Price per Pound
Million US $
$0.48
$0.50
$0.52 _
$0.54
- $0
56
- $0
58
$0
6
.
.
.
1
730
760
790
821
851
882
927
456
456
456
456
456
456
456
140
140
140
140
140
140
140
200
222
244
266
288
311
344
74
e:2
90
99
107
115
127
38
42
46
50
55
59
65
a. At a production level of 760,002 short tons.
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Table 4
Zambian Central Government Accounts
as Published in January 1971
Million us$
Recurrent Account
1. Revenue
484.1
2. Expenditure
460.9
3. Surplus
23.2
4. Accumulated surplus on recurrent
account
105.7
Capital Fund Account
5.
Appropriation from recurrent revenue
112.0
1
6.
Borrowing and other receipts
101.2
7.
Total capital receipts
213.2
8.
Capital outlays
241.6
9.
Deficit
28.4
Accumulated surplus on capital account
35.0
2/
Total fundo available
(item 2 + 6)
Total cxpr nditurctt
(itarro 2 + 8)
,0f. S
Total deficit 117.2
Total accumttlatrrd nurpluq avaiZablo
(i tons 4 + 30) 240.7
a. Unapproprjata Burp ;;cc on Recurrent Alola tod from pant !,are.
ount aacuru-
b. Appropriation to be made out of itor;o 3 and 4.
0. Unappropriate e nurplu*ear on Capital Fund Account
aoour.,uZa tod from pant years before daduotion of 1971
dcftoit of $28.4 r-iZtion. . 15.
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Conclusions
18. Zambia's dependence on copper for more than 90% of export
carl!ings and 60% of government revenues makes the Country's economy
:xtremely sensitive to world copper price movements. At current production
levels, co;:h I cent variation In the average annual price received per pound
cauprs a $1 S million change in annual export earnings and a variation of
approximately $11 million in government tax fievcnucs. Relatively high
copper prices since 1965 but particularly in 1969 and early 1970 permitted
high levels of spending on infrastructure and the development of domestic
resources and other projects to lessen dependence on Rhodesia. In spite
of large expenditures, surpluses were shown on annual budgets, and external
reserves Increased to slightly more than $500 million at the end of 1970.
19. The sharp drop in copper prices In early 1971, unless reversed
later In the year, will significantly reduce Zambia's export earnings and
government revenue. The recent agreement nationalizing the copper industry
Is ul,tikely to increase the government's share of gross copper earnings very
rmuch. Despite lower revenues, the government Is going ahead with economic
development and military programs; imports and government expenditures
are planned to increase substantially in 1971. As a result, both the balance
of payments and the state budget arc expected to show deficits.
:0. Zambia's foreign exchange reserves are more than sufficient to
cover prospective balance of?payrncnts deficits through at least 1972, with
Imports largely free of restrictions, it is unlikely that the projected budget
deficits will be serouily inflationary.
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