Glencore Collapse Drags Down Zambia as Mining Job Cuts Loom

  • Currency has slumped 48 percent against the dollar this year
  • Company plans to cut 3,800 jobs, suspend operations in Zambia

What’s Behind Glencore’s Freefall?

Glencore Plc’s record slump is dragging Zambia’s economy deeper into crisis as thousands of job cuts loom at one of the nation’s biggest copper mines.

Zambia’s kwacha fell as much as 16 percent on Monday to a low of 12.69 against the dollar on the same day that Glencore’s stock fell 29 percent. The company, which already announced plans to suspend operations in the country, owns more than 70 percent of Mopani Copper Mines, the largest employer after the government that produces 26 percent of the nation’s output of the metal.

“The precipitous decline in Glencore’s share price has intensified selling pressure” on the kwacha, Nema Ramkhelawan-Bhana and Celeste Fauconnier, economists at Rand Merchant Bank in Johannesburg, said in a note to clients on Tuesday. “Glencore’s apparent balance sheet woes increase the likelihood of job cuts at its Mopani mine.”

Zambia’s economy has been beset by turmoil this year triggered by a slide in copper prices. The metal makes up 70 percent of the nation’s export income and falling revenue has pushed up government debt to levels causing discomfort for investors. Moody’s Investors Service cut the nation’s credit rating on Sept. 25 to B2, five steps below investment grade.

The kwacha has plunged 48 percent against the dollar this year, the most of more than 150 currencies tracked by Bloomberg. Copper has dropped 21 percent this year in London.

Glencore said on Sept. 7 it plans to suspend operations in Zambia and at Katanga Mining Ltd. in neighboring Democratic Republic of Congo for 18 months. The company has been in talks with the government and labor unions on plans to cut about 3,800 of the 20,000 jobs at Mopani.

‘Phantom Demand’

“With the benefit of hindsight, we can see how the kwacha’s fortunes have become tied closely to that of Glencore’s, the major mining company in the country,” Gareth Brickman, a market analyst at ETM Analytics NA LLC in Stamford, Connecticut, said in a note to clients.

Glencore’s stock rebounded on Tuesday, surging as much as 22 percent after the company said it can withstand current market conditions and has “no solvency issues.” The kwacha fell 3.2 percent to 12.3775 against the dollar as of 5 p.m. in Lusaka, the capital.

The currency’s slide is being fueled by “phantom demand” for foreign exchange, Bwalya Ng’andu, deputy governor of the central bank, said in an interview in London.

Power Crunch

“What’s clear is there is a mismatch between the way the market is behaving and the fundamentals in the market,” he said. “The market is fueling itself.”

Compounding Zambia’s problems is the nation’s worst power shortage yet. The country generates almost half of its electricity from a hydropower plant at Lake Kariba, the world’s largest man-made reservoir that’s less than a third full because of drought.

Barclays Plc estimates the economy will expand 3.4 percent this year, which would be the slowest pace since 1998, while the budget deficit will soar to 8.4 percent of gross domestic product, almost double the government’s initial target of 4.6 percent.

Zambia has so far resisted calls to turn to the International Monetary Fund for emergency loans as it runs down reserves and debt costs soar. Yields on the $1.25 billion Eurobond sold in July have surged 250 basis points to 12 percent since the auction. Reserves have slumped 20 percent in the year through June to $2.7 billion.

Before it's here, it's on the Bloomberg Terminal.