Mineral and commodity prospects are looking up.
The outlook has been clouded for the last few years, but now the world’s major economies are firing, ensuring demand for many key commodities mined on the continent. There are still risks of volatility in the global economy and these could pose problems for these shoots of optimism, as we examine below. However, due to technological changes, prospects may be brighter for many of the continent’s minerals in 2018 and even in the medium term.
Global trade winds
Events in the United States and Europe caused many to believe that the commodities supercycle of the 2000s, or at least the upward trend in commodities prices, had ended. After booming in the early 2000s, prices first fell with the financial crash of 2008. This was followed by a depressed outlook for commodities as growth and trade volumes stagnated, and China, or at least capital investment in its economy, seemed to be stalling.
However, more recent events in emerging economies, and in particular China, pose the question of whether Western economies still have as much influence over commodities markets.
While China seems set to grow at a relatively healthy 6.5%, continued “risk controls”, as Citi Research notes, could take it below 6%. That possibility, notes the American lender, could seriously dampen prices for some of the continent’s most valuable commodities. Zinc, copper, steel, iron ore and coking coal would all be vulnerable in the event of a Chinese slowdown.
More specifically, the cessation of Chinese winter environmental protection controls in some of its most economically vibrant eastern urban areas on the 15 March could act as a spur to commodity prices as Chinese producers rev up their engines again.
However, the actions of President Xi Jinping of China this year could prove decisive. His government may decide that the favourable economic outlook for the year makes this a suitable time to crack down on the shadow banking sector or for the tightening of bank lending rules. This could result in a slowdown in the economy, and a drop-off in fixed asset investment, the traditional Chinese engine of commodity price growth.
It is widely accepted that there is a burgeoning debt crisis in China and similarly that official growth figures are routinely fudged. Should either of these issues accelerate or blow up, that could have a severe impact on growth. The possibility of Chinese provinces curtailing investment in fixed assets – for instance in building infrastructure – could turn commodities bearish. While in the long to medium term greater regulatory oversight in China is welcome – particularly with fears of vast semi-hidden debt – the possiblity of investment taking fright is a major short-term worry.
Chinese policy changes and their effects are slightly easier to predict, but there are also a multitude of potential threats that emanate from ruptures between the “great powers” – chiefly, the unpredictability of US President Donald Trump.
Of note has been his bellicose rhetoric regarding China. Could the White House initiate a trade war between the two powers? A recent report from the US trade representative, Robert Lighthizer, described allowing China’s accession to the World Trade Organisation as a “mistake”.
Reversing this fundamental of American policy, through potential penalties for what Washington sees as punitive Chinese actions towards foreign companies in China, could result in retaliations by China and harm to global growth. President Trump has already imposed tariffs on imported solar cells and washing machines.
Should the White House’s war of words with North Korea move towards action, major commodity prices, in particular iron ore, would be hit. Japan, South Korea and China account for over 80% of seaborne iron ore trade. War in the region would be catastrophic for values of the commodity and global trade in general.
While tensions in East Asia risk blowing up in ways that would be catastrophic to global trade, theyalso raise intriguing possibilities for African miners. For instance, the renewed threat from nuclear conflict raises the interest in uranium sourced in Niger, Gabon and elsewhere on the continent.
The renewed tensions between the major powers and determination to secure supplies and prevent others from doing so offers potential for dampened uranium prices to rebound. Increased demand combined with cuts to supply from Canadian and Kazakh producers mean that the price of the nuclear metal could recover.
Meanwhile the changing tides of technology and the demands new entrants place on suppliers also look to be at decisive juncture. For instance, contrast the fortunes of platinum and cobalt. Platinum’s outlook looks uncertain.
The precious metal is used in the engines of diesel and other combustion engines. But the emissions scandal that has engulfed automakers such as Volkswagen has raised awareness of the pollution caused by diesel. Efforts are being made across the world, at least nominally, to turn away from diesel engines, and combustion engines more generally. As a result, the outlook for platinum has looked weak.
Cobalt by contrast surged by around 127% last year to over $75,000 a ton. The precious metal is found in abundance in the Democratic Republic of Congo (DRC). While the advance of sustainable technology is arguably humanity’s greatest tool to meet the challenge of climate change, the mineral’s production in DRC highlights many of the continent’s continued challenges.
With cobalt’s rise analysts fret over instability and the weak regulatory environment in the country, in particular the opaque nature of supply chains. A 2016 report by Amnesty International found that Chinese child labour was used to mine the ore that is used in components for everyday objects such as smartphones.
The increased importance of minerals from DRC has, moreover, shed light in recent years on the loss-making, state-owned mining outfit cum gatekeeper, Gécamines, and the political and civil conflict across the country.
Meanwhile, DRC’s political and humanitarian woes endure. The UN currently estimates that in the Kasai region alone, some 3.2m people face starvation this year without increased external assistance.
Moreover, the threat from further political rupture as President Joseph Kabila continues in power, despite his legal tenure ending in December 2016, remains high. As Peter Jones, DRC expert at London-based extractive sector watchdog Global Witness, says: “As the political crisis drags on it’s likely that the regime’s need for money increases, so it is very worrying when we see questionable deals being signed.”
Violence and the sentencing to prison in absentia of opposition figure Moïse Katumbi, the former governor of the vital Katanga province, contribute to a difficult environment in a nation which should be thriving. DRC is the source of two thirds of the world’s cobalt and has vast copper reserves.
Both minerals started the year in bullish form. Of note this year is a promised new mining law that threatens to more than double taxes on the export of any commodity the government deem “strategic”, which would most likely include cobalt and copper.
In theory greater tax revenue for Kinshasa would help to sure up the weak regulatory environment, but Jones comments: “The tax agencies are very opaque and it’s not clear what happens to some of those revenues, so it’s not certain that increased taxation through the new mining law would necessarily mean more spending on public services… The new mining law proposals have also caused a lot of concern among investors.”
By some estimates some 30–40% of mining revenues owed to the people or government of DRC disappears. Meanwhile, there is little scope for the political crisis ending in the country, which say analysts will most likely lead to continued instability throughout 2018, with an election tentatively scheduled for December. President Kabila is unlikely to leave willingly, so hopes for stability most likely lie with his government changing the two-term limit on office in the constitution to allow his continued rule, which, if nothing else, would ensure an uneasy degree of stability.
Optimism in South Africa
In contrast, analysts have greeted Cyril Ramaphosa’s ascension to the presidency of the African National Congress (ANC) in South Africa as a positive turn of events. Ramaphosa has both strong political credentials and serious mining credibility, having been general secretary of the country’s National Union of Mineworkers and a member of the board of mining company Lonmin.
He has been criticised for the position he took on the massacre at Lonmin’s Marikana mine in which 34 striking workers were killed in 2012. Lonmin is currently mired in debt, having lost over $1bn last year, with potential for a major takeover and restructuring this year.
Ramaphosa, meanwhile, has vowed to fight corruption, allegations of which have tainted the Zuma administration. There is hope, moreover, that he will produce a more investment-friendly final version of South Africa’s Mining Charter 3 than the Zuma administration had promised.
Similarly, in Zimbabwe there is hope riding on Emmerson Mnangagwa’s presidency after the surprise ousting of Robert Mugabe last year. The new administration in Harare has made promises to turn around the country’s economy, and while some have claimed that the former Mugabe loyalists in power have lacked specificity in their promises, changes to stringent indigenisation laws that have prevented FDI in mining would be welcome news in 2018.
Such moves could help to stimulate interest in the country’s lithium potential. Like cobalt, lithium has surged in price and importance due to its use in batteries that are essential for electric vehicles. Zimbabwe is currently the world’s fifth largest producer of lithium, but it is hoped that new finds can help it to grab market share.
Outlook for copper, gold, cobalt and platinum
Copper: Industrial demand, particularly in Asia will most likely keep the outlook rosy for the red metal. While it started the year trading at around $7,000, Bank of America Merril Lynch predict it could reach $7,700 a ton by the middle of 2018.
The general trend of demand for infrastructure, spurred by strong growth figures globally bode well. Supply-side issues in Latin America are welcome news for suppliers on the continent, most prominently Zambia. The country is looking to re-open a number of mines and should be able to continue impressive increases in output in 2018.
Gold: Weak demand last year should be gradually corrected in 2018, with a rebound expected in its second largest market, India. Reversals to otherwise strong global stockmarket growth sparked by political instability could similarly see a rush to gold. For instance, fears over America’s government shutdown in January saw gold prices surge briefly.
Cobalt: 2018 should see continued strong growth in cobalt prices. Political instability in DRC, which has a near monopoly on supply, will likely only have minor impacts on the price of the mineral.
Said instability and fears over doing business in DRC will most likely keep more responsible investors out of the troubled Central African nation. However, threats remain in the short-term.
The major applications for cobalt remain in new battery technologies, which could be affected by cuts to subsidies for electric cars in China. Meanwhile, breakthroughs in technology mean less cobalt could be required in batteries.
Platinum: The precious metal’s broad outlook has been bearish of late. This trend will most likely not disappear.
However, its weakness could result in a moderate correction as prices make it attractive, especially in relation to copper, palladium and gold. While its use in catalytic converters in out-of-favour diesel cars has been the major reason for bearish sentiment, general strong form for car sales in general and a possible up-tick in demand for its use in jewellery in China could result in at least a minor correction.
Restructuring of once mighty Lonmin, which has shut older mines in light of a precipitous fall in the company’s value, could result in a supply deficit which could additionally result in at least short term bullishness.
Want to continue reading? Subscribe today.
You've read all your free articles for this month! Subscribe now to enjoy full access to our content.
£8.00 / month
Receive full unlimited access to our articles, opinions, podcasts and more.
£70.00 / year
Our best value offer - save £26 and gain access to all of our digital content for an entire year!