Rollercoaster Year: 2020
An overview of a tumultuous period for the mining industry in the region
Home to the world’s largest cobalt producer and Africa’s top-two copper producers, the Copperbelt region attracted a total of US$2.3 billion in investment during 2019, according to the United Nations Conference on Trade and Development (UNCTAD). Meanwhile, Central Africa attracted US$8.7 billion of investment overall and maintained a GDP growth rate of 3.8%, according to the African Development Bank (AfDB). Central and Southern Africa’s dependence on natural resources has contributed greatly to this rise, but is also a main cause of the fragility of its economies as it increases vulnerability to external shocks. The region’s growth is currently driven down by its most densely populated and resource-rich country, the Democratic Republic of Congo (DRC), which contributed 32% to the region’s GDP in 2019. While all the countries in this region witnessed growth acceleration from 2018-2019, real GDP growth in the DRC decreased by 1.5%, according to the AfDB, primarily due to the uncertainties of a political transition, drops in copper and cobalt prices, as well as the Ebola outbreak. GDP is expected to contract by a further 1.9% in 2020 as the Covid-19 pandemic takes its toll on the economy, according to the World Bank, resulting in further uncertainty in a continent already grappling with widespread economic and geopolitical instability.
“The mining industry was somewhat immune to the pandemic relative to other industries. Mining companies took the necessary measures to be able to continue production safely and global commodity prices have remained broadly supportive.”
Yannick Mbiya, Regional Director, Trust Merchant Bank
However, Central Africa remains a region with favourable prospects for medium-term economic growth. Central African economies have benefited from serious efforts at diversification and reform, including Cameroon attempting decentralization, DRC aggressively enforcing transparency initiatives, and the Central African Republic undertaking a full overhaul of its alluvial mining sector. However, this was during a pre-pandemic global economy. Today, a regional growth rate of -4.3% is the most likely scenario for 2020, according to the AfDB. As global lockdowns and travel restrictions are enforced to contain the pandemic, the economic sentiment of the mining industry is increasingly gloomy; 275 mining projects are at risk around the world, according to S&P Global Market Intelligence.
Sectors supporting the mining industry also suffered, most notably logistics. “Some problems were faced in March and April 2020 with South Africa, from where we receive major import flows, when their lockdown and road closures were imposed. Quarantine in Zambia has also been a challenge for our drivers on this corridor,” explained Rodolphe Kembukuswa, general manager in Southern DRC of Bolloré Logistics, a leading transport and logistics provider. “Forwarding out of China and India was impacted, as sailing from February until July was forbidden which caused major project delays.
“From March to September 2020, the global diamond market was stagnant, therefore a management mode was implemented in order to survive the pandemic while profits fell. Production plans for 2020 decreased by about 30%; only vital investments were kept.”
Dr. Benedito Paulo Manuel, Director General, Sociedade Mineira de Catoca
Due to port and refinery closures in addition to supply chain disruptions, demand for African commodities from China decreased, especially for copper. Even though copper was the worst performing metal in Q1 of 2020, it has had the strongest rebound since; from 2.8 US$/lb in January to 3.59 US$/lb in January 2021. Copper shortage fears continue to increase as major mines around the world have shutdown operations as a result of the outbreak. For example, Peru, the world’s second largest copper producer, experienced a 20% decline in mine output in the first half of 2020, with a decline of 38% in April-May compared to 2019. Demand for copper will increase in the upcoming years as electric vehicles (EVs) are on the rise, which require four times more copper than a conventional car. The Copperbelt region has already started attracting attention, especially the DRC as a producer of both copper and cobalt.
The DRC is no stranger to disease outbreaks and thus has one of the least impacted mining industries. “The mining industry, which contributes 40% to the DRC’s GDP, was somewhat immune to the pandemic relative to other industries,” confirmed Yannick Mbiya, regional director at Trust Merchant Bank in the DRC, a commercial Congolese bank operating since 2004. “Mining companies took the necessary measures to be able to continue production safely and global commodity prices have remained broadly supportive.”
DRC mining revenues were not heavily impacted and projects such as the long-anticipated Kamoa-Kakula mine – to be one of the largest copper mines in the world once completed – are ahead of schedule. The country’s experience with Ebola allowed it to react quickly, according to Marie-Claire Yaya, CEO of ITM Holding Africa, an international human resources solutions company: “The DRC’s success in containing Ebola greatly helped the country with the current pandemic, as the two outbreaks present significant similarities. The measures that were initially put in place to counter Ebola, mainly handwashing and social distancing, played an important role in the fight against Covid-19. Both outbreaks emphasize the need to invest in essential healthcare to develop the nation’s capacity. Nonetheless, the DRC’s contact tracing programs ranks highly relative to other African countries, adopted from Ebola.”
The Congolese government must also fight another disease that has plagued the nation for decades: infrastructural deficit, which continues to dampen economic development significantly. The flawed nature of the Sicomines minerals-for-infrastructure pact with China must be addressed, as it has failed to live up to expectations to the extent that it serves as a warning to other emerging economies to ensure benefits are of guaranteed value before exchanging their main source of wealth. The government has yet to address the current malfunctioning roads, failing rail networks and power shortages. The DRC also fails to utilise its full hydropower potential; according to the USAID, the country is only using 2.5% of its hydroelectric resources. Hydropower offers an excellent alternative to power mines considering its lower cost and environmentally friendly nature. Barrick already benefits from hydroelectricity at its Kibali gold mine.
Meanwhile Zambia, the DRC’s copper rival, is drowning in debt to finance its infrastructural projects under the government’s Seventh National Development Plan (7NDP). The nation’s overreliance on non-concessional external borrowing since 2014 has allowed public debt to reach 80% of GDP at the end of 2019, compared to 35% in 2014. Nonetheless, it has contributed greatly to infrastructural developments. “On-going projects, such as the road rehabilitation projects in Lusaka, will alleviate congestion in the city, and the Kazugungula bridge across the Zambezi river between Botswana and Zambia will foster more efficient cross-border trade. The bridge is nearing completion and will be inaugurated hopefully this year,” elaborated Olivier Terra, country director at Bolloré Zambia.
“The macroeconomics of Zambia was appealing to investors in the past as it offered stable economic growth, good market potential, political stability and so-called ease of doing business. But the country is now heavily indebted and its macros are less optimistic.”
Olivier Terra, Managing Director, Bolloré Transport & Logistics Zambia
The Covid-19 crisis caused the Zambian economy to contract for the first time since the late 1990s, exacerbated by a drought in the south, which lowered agricultural production. Economic activity is expected to remain weak throughout 2020. Zambia has seen a 4% decline in copper production in Q1-Q2 of 2019 relative to 2018, according to the Zambian Chamber of Mines.
Despite problems in the DRC, which increased royalty fees and taxation, Zambia is failing to recover its status as Africa’s leading copper producer as regulatory uncertainties plague the sector. Between 2001 and 2016, changes in mining regulations led to the re-drafting of eight national mining contracts. The Fraser Institute’s Annual Survey of Mining Companies ranked Zambia as one of the least attractive jurisdictions for mining investment in the world, as its score decreased from 63.6 in 2018 to 37.09 in 2019. The introduction of a new controversial tax regime and the consistent lack of trust between the government and mining companies will likely decrease its score further for 2020. Concern over regulatory inconsistencies has eroded investor confidence, exemplified by the government’s feud with Vedanta Resources in 2019, when it seized control of Konkola Copper Mines (KCM), Africa’s largest integrated copper producer, on the grounds of an alleged breach of environmental and financial regulations. President Edgar Lungu’s government also threatened to strip Glencore of its copper mining license after it announced closure of its Mopani copper mines due to logistical challenges and falling metal prices in April 2020 as a result of the pandemic. As mine closure is illegal, the closure decision defied the government. The feud escalated further when Mopani’s CEO was detained at Lusaka airport.
A ‘them and us’ narrative defines current Zambian mining culture as President Lungu’s administration puts pressure on foreign miners under his resource nationalist agenda. This phenomenon is widespread across the continent. “Politically, African countries across the whole continent are beginning to adopt policies that stop unwanted exploitation of their resources. We hope to continue to expand in Africa, depending on whether the regulatory frameworks allow us entry to the various markets on this continent. However, the markets in Canada, South America and Russia continue to carry great potential,” elaborated Marc Kleiner, managing director of Condra, a South African manufacturer and distributor of cranes and hoists across Africa.
“The DRC has received some negative press recently due to the revision of the mining code in 2018, just prior to the election. There was a period of interaction between the mining industry and the government trying to reach some middle ground, but during election periods it is difficult to reach consensus around legislation.”
Marna Cloete, President and CFO, Ivanhoe Mines
South Africa has also seen its mining investment decrease significantly since 2017, partly due to implementation of strict local content laws.
The world’s fifth largest diamond producer, Anogla, also expects GDP to contract by 4.1% in 2020, according to the Economist Intelligence Unit (EIU), as it suffers under the dual shock of the effects of Covid-19 and the fall in oil prices. The Angolan diamond mining industry, which President João Lourenço is determined to protect, has also experienced a difficult year as the diamond market struggled to find demand as an industry that thrives on face-to-face interactions. Anglo American’s De Beers cut 2020 production by a fifth, Dominion Mines filed for insolvency protection and Catoca, operator of the fourth largest diamond mine in the world, shut down its mining processing factory. “From March to September, the global diamond market was stagnant, therefore a management mode was implemented in order to survive the pandemic while profits fell. Production plans for 2020 decreased by about 30%; only vital investments were kept,” highlighted Dr. Benedito Paulo Manuel, general manager of Sociedade Mineira de Catoca.
The Covid-19 pandemic took the world by surprise and the consequent shutdown measures shocked the world economy, expected to contract by a 5.2% in 2020, according to the World Bank. Central Africa and Southern Africa are not immune to the disease or its consequences and containment measures weigh heavily on economic activity. Notwithstanding this impact, the region is forecast to bounce back as global demand recovers in 2021.
Image courtesy of Aggreko