With few exceptions, the prices of most metals and mineral commodities – as well as the “softs” that include cotton and food crops – continue to soar. And oil, on the back of increasing nervousness concerning Middle East supplies, is also recording a higher price on an almost daily basis.
On the face of it, this is good for Africa’s producers. But there is another side to this story as those African countries that export basic commodities face a currency problem. It arises as the value of local currencies rise as a direct consequence of higher prices for commodities on international markets. This tends to “price out” Africa’s fragile domestic manufacturing base from global markets.
There is another problem too. Most commodities are sourced in Africa by very large multinational companies (MNCs). These MNCs do pay taxes on their operations to local African governments, but the fact remains that, in the main, it is the value addition that is made to commodities overseas that commands the biggest profits.
The same is true of the trade in commodities, dominated by the world’s biggest banks. Blythe Masters, the commodities chief at JP Morgan, has announced revenues for commodity trading leaping to a record of $2.88bn last year, and although those of both Goldman Sachs and Morgan Stanley lag behind JP Morgan, they are similarly significant.
Africa remains a resource-rich continent. One 2007 study by development economist Ray Bush reported that Africa contained 42% of the world’s bauxite (used to smelt aluminium); 38% of its uranium; 42% of its gold, 73% of its diamonds and around 10% of its oil.
Yet Professor Paul Collier of Oxford University’s Centre for the Study of African Economics, believes these figures may be a radical underestimate. He and his colleagues extrapolated World Bank figures that showed that the world’s rich OECD countries’ sub-soil assets were worth $114,000 for each square kilometre. But the average square kilometre in Africa had only $23,000 of sub-soil assets. He makes the point that the World Bank was not measuring the endowment of the OECD’s and Africa’s sub-soil assets but their known sub-soil assets. He concludes that it is the lack of prospecting that explains Africa’s apparent shortfall.
The softs are a hard market
Similarly, above ground, Africa is endowed with vast tracts of arable land that have yet to be fully exploited. Agriculture accounts for 65% of full-time employment in Africa, 25–30% of its GDP, and over half of export earnings. Net production data shows that there has been substantial growth in production across all regions of Africa, with output more than trebling over 50 years – the greatest growth occurring in north and west Africa.
Nevertheless, the challenges still remain substantial for Africa’s agricultural commodities. With agricultural goods, the continent has long had to struggle with an un-level playing field created by the subsidies paid by the West to their farmers. Food “dumping” by the West is also a problem for African producers. Consequently, the continent remains a net importer of foodstuffs and many countries remain virtually powerless in the face of the rising world prices for commodities such as maize, wheat and soyabeans.
The US Department of Agriculture, which monitors the price that many food commodities trade at, says that in the five years between 1996 and 2011, maize prices rose by more than 100%; the soyabean price by more than 80%; and the wheat price by over 70%.
Increasingly prosperous consumers in emerging markets, including Africa, are also driving up the price of food as they demand more and better quality nutrition, including a greater proportion of meat in their diets – which in turn drives up the price of maize being consumed as feed for livestock.
Turning our attention to hard commodities, a number of factors have resulted in a sharp rise in metal prices. Metals recorded their best monthly performance in January this year (since December 2010) with the “basket” of metals futures on the London Metal Exchange rising by almost 11%.
Precious metals have been one of the best performing asset classes on global markets since the beginning of the year. Gold, a crucial export commodity for a number of countries including the continent’s biggest producer, South Africa, as well as Ghana, Tanzania, Burkina Faso and Mali, has risen to above $1,750/oz.
Some trading analysts are predicting that gold may end the year as high as $2,250/oz. The performance of both the silver and platinum price has been equally meteoric.
Iron ore and metals such as manganese, nickel and zinc have all had their prices underpinned by demand from China, India and Brazil, as has thermal coal, sought to power both China and India’s smelters and power stations. But it is the price of copper that has shown a clean pair of heels to the other industrial, or base, metals.
Copper is mined in many parts of Africa, but Zambia is the continent’s biggest producer. And for the red metal, the prospects are equally as bright as base and even the precious metals. It remains a bellwether of global industrial performance because of its use in practically all construction projects and the manufacture of automobiles and consumer durables.
The metal may be off the heady highs of mid-2010 when it went over $10,000/tonne, but it still trades at more than $8,000/tonne and many believe it will reach the five-figure mark again before long.
One interesting aspect of the copper price is the metal’s correlation with the oil price. As copper is often used in the manufacture of tubing, there can come a point when the metal’s price outstrips its viability in this use, and plastic piping (produced from oil) is substituted for the metal.
The $1.3bn takeover by China’s Minmetals Resources of the copper miner Anvil – its most important asset being the Kinsevere Mine in DR Congo – illustrates a trend for China being prepared to purchase reserves that are still in the ground, rather than it simply being in the market for Africa’s resources. In another move by a Chinese entity to buy stakes in African mines, the Guandong Nuclear Power Corp is actively seeking to buy a stake in Namibia’s Husab uranium project.
Ali spoils the party
The one apparent exception to the metal price boom is the performance of aluminium. This metal has been forecast to trade at an average of $2,315/tonne this year, a fall of 4% off last year’s average price despite a global cutback in production.
This trend has implications for Mozambique, South Africa and Guinea – the latter of which possesses what is believed to be the world’s largest deposits of bauxite, the raw material that is smelted into aluminium.
But it would be a mistake to believe that African governments are taking a back seat when it comes to the new scramble for Africa’s resources. In fact, increasingly, they are flexing their muscles and demanding a bigger share of the profits of extraction. Perhaps nowhere is this more obvious than in the oil and gas sector.
Indeed, a report from the accountancy firm Deloitte showed that the market capitalisation of many listed independent oil explorers had actually fallen between 2010 and 2011, despite the higher oil prices.
One such company, Cove Energy, which operates in Mozambique, saw its stock price lose value, even as it was the subject of a takeover move by Shell, when the Mozambican government indicated it wanted to have a financial stake in the deal.
Mozambique is itself something of a hotspot for African commodities, having not only identified major off-shore gas but attracting BHP Billiton, Rio Tinto, Vale of Brazil, Tata of India, Posco and Nippon to invest in smelters and extract the country’s deposits of iron ore, coal and other minerals.
One of the major attractions for exploration companies, as outlined by the junior miner Baobab Resources’ Ben James, is the cost of energy in the country. Thanks to Mozambique’s hydro-power and gas assets, James points out, “we may be able to negotiate tariff rates at a third, if not a quarter, of typical power generation costs in West Africa”.