16 July 2009

Mining is the second largest buyer in Zambia after the government, making the copperbelt a tough place to be for buyers

In the north of Zambia lies the country's single most important industry. Known by locals as the "copperbelt", it is home to some of the world's most productive copper mines - which form the "backbone" of the economy.

The industry was established in the 1930s and, according to the country's Ministry of Mines and Minerals Development, Zambia is the seventh largest producer in the world. It is also the second biggest producer of cobalt, a grey metal by-product of copper mining used in, among other things, high-strength alloys.

Mining contributes an estimated $822 million (£505 million) to the nation's export income. "The copper industry is the lifeline of the country," says one industry insider. Another admits: "There's nothing else, really nothing else." This dependence is not always healthy, and for a simple reason. The success of the industry is closely tied to volatile copper prices, which have endured a torrid time in the past year.

They rode high at around $8,000 (£5,000) a tonne back in 2007 and early 2008, but as the world economy went into meltdown, demand fell and copper prices plummeted to about $2,000 (£1,200) a tonne. This decline has steadied in recent months and prices have begun to creep over the $4,000 (£2,400) mark, even nearing $5,000 (£3,000) a tonne in mid-June.

Zambian people feel these fluctuations acutely. When prices are low many mining companies cut back on exploration projects or stop production. This results in redundancies and means less money is pumped into the economy and government coffers.

AT THE COPPER FACE

One of Zambia's largest firms, Mopani Copper Mines, has not escaped the downturn, halting underground development and preventative maintenance work in the past six months in a bid to continue business operations. These are big steps that usually garner substantial attention from local and international media.

But look deeper into the Mopani world, right into the heart of its sun-drenched headquarters on the outskirts of mining town Kitwe, and you will find procurement is quietly playing a crucial role in the company's battle for survival.

Mopani has an average procurement spend of $288 million (£177 million) a year - not including capital expenditure - and the department has made big strides in improving operations and boosting its internal profile since the appointment of purchasing head Hermann Siegling 19 months ago.

Like most procurement departments, the team has dealt with an urgent demand from senior management to reduce costs during the economic crisis. Its savings target of 10 per cent of annual spend has been pursued in a number of ways, and significant cultural changes have been brought about.

Siegling says: "There's pressure on procurement to reduce costs and we have a big responsibility to question what is being requisitioned by end users. We have to go to a miner or an engineer and say 'I don't believe you need that', which is difficult for a buyer that doesn't have the technical knowledge."

He adds that the company's inventory staff are also approaching stakeholders and pressuring them to use equipment already stocked, even if it is designed to a slightly different specification.

Push back is inevitable, but if the procurement team strongly believes in the request, it takes the issue to a higher level of management in the company to get it signed off. "It's difficult, but we have to do it and we have a surprisingly good success rate," Siegling says.

Another change has been made to supplier negotiations, with greater pressure falling on vendors to reduce and contain costs. Siegling admits it was too easy for them to pass on raw material price increases in the past.

His biggest task, however, is to make the department more strategic and turn short-term efficiencies into something more sustainable. He is making progress. In March this year, Mopani's chief executive authorised a new procurement policy, outlining the role of the function and what it should achieve.

In addition, the CEO signed off further standards on supplier relationship management, as well as agreeing to establish a "sourcing standards committee" - a group of buyers and stakeholders that analyse purchasing activity - to monitor and mitigate risks including corruption.

Mopani has also this year introduced a new e-procurement system. It registers suppliers and ensures transactions can be processed more efficiently.

"In April, for the first time in a long time, Mopani came very close to our production targets and within budget, so what we have done has really paid off," Siegling says.

WHAT SUPPLIERS SAY

But Mopani is not just charged with managing its own survival, it is under enormous pressure to support Zambia's wider economy by contracting local vendors.

Fanuel Banda, president of the Mine Suppliers and Contractors Association, a body that represents around 2,000 Zambian mining suppliers, says Mopani and its rivals should be doing more to support local businesses.

He argues that procurement capabilities at the country's mining firms do not meet international standards, and procedures encourage self-preservation - rather than promoting opportunities for local companies.

A lack of transparency around contract awards, he argues, means more than 80 per cent of business is agreed with vendors outside of Zambia. "The only way to capture a component of that locally is where foreign companies use local material distributors, that's the way we bring money back into the country. Unless you have got clearly laid down, standard tendering procedures that ensure business is awarded fairly, it's very difficult for us to monitor," Banda says.

Part of the reason for the loss of local deals is because Zambia has a poor manufacturing base, he admits, but he believes the problem goes deeper.

Many of Zambia's mines are owned and run by foreign investors. Only last month, China Nonferrous Metal Mining Corp bought a reported $400 million (£245 million) controlling stake in Zambia's Luanshya Copper Mines. Banda argues takeovers like this will turn the country into a "satellite" for other economies and procurement processes will favour the investors' indigenous suppliers.

"Certain investors are very biased against Africans, to the point that they do not think anything good can come out of Zambia."

Siegling disagrees with Banda's view that more than 80 per cent of business is controlled by foreign vendors. He argues around 76 per cent of Mopani's annual spend is awarded to Zambian businesses, including contracts with Zambian electricity and telecoms suppliers.

Siegling also raises concerns over the absence of a manufacturing industry in the country, suggesting that suppliers make little effort to establish and build industrial facilities. There is a "man and a briefcase" culture in Zambia, he says, where businesses consist of one computer and a telephone and claim to supply everything from electrical equipment to capital-intensive construction work services.

RISK MANAGEMENT

Colleagues express similar frustrations. "There's a lack of skilled people and a lot of them are just traders," says Mopani's buying superintendent Julieta Dias. "We had a guy come in last week and say, 'I've got all the money, but I need big orders'. So I said: 'I can understand you've got the investment, but I need to know what you specialise in'." She adds that orders for equipment like valves will be left at Mopani's door and the supplier will never be seen again. The company is working to address these risks by reducing its supply base. It is assessing all listed vendors and has taken numbers down from 2,000 to around 600 over the last year, clearing out some of the "briefcase businesses".

But this process is not always straightforward and, as Siegling suggests, decisions to axe suppliers can often be tied up in politics. "Zambia's population is fewer than five million, and everybody's got a relative in the government somewhere," he says.

"You can't tell them 'you're no good, off you go', it's not that easy. We are linking critical commodities to assessed and approved suppliers, and the rest [of the vendors] for less critical supplies fall into a general bucket at the bottom."

Mopani's supply chain standards coordinator, Daniel Kabamba, describes the clamour for business as "desperation".

"We've got this resource that sits in the ground here and they all want their share," adds Siegling.

This culture provides the breeding ground for corruption. "There is not enough cake to go around," says Banda. "As a consequence, suppliers will tend to bend the rules to ensure they get the business."

He proposes that as the second largest buyer in Zambia after the government, the mining industry should set up a single professionally supervised procurement system for all copperbelt firms, so purchasing activity meets "acceptable standards". Only this will stamp out corruption, Banda insists.

Siegling is first to accept fraud is a huge issue. He says he was brought in because some previous supply staff were asked to leave because of irregularities. "There was a lot of back-handing and bribery going on and it's easy to fall into that trap, easy to become part of it. Getting rid of this sickness is one of my major challenges."

He insists progress has been made in the past 18 months, and soliciting and accepting bribes is now "unacceptable" at Mopani, while in the past it was part of the company's culture. The new sourcing standards committee is playing a big role in this evolution, as Siegling explains: "If somebody wants to change something, a product or a brand and test something new, all disciplines are represented here (the committee) and we make a joint decision in a controlled environment. It's not only a supplier, mining or engineering decision, everyone has bought in."

With the support of business groups, such as the Chamber of Commerce, Mopani is also helping "honest" suppliers win business they would have struggled to access before because their rivals were bribing their way to success.

"We've come a long way in two years," says Dias. "The days when you hear 'you've got to pay Mopani so much to become a supplier' are no longer. I think that there's finally a lot more communication with suppliers and we're forming partnerships now."

The work is recognised by Banda, who says he has experienced a good level of cooperation from the company in efforts to stamp out corruption and boost local contracting. He meets with Siegling and other buyers at Mopani once a month to discuss issues and form action points for improvement.

The Zambia Institute of Purchasing and Supply (ZIPS) has also waded into the issue. It recommended all mining companies share information and create a database of suppliers, flagging up businesses that have been involved in corruption in the past.

ZIPS CEO Abraham Mutakila believes the "infiltration" of unqualified buyers into procurement also fuels the problem of corruption. "People don't follow rules and regulations," he argues.

There are no formal targets on eliminating corruption, admits Siegling, but there is a collective and energised push for improvement which is beginning to bear fruit. For Mopani's procurement team this is a revelation: stakeholders are more disciplined and with less fraud, the department has a firmer grip on costs.

"We're starting to reap the benefits," adds Dias. "Things are changing in Zambia."

Mopani Copper Mines

Mopani produces around 255,000 tonnes of copper a year and 2,000 tonnes of cobalt, a by-product of copper mining;

Its operations consist of five underground mines in the towns of Kitwe and Mufulira and it employs approximately 7,800 people;

Its main copper customers are located in South Africa, the Middle East and Asia.

Quick copper facts

Copper has been used for more than 7,000 years and is primarily traded on the London Metal Exchange

Commercial sources of copper are found in deposits underground that formed as a result of volcanic disturbances early in the earth's history

Copper is used in wiring because it is considered the best electrical conductor of all non-precious metals, it is also highly malleable

It is also successfully used as piping in air conditioning equipment and refrigerators, as well as in computer chips The average US car contains 55 pounds of copper

Swiss commodities supplier Glencore International AG has a 73 per cent controlling stake in the company.