Africa sets its sights beyond commodities

CAPE TOWN // The collapse of commodity prices has hit resource-dependent African countries hard, but it is forcing them towards economic diversification, presenting fresh opportunities for outside investors.

The big bang in demand for raw materials, driven mostly by China, has been good for African mineral producers. Too good perhaps, as little effort was made during the boom years to lock in gains by diversifying.

Of Africa’s 54 countries, 24 rely on a select few mineral products to generate more than 75 per cent of their export earnings, according to a study by the African Development Bank (ADB). A further 20 countries that do not have much in the way of resources still managed to grow by more than 4 per cent, as regional benefits spilt across national boundaries.

“The mining sector remains absolutely vital for Africa, even with the sharp decline in prices,” the former British prime minister Tony Blair told about 7,000 delegates at the Mining Indaba in Cape Town last month, the world’s largest African investing event.

At its height, inward private investment rose to US$50 billion a year, the ADB says. The conduits for much of this money were the stock exchanges geared towards mineral capital raising; Australia’s ASX, London’s AIM and especially the TSX of Canada. Canada, incidentally, is Africa’s largest resource investor and not China as many suppose.

The precipitous decline of resource prices of all classes from oil to iron ore to gold, has hurt the budgets of countries up and down the continent.

Still, the IMF sees some bright spots.

“There is reason to remain hopeful about Sub-Saharan Africa, which remains the second fastest-growing region after developing Asia,” says David Lipton, the first deputy managing director of the fund.

“Even with the reduced demand for commodities and slower growth among the emerging markets, most countries in the region are expected to maintain high rates of growth in 2015. Growth in the region should remain at about 4 .75 per cent this year.

“This is important because Sub-Saharan Africa’s economic performance over the past 15 years has changed this continent’s outlook profoundly,” he says.

“High growth is partly a result of demand for commodities and investment from the emerging markets. But it also is the result of stronger governance and policy frameworks, the development of services and the financial sector, increased farm productivity, and investment in infrastructure,” Mr Lipton adds.

But the picture for Africa’s oil producers – Nigeria, Angola, Libya, Sudan, Republic of Congo, Algeria, Egypt and Equatorial Guinea – is bleaker.

Nigeria needs crude to sell for $125 per barrel if it is to maintain current levels of state expenditure. Uganda, meanwhile, which has yet to produce a single barrel, has borrowed itself into a deep hole. Officially it owes $7bn to external creditors but real debt is probably much higher as Uganda has signed a raft of infrastructure agreements with China underpinned by future oil revenue. A railway contract with Chinese companies alone will require $8bn in funding.

It is not just individual countries that are taking the pain. The fall-off in commodity prices has threatened the ability of junior explorers to raise funds and thus their ability to bring projects to production. Take Tullow Oil, for example. The Ireland-headquartered company became something of a rock star in the African energy scene, brazenly searching eastern Africa when almost all the work being done by larger peers was on the continent’s western seaboard.

It struck oil in Uganda and sent its explorers fanning out through the region. However, last month the company admitted it was in trouble as it crashed to a $2bn annual pre-tax loss.

Even the Chinese, the great hope of the African resources sector, are faltering.

Jim O’Neill, the former chief economist at Goldman Sachs and the man who coined the term “Bric” to classify Brazil, Russia, India and China, said at the Mining Indaba the era of double-digit growth for the world’s largest economy was over.

For the rest of the decade, Mr O’Neill said, Chinese growth would not top 7.5 per cent. “We are looking at a completely different China from the one we thought we knew from Africa the previous decade.”

Does this mean the “Africa rising” meme is over? Hardly. There are signs that resource-dependent countries are recognising, as Abu Dhabi once did, that they need to diversify their economies. As they do so, new opportunities are presenting themselves to a new generation of investors.

Like the Arabian Gulf states, African nations are looking for areas where they can compete outside the resource space.

Nigeria has already started. It broke up the state’s power firm and sold it to a dozen or so investment groups made up of Nigerians and foreigners, and begun modernising industrial policy.

Last year the first vehicles rolled off a brand spanking new Nissan assembly line, a result of the country’s motor industry incentives designed to encourage local manufacturing. With 150 million people Nigeria is potentially Africa’s largest vehicle market, with the right incentives in place.

“I think the government is serious about making this work,” says Dawn Dimowo, an Abuja-based lawyer specialising in the Nigerian automotive sector.

“I don’t expect the industry to properly take off for another year or two – locally assembled cars will remain expensive in the short term – but it is interesting that most of the people who have gone into car assembly have been the major car importers and distributors.

“If car production booms, imports will definitely reduce and the local assembly sector will attract even more players.”

Other countries are also scrambling to find the shortest path to diversification. Oil-dependent Angola has announced a shake-up of its visa requirements for visitors, to encourage tourism, an industry that thrived during the years of Portuguese colonial rule.

Kenya, meanwhile, is to begin construction this month of a $25bn rail/port corridor that it hopes will turn it into the trading hub of East Africa. And Ghana, which had the double blow of the collapse in price of its two key exports – gold and oil – hopes to turn some of its vast Jubilee field into electricity; in Dubai last year the president John Mahama used the Africa Global Business and Economic Forum to announce a strategy to become the power hub for electricity-starved west Africa.

Individually, these efforts may not shoot the lights out but they do demonstrate that African countries are eager to be seen as open for business, without waiting for the commodity cycle to turn again.

Some, however, will struggle in the meantime. Although Zimbabwe is projected to grow by 3.2 per cent this year and 3.7 per cent in 2016, a lot will depend on commodity prices.

Last month The Zimbabwe Independent said that, according to the country’s chamber of mines (CoM), the mining sector is expected to decline for the first time in five years due to plummeting commodity prices, high costs and lack of capital.

“The sector continues to operate below capacity amid a host of challenges, not restricted to but including, depressed metal prices, lower capital and FDI flows, high-cost structures, suboptimal royalties and power shortages,” CoM said.

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Gavin du Venage

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