Author: TSA Press

A sudden drop in the price of tobacco could not have come at a worse time for Zimbabwe. Halfway through the selling season, the price is about 37% lower than last year — at a time when, on its current trajectory, inflation could hit 100% by year-end.

It’s a blow for a country already in dire economic straits. Tobacco is a leading foreign currency earner. It accounted for nearly a fifth of Zimbabwe’s $5.3bn export earnings in 2018, bringing in almost $1bn.

It’s also a large employer: there were about 172,000 growers this year — up from 111,000 for last year’s bumper season — but only about 2,000 grow more than 2ha.

The average price at last count was $1.82/kg, against $2.87/kg a year ago, with little wriggle room. Insiders predict that, at the outside, it could rise by US20c.

The situation will put the screws on producers already under strain. According to tobacco expert and opposition MP Rusty Markham, tobacco is an expensive crop, costing about $12,000/ha to farm.

In the wake of the post-2000 land invasions, the state’s land bank collapsed. Then, as a result of the nationalisation of agricultural land in 2005, commercial banks withdrew from the tobacco market, citing a lack of security to cover loans.

It means that about 80% of tobacco operations are financed in US dollars — mainly from tobacco contractors and merchants in the US, UK and Zimbabwe. Farmers, large and small, are paid in real-time gross settlement dollars (RTGS$) — but they have to repay their funders in US currency, at a crippling rate of about RTGS$5.7/$1. Though they can later claim 50% of their earnings back in US dollars, that process has not always proved easy.

Industry insiders, including Markham, predict the low price will leave top growers in debt. “They will not cover costs — and will therefore not be able to pay back all the money they borrowed from contractors to grow their crop. The [exchange] rate will also hit them hard,” he says.

Those in the know doubt that defaulting growers will be closed down ahead of the planting season, as the tobacco merchants and contractors need to ensure continuity of flavour and quality in their products. But there must surely be a limit to that patience.

Some contractors employ former tobacco farmers — many of them evicted from their farms in the land grabs — to supervise and help growers so they do well enough to pay back their loans.

But part of the problem is the contractors/merchants themselves. The auction system no longer works for the large growers, who produce about 80% of the crop. So they are beholden to merchants — China’s Tian Ze, British American Tobacco through Northern Tobacco, and several other local and international buyers — and the prices they dictate.

It’s unclear what exactly is pushing the price down, but industry speculation points to the US-China trade war, a glut of Zimbabwe’s main flavours on the market, contractors punishing the government for paying growers in RTGS$, and fewer people smoking, including in Asia, the primary export market.

The potential fallout of the price drop does not seem to have sunk in yet. Some speculate that this is because of the glut of other bad news, including load-shedding — 10 hours a day — which will continue at least until the end of the year.

But until the country’s currency woes are resolved, it’s unlikely that the bad news cycle will be arrested.

Ashok Chakravarti, an economic adviser to the government, points to the need for dramatic changes in “the rate” in the coming months. He and other industrialists and retailers, who meet regularly and call themselves the “round table”, believe the market must be left to determine the rate of exchange as a precursor to Zimbabwe launching a new currency. It’s a move that will substantially diminish the power of the Reserve Bank of Zimbabwe, bringing it in line with conventional central banks.

The glitter of Zimbabwe’s gold sector is dimming. A perfect storm of factors — not least of which is soaring inflation — is tipping the key industry downwards, taking with it the country’s prospects of production growth and an escape from a gripping foreign exchange shortage.

Gold is a significant contributor to Zimbabwe’s economy. The Chamber of Mines’ most recent “State of the Mining Industry” report, released in November, reveals that the sector generated 45% of the country’s mineral exports last year — up from 40% in 2017. In the course of the year it produced 33t of gold, worth more than $1bn.

It’s also a large employer, accounting for about 30% of all formal mining jobs last year, with as many as 500,000 small-scale and artisanal miners plying their trade across the country.

In the face of numerous challenges, capacity utilisation in the industry fell to 71% in 2018 from 74% in 2017, by chamber estimates. And in the first quarter of 2019, gold production was down 10% — the biggest slump across the minerals sector — says chamber CEO Isaac Kwesu.

It’s problematic for an industry that has the capacity to boost an ailing economy — and for government’s ambitions for the sector. It’s looking to increase annual bullion output to 100t a year by 2023, in the hope the sector will raise much-needed forex to fund vital imports such as fuel, medicine and electricity.

But it is the forex crunch itself that gold producers blame, in large measure, for the state of play.

Zimbabwe’s central bank pays gold miners 55% of their earnings in foreign currency, with the balance paid out in local currency — real-time gross settlement dollars, or RTGS$ — at the official exchange rate (about $1/RTGS$5, against a parallel-market rate of $1/RTGS$9). But delays in accessing foreign earnings are concerning, says the mines chamber.

Metallon, one of the country’s large producers, previously told the FM that it was feeling the effects of “the delay of payments for gold deliveries, and foreign currency shortages for securing key inputs”. And it’s been reported that Metallon chair Mzi Khumalo is suing the Reserve Bank for failure to access foreign currency earnings — a reason another large miner, RioZim, previously closed its operations.

It’s not just the large miners that are struggling under the currency rules.

Small-scale miner Philip Nyazvigo owns gold claims in Mazowe, just north of Harare. “As miners, we bring in a lot of foreign currency,” he says. “We used to be OK when [the central bank] was giving us 70% in forex and 30% was put into local currency. But now we are worse off — we get only 55% in forex and the rest in local currency, which is useless. Everything we do is in forex … [There is] a mismatch, because we have a lot of expenses, such as transport, employees and other inputs.”

Besides the forex crunch, rolling power cuts present a new threat to the industry — despite miners paying a premium for uninterrupted power.

Batirai Manhando, outgoing president of the Chamber of Mines, says the blackouts are a recent phenomenon, and the mining industry still gets priority in terms of power allocation. However, he says “there has been some load-shedding in some gold mining houses”.

Smaller miners in particular are more vulnerable to issues around mineral claims and inadequate infrastructure.

Nyazvigo points to the effects on production of unclear rights allocations. “Disputes over gold claims are very common, especially among small-scale miners,” he says. “The mining certificates we have use approximate location so you end up having people coming every day to say: ‘This is my claim.’ This disturbs operations.”

Moving ore to processing centres is also problematic, as producers are forced to use roads considered unsafe. It costs them as much as $150 to move 5t of ore. And with the national rail agency now adjusting freight charges to match inflation, production costs across the board will rise.

Government is consulting on increasing ground rental fees, according to industry insiders — likely to eat further into margins.

The result has been cutbacks and a scaling down of operations. Large companies such as Metallon, for example, have put workers on short working weeks, while others are retrenching miners, says Tinago Ruzive, president of the Associated Mine Workers Union of Zimbabwe. “There is a lot of compromising of safety measures as workers have to work without sufficient protective wear and gear.”

Mines minister Winston Chitando had not responded to questions at the time of going to print. But the Zimbabwean central bank is trying to boost production — and discourage smuggling — through an incentive system. It was paying an output incentive of about $1,368/oz for gold, against a fluctuating spot price of about $1,327 at the beginning of the week.

But the problem, according to a finance manager at a large gold mining company, is that there is little willingness to address underlying challenges affecting the industry.

There’s also been little to no investment for expansion.

“There are no new gold projects and investment into capacity expansion is very limited,” says a board member of a local gold company, speaking on condition of anonymity. “The gold sector is struggling and we see this as reflecting in the first-quarter output decline for gold which, if we are not careful as a country, may continue for the remaining quarters.”