After five difficult years, some high-profile analysts think that 2019 could see an improvement in Africa’s mining sector, although much will depend on whether the US-China trade dispute is settled. Neil Ford reports.
The African mining sector has endured a difficult time over the past five years. Commodity prices fell on the back of weaker Chinese demand and investment decisions on both mine projects and the railways needed to support them were delayed. New frontiers, such as iron ore development on the borders of Gabon, Republic of Congo and Cameroon, were worst hit, but even established areas of production suffered. The outlook for 2019 is not one of unadulterated confidence but there are reasons for cautious optimism.
While the terms of investment and political stability play a role in dictating mine development, global commodity prices will, as ever, have the biggest influence on mine projects. These in turn will be heavily affected by the direction of the Chinese economy. Opinion varies but some high-profile analysts are confident that the mining sector will enjoy improved health this year.
Barclays believes that Chinese demand for iron ore, copper and bauxite is set to increase on the back of increased infrastructural investment to combat slower growth. China’s National Development and Reform Commission (NDRC) approved 860bn yuan ($127bn) worth of rail projects in the last month of 2018. However, the health of the global economy and demand for mining commodities will depend in large part on whether the US-China trade dispute is settled or intensifies.
Coal and iron ore prices are likely to continue the fluctuating pattern of the past year, but there is reason for optimism for other mining commodities. Demand for the Democratic Republic of Congo’s cobalt should increase as electric vehicle production begins to take off, adding to existing demand from the telecoms sector. The Katanga provinces in the far southeast of DR Congo, which account for 62% of the world’s cobalt production, have been relatively sheltered from events in the rest of the country over many years and so political uncertainty should not impact output.
Fitch Solutions forecasts that global copper demand will increase from 23.6m tonnes in 2018 to 29.8m tonnes in 2027, an average annual rise of 2.6%. This is well above expected production increases, so prices for Zambian and Congolese copper are likely to rise, increasing the pressure for new mine development.
Uncertainty in South Africa
Investors have delayed sanctioning new projects in South Africa because of uncertainty over the Mining Charter. According to government figures, the industry shed 74,000 jobs between 2012 and 2018. Mining output fell 5.6% year on year in November.
Mining firms had strongly protested against proposed changes to the document in 2017 but the final draft of the new legislation that was passed in December excludes many of the most controversial aspects. Black empowerment interests – that is, companies mainly owned by black South Africans – are still required to take at least a 26% stake in existing mining projects, with the higher 30% threshold only imposed on new permits.
Pretoria has now dropped its requirement that this proportion be maintained in perpetuity, even if the original empowerment investors sell their stakes to non-empowerment companies. The government has also dropped its initial plan to allocate itself an automatic 20% stake in all new projects. However, at least a third of the empowerment stake on new permits should be allocated free of charge to employees and community groups.
Even during the investment downturn of recent years, there has been some development. For instance, in July coal and gas-to liquids firm Sasol began developing its R5.5bn ($400m) Shondoni mine with the intention of producing 8-9m tonnes of coal a year over 20 years. It seems likely that the passage of the Mining Charter will unlock further big investment announcements this year, both because it ends the regulatory uncertainty and because the document offers a more attractive investment regime than many thought possible, even a year ago.
Nigeria could finally acquire a significant mining industry, following the announcement by Abuja that African Natural Resources and Mines will invest N183bn ($501m) in a combined iron ore and steel project in Kagarko in Kaduna state. Successive governments have long sought to encourage domestic steel production in order to reduce imports.
The minister of finance, Zainab Ahmed, said of the mine: “This is about the first major investment in the mining sector in more than two decades.” The mine will have production capacity of 5.4m tonnes a year and it is intended that steel from the plant will supply local manufacturers.
New capacity for Mozambique
Mozambique’s coal industry has developed more slowly than expected over the past decade because of a combination of low international prices and a lack of transport capacity. However, exports are now benefiting from a growing range of export options. Most of the country’s proven reserves are located in Tete province in the far northwest but mines in the province’s Moatize basin are now connected by rail with coal terminals at the Indian Ocean ports of Beira and Nacala.
Funding has been secured for a project that could offer the highest capacity export line. China Export and Credit Insurance Corporation (Sinosure) and Chinese banks are to finance a $2.7bn venture to build a 639km railway from Moatize to Macuse near the mouth of the River Zambezi, plus a new coal port at Macuse itself with initial handling capacity of 25m tonnes a year.
The government in Maputo had spoken of an eventual capacity of 100m tonnes a year, which would put it on a par with Richards Bay Coal Terminal in South Africa, but both thermal and coking coal prices need to significantly recover if that it is to be achieved. According to Maputo, it costs about $50 per tonne to transport coal on the Nacala line currently used by Brazilian mining giant Vale.
The completion of the new line should help to substantially reduce those costs. The railway consortium of Thai Mozambique Logistics, state-owned transport utility Portos e Caminhos de Ferro de Moçambique (CFM) and Corredor de Desenvolvimento Integrado do Zambeze (Codiza) should take the final investment decision on the project this year. The decision may determine whether Mozambique remains a fairly modest coal exporter or finally begins to tap its huge potential.