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A Brave New World In 2012

A Brave New World In 2012

Several factors, including China’s ongoing need for massive volumes of mineral products to sustain its growth levels, suggest that 2012 is going to be another excellent year for Africa’s producers.

The PricewaterhouseCoopers report, Mine 2011 The Game Has Changed, concludes that the mining industry is entering a brave new era in which growth in demand, increasingly located in emerging markets, continues, whilst supply is hampered. New supply prospects tend to be more complex and expensive as they are frequently increasingly remote, of smaller quantity, of lower ore quality or there is insufficient labour available.

Managed correctly, this could be excellent news for Africa’s mining sector because the continent is especially well endowed with minerals and this refers to just those that are already known to exist. Professor Paul Collier has estimated the value per square kilometre of mineral wealth in OECD countries to average $125,000 compared to just $25,000 in sub-Saharan Africa. This implies there is likely to be an enormous amount of mineral wealth that is as yet undiscovered.

Given we are at a point at which the world’s largest miners are recognising the need to look beyond traditional investment locations and are showing a greater appetite for investing in countries formerly regarded as unstable – countries like Angola and Guinea, for instance, that have taken steps towards improving transparency whilst implementing mechanisms than enable them to share from profitable investments. These are amongst those best placed to capitalise on the enormous amounts of capital flowing into the sector.

This is a major trend for the future, since investors are already implementing serious projects and mining executives are clear on the potential value available in Africa and so are willing to act.

Whilst the Dodd-Frank Act was passed into law in 2011, the precise details of the traceability regime that the Securities & Exchange Commission will require of US companies will be announced during 2012. It is expected that the requirement for firms to provide details of their mineral purchases will reduce corruption and the ability of insurgents to finance their conflicts by the sale of minerals.

Further success in 2012 by all stakeholders (governments, miners and populations) in legislating wisely, behaving responsibly, transparently and fairly are essential if the sector is to fulfil its considerable potential.

China’s centrality for commodities markets is clearly apparent. Its significance, analysts believe, is even increasing. With the 12th Chinese Five Year Plan calling for a growth rate of 7%, considered credible by experts, the country’s commodity-devouring economy is set to double over the next decade. Anglo American estimate that China’s share of global copper consumption will rise from around 40% now to over 50% by 2020. In this context it is hardly surprising that, despite their initial mutual suspicions, Zambia’s President Michael Sata has now reached rapprochement with the Chinese – given the vital trade connections between the two countries.

PwC expect China to continue its pursuit of mineral assets, particular in Africa, where it has been traditionally discounted due to perceptions of political risk, something China feels competent to manage.

Equally, the Chinese trend towards seeking value in their acquisitions, as they did during the course of 2011, focuses on avoiding overpaying. China is likely to be looking to diversify its vast trade surplus as well as secure the epic scale of resources it requires to meet its growth plan. One must bear in mind that China must house, clothe and feed an additional 300m or more citizens by 2030 – equivalent to the current population of the United States.

The principal risks China poses to the mining sector are of a major economic catastrophe, such as the housing market bubble bursting, uncertainty due to the forthcoming leadership change and the expected slightly lower level of growth which could stall the economy or ferment unrest.

Due to the uncertain economic headwinds, mining giants are likely to be cautious in pursuing mergers and acquisitions, seeking only those that offer the very best value in terms of price or overall value proposition.

Impact of Eurozone crisis

The ongoing Eurozone crisis will be watched keenly across Africa because of the fear of global economic contagion in the event of, for example, a break-up of the currency zone. The EU is the destination for some 30% of South Africa’s mining exports and so the former’s economic performance is of particular interest there.

Nevertheless, Asia remains the country’s dominant market place, accounting for 60% of mining exports. However, the rise in the share of other African nations’ consumption of South Africa’s manufacturing exports, already at a level roughly equivalent to the EU, is a trend that is expected to continue.

Oil-rich countries that have been slow to exploit their mineral resources, being focused on oil, are increasingly turning their attention to this sector, Nigeria and Angola are cases in point. Other nations, like Guinea, are already witnessing massive investments likely to transform them over the next few years. In Guinea, Liberia and Sierra Leone in particular, their ability to continue to attract and retain investors is going to be closely tied to their ability to expediently develop the significant infrastructure required, usually in tandem with mining houses.

Because of the long-term trend for deposits to be of lower ore quality and lying deeper in the ground, in addition to rising input costs, prices are likely to continue their upward trend, short of a major global economic catastrophe.

South Africa has a challenging year ahead. The debate around nationalisation, whilst it does not appear to be anything more than a debate, has nevertheless caused concerns for investors, a nervous breed at the best of times. Moreover, rising diesel prices and 20% electricity price hikes are major barriers to the sector’s development.

Ernst & Young’s African Mining Investment Environment Survey 2011 compares 13 of Africa’s principal mining nations to assess their attractiveness to investors. Botswana, which derives 29% of its GDP from mining, attracts particular praise. Namibia, Ghana and Zambia are also well regarded. However, Gabon, Madagascar and Nigeria were removed from the surveyed countries due to slow growth in the sector there, whilst Algeria, Angola and Mauritania were added.

Given that the BRICS and so-called Next 11 countries (which includes Egypt and Nigeria) consume proportionately more steel per unit of growth than the developed nations, expect further deal making and further substantial investment in the hot iron ore and coal sectors. China alone currently consumes nearly two thirds of the world’s seaborne iron ore.

There is certainly more instability to come in minerals markets but, short of a sovereign default in Europe or a derailing of the Chinese economy, the trends in terms of population and growth mean that Africa’s producers have grounds for optimism about the year ahead.

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Written by African Business Magazine

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