Mining Industry Prospects in Africa
Dec 26th 2012
The mining industry worldwide is undergoing unprecedented changes, including high volatility of commodity prices and rising exploration costs. Africa, which produces more than 60 metal and mineral products, has a huge potential with respect to mineral reserves exploration and production.
The continent hosts about 30% of the world’s total mineral reserves and even a higher share of deposits of diamonds, vanadium, manganese, platinum, cobalt and gold. Investors are seeking expansion to new markets especially in the developing world, which presents a new investment frontier for leading mining firms. In this context, the African mining industry is offering unparalleled opportunities for both local and international investors.
Despite the significant amounts of mineral resources held by the continent, Africa’s production represents only about 8% of the global mineral production. Most of this production is exported in raw form. Thus, in order to unlock its mining potential, Africa should overcome the obstacles that hamper the development of the industry. Revenues generated from mining can help African economies strengthen their comparative advantage and achieve greater economic diversification.
Obstacles facing the mining industry in Africa
The African mining industry is facing many challenges. Chief among them is the still low base of the mining activity. A number of African countries depend on extractive resources for revenues and export earnings but mining faces huge challenges related to environmental degradation and social issues.
Low industrialization of the industry: Although Africa is the most endowed region in terms of mineral resources, the continent remains under explored. Expenditure on exploration activity in Africa has remained below USD5 per square kilometer relative to an average of USD65 per square meter in Canada, Australia and Latin America. Furthermore, most of the minerals produced in Africa are still exported without downstream processing, thereby reducing their potential value added.
High degree of dependency: Many African countries depend on the production of metal and mineral products. Out of the 54 countries in Africa, 24 rely on relatively few mineral products to generate more than 75% of their export earnings. This high dependence on mineral rent has been partly responsible for the disruption caused by external shocks and low level of economic development. Consequently, the abundance of natural resources has not necessarily translated into desirable sustainable economic growth in Africa.
Environmental and social impacts: In some African countries, environmental problems and social issues caused by mining have been sources of protests and conflicts between mining companies and communities in mining areas. Mining has often been associated with deforestation, land degradation, air pollution, and disruption of the ecosystem. For example, the recent strikes and deaths in major platinum and gold fields in South Africa have highlighted the social impacts and uncertainties surrounding the country’s strategic mining sector. To curb social and environmental impacts of mining, industry players and governments should strive for a more inclusive and transparent partnership by encouraging public participation in mining communities.
Outlook for the mining industry in Africa
Addressing the challenges facing Africa’s mining industry would significantly improve the outlook of the sector, making it viable and structurally transformative. Investors are searching for better opportunities and Africa with its vast mineral potential offers an attractive environment for mining investment. However, to attract investment into the sector, the authorities must address the risks and other impediments that confront the investors, including reducing bottlenecks to exploration and unstable mineral fiscal regimes. In turn, this would encourage mining industrialization, thereby boosting the industry’s contribution to economic diversification.
Low costs of extraction and presence of global firms: The high cost of mining in developed countries has forced major global companies to seek investment opportunities in Africa which offers relatively low costs of production. For instance, BHP Billiton, the world’s largest mining group, has canceled about USD40 billion projects in Australia mainly due to high costs, including labor-related expenses. Such costs have led to an increased presence of multinational mining companies in Africa. This includes the world’s biggest companies such as BHP Billiton, Rio Tinto, Anglo American and Xtrata. More than 200 Australian companies are currently operating more than 650 projects across 37 African countries.
The emergence of major Asian investors in mining also provides additional opportunities for investor diversification in African countries. In particular, China and India have recently boosted their investments in the continent’s metals and minerals sector. These investments are critical for boosting mineral production and value-added processing. They also provide an impetus for scaling up infrastructure development, especially in energy and transport to meet the growing demand from investors.
An urgent need to industrialize the mining sector: Most African mining products are exported as raw materials. This reflects the low level of industrialization of the continent’s mining sector. Accelerated structural transformation could benefit from mineral processing and value-added manufacturing linked to the mining sector. However, this would require attracting technology and skills from mature markets in order to improve the quality of mineral products. By improving the quality of mineral product exports, African countries could generate additional revenues that would be deployed into other economic sectors. This is essential for employment creation and improvement of living conditions of the people.
However, this will require deeper reforms and implementation of effective strategies specifically aimed at making the mining sector a key player in economic transformation. Proactive and deliberate government actions are pivotal to the success of Africa’s industrialization strategy.
Establishing an industrial base through backward and forward linkages and promoting regional integration are other means by which African countries can foster the industrialization of the mining sector. More importantly, Africa needs to exploit innovative strategies by harnessing the potential of public-private partnerships as well as ensuring compliance by industrial players to regulations that would limit the environmental and social costs of mining.
Role of international development partners: The Africa Mining Vision (AMV) which was adopted by the African Union in 2008 has an ultimate goal of using Africa’s mining potential to meet the Millennium Development Goals by achieving rapid and inclusive socio-economic development. The AMV’s action plan comprises nine program clusters of activities. These include prudent management of mineral rents, building human and institutional capacities, mining sector governance, promoting research and development, dealing with environmental and social issues as well as linkages and diversification. The African Development Bank is currently actively involved in supporting the development of the mining sector in Africa. Through its public and private sector operations, the Bank has intensified efforts in recent years to foster the role of mining industry as a catalyst for economic growth and poverty alleviation on the continent.
Professor Mthuli Ncube is the Chief Economist and Vice President of the African Development Bank, and holds a PhD in Mathematical Finance from Cambridge University, UK, on “Pricing Options under Stochastic Volatility”.