Making the Most of Africa's Resources: In the Face of Increasing Demand, Rising Prices and Profits, Resource - Rich Countries in Africa Are Increasingly Keen to Make Sure They're Getting a Fair Deal. How Best to Do So? MJ Morgan Discusses
Morgan, Mj, African Business
Prior to the global economic crisis of 2008, commodity prices had risen precipitously and they have since recovered to pre-crash levels. So now, as before the crisis, commodity-rich nations have watched keenly the increase in value of their exports and considered how they might share in the spoils.
The spoils are certainly considerable. Since the crisis, according to PricewaterhouseCoopers' Mine 2011 report, the world's top 40 miners have halved their debt, built cash reserves of $105bn, asset values have reached $1 trillion, revenues surpassed $400bn and profits topped $110bn last year. On top of that there is collectively $300bn in capital programmes already announced.
As this investment would suggest, despite the uncertain economic headwinds, demand for commodities remains resilient. Although there is significant volatility, as concerns persist about growth in Europe, the US and elsewhere, in the long term it is going to be immensely challenging logistically to produce the quantities demanded. Iron ore demand, for instance, is expected to increase by 50% between 2010 and 2016, from 1.8mt to 2.8mt.
China is also no stranger to concerns about its ability to maintain its phenomenal growth rate. Worries include the possible presence of a housing, or other asset class, bubble - if it is so hard for the market in its infinite and mysterious wisdom to allocate capital efficiently, can central planning by Beijing do any better? In the long term this remains to be seen. Nevertheless, so far so good; China continues to grow rapidly.
Since it consumes 40% of the world's copper and around half of its iron ore, cement and coal, its performance is key to the commodities outlook. But even aside from China, a growing world population, and a general downward trend in the scale and ore quality of mineral finds all combine to increase the economic and political significance of major mineral deposits.
Commodity supply is, of course, relatively inelastic. It is necessary to raise money to spend on exploration and a miner must negotiate with a host nation to ensure a mutually satisfactory arrangement can be met. In order to attract investment, a sufficiently desperate nation may virtually give its mineral endowment away, whilst another may set its sights too high to get projects off the ground.
The matter is further complicated by the fact that the costs of, for example, establishing a mine are extremely high. Minerals are often located in out-of-the-way places. Offices, staff accommodation and rail and port connections may have to be built. This is on top of the cost of the expensive equipment required to drill the mine - with minerals such as gold now being found in deeper and deeper deposits.
The capital costs of taking a mining project from discovery to production are front-loaded. These large sunk costs for a miner may take years to recover - a mine may typically operate for 20 years. This exposes the company to the risk that a government or successor government may decide to levy a windfall tax, make changes to taxes such as royalties or even, in extremis, confiscate, nationalise (as Hugo Chavez did in the case of Venezuela's gold mines) or even sell a mine.
Additionally, nations that have seen increases in miners' profits as a result of higher prices but at the same time little or no increase in their own share of this wealth, can be tempted to act to take a larger share.
Assertiveness by countries over their resources is referred to as resource nationalism by the industry and, as previously reported in African Business, is the number-one concern amongst mining executives polled by Ernst & Young in a recent report.
There is some justification for these concerns. All across the world, from the US to Australia, China, Peru and Panama, the compact between government and miners is evolving. …