Africa continues to benefit from the global demand for oil, natural gas, minerals and food. The mining sector remains Africa’s largest contributor to FX receipts, while new oil and gas discoveries are expected to boost regional growth (especially in East Africa), and the largest employment sector on the continent — agriculture — is benefitting from rising government and private sector interest in agro-processing.

Unfortunately, the slow diversity of most African economies will keep the continent at the mercy of the performances of these sectors. Thus, commodity price dynamics play a major role in economic growth and financial market stability and should be monitored closely.

Waiting for the commodity super cycle to turn

Commodity prices have bounced from their 2016 lows but are still substantially lower than the peak of the super cycle in 2011 (Figure 2.1).

Figure 2.1: Bloomberg Commodity Price Index

Source: Bloomberg

With most African economies still highly dependent on resources for exports, the hope is that the structural cycle will turn, providing a renewed boost to the continent’s performance.

Figure 2.2: Concentration of goods exports (% of total exports)

Source: World Development Indicators

Essentially the commodity price outlook is moderately positive. Consensus forecasts are for upward movements in the prices of most key commodities in the period out to 2022, with the notable exception of many energy products such as oil. The key arguments underpinning these hopes is that rapid economic growth in emerging markets will support rising demand, while most prices are already at, or close to, the marginal costs of production.

Within the commodity basket there have been, and expected to be, divergences between product types:

Table 2.1: Divergences between commodity prices

Metal and minerals	The bias is for a long-term upward trend in metal and mineral — or “hards” — prices, where supply is contained by limited resources in the ground.
Oil	The price of oil is most at risk of trending lower relative to all other commodities. The US shale revolution has boosted supply at a time when environmental concerns have limited demand. Black gold will not be quite the money spinner it used to be for those lucky enough to find it in abundance.
Soft commodities	Agriculture, or “softs”, prices have been on a downward trend as technology boosts yields. However, with population growth and rising standards of living in the developing world, the expectation is that the next five years will again see rising prices in this space.

Commodity prices will remain dependent on the global economy’s performance. Downturns in prices can last a year or more, and a positive long-term outlook for these prices is of no help to Africa when temporary lower export revenues filter through into a weaker economy and fiscal stresses. With many African countries having built up heavy debt levels, history could repeat itself through struggling economic growth and debt defaults.

Mining

Mining remains a significant contributor to Africa’s GDP and revenue earnings. The sector is still an attractive one to invest in due to the continent’s significant deposits. Africa hosts 30% of the world’s mineral reserves, and these minerals will continue to be a beneficial trade globally — not just for their traditional uses like jewellery, automobile parts or electrical conductors, but also for modern electronics such as smartphones. Although opportunities for investment are abundant, the mining landscape in Africa is still riddled with challenges.

Opportunities

• Abundant mineral deposits
• Low labour costs
• Higher mining sector value growth compared to other regions in the world

Challenges

• Regulatory uncertainty
• Weak governance and inconsistent application of civil and tax law
• Weak supply chains to connect mines with points to market
• Underdeveloped infrastructure

The outlook for mining commodity prices is stable. According to the Bloomberg consensus forecast, almost all commodities are on a slow upward trajectory through to 2022, but steel and iron ore will experience a slight downward trend.

The following sections will focus on Africa’s continued dependence on the mining sector by highlighting countries that are most vulnerable to price shocks; the value of each country’s mining sector; and the mining regulatory environment.

Africa’s dependence on the mining sector

The International Council on Mining and Metals’ 2018 Mining Contribution Index (MCI) looks at four major aspects to assess the mining sector’s contribution to national economies.

• Mineral and metal export contribution in 2016 — provides a measure for the scale of mining in relation to other productive activities.
• Increase/decrease in mineral and metal export contribution between 2011 and 2016 — serves as an indication of whether the importance of mining as an economic activity is growing or falling over time.
• Mineral production value expressed as a percentage of GDP in 2016 — gives a sense of the value of the economy (this is not the contribution of mining to GDP — on average around a third of production value represents value addition to the national economy).
• Mineral rents as a percentage of GDP — production values minus normal costs*, which provides a clearer indication of tax and profit above normal profits* from mining.

Note:
* Normal costs: Costs to products based on the materials, labour and overhead used to produce them. Normal profit: Total revenues are equal to its total costs.

The Council highlights that the index is a not a measure of success in the industry — it measures the dependence of an economy on the mining sector. The quality of governance and investor-friendly regulations would be the ultimate overlays to assess the success of each economy’s mining sector.

Figure 2.3: 2018 Mining Contribution Index (MCI)

Note:
Although the data is for 2016, the structure of African economies does not change significantly in a short period of time, therefore we expect the 2017/18 data to show a similar trend once it has been released.

Source: International Council on Mining and Metals

When looking at the MCI from a global perspective, the upper-middle to high-income economies that feature high in the index are placed there due to the high monetary value of metals and minerals production. Low-income economies that rank high, such as the DRC, Guinea and Burkina Faso, are driven mostly by the component that looks at mineral and metal export contributions — highlighting the vulnerability of African economies to a downturn in commodity prices, and the overall lack of export diversification. Lower levels of mining production or prices threaten Africa’s balance of payments and justify weaker currencies. We highlight the countries that are potentially at most risk of a downturn in production and lower ores and metals prices.

Figure 2.4: Ores and metals exports (% of merchandise exports)

Note:
Latest available data

Source: World Bank

Is there still value in the industry?

The value of Africa’s mining industry is set to increase robustly from 2019 to 2022 as key projects come online across the continent, and it will grow gradually by an average of 3% until 2028 (Figure 2.5). In dollar terms, the industry’s total value is still small at US$70bn, just less than half of North America’s US$130bn, but the year-on-year growth in value is set to outperform other regions globally (Figure 2.6).

Figure 2.5: SSA mining industry value and growth (US$bn and % y/y)

Source: Fitch Solutions

Figure 2.6: Mining industry value growth per region (% y/y)

Source: Fitch Solutions

A number of countries outperform in mining industry value terms:

• The DRC: Glencore’s Katanga mine is set to reach full production in 2019. The sector is also helped by rising demand for cobalt from the electric vehicle market.
• Namibia: Uranium production at the Husab mine is expected to ramp up in 2019.
• Burkina Faso: There has been an influx of investment into the gold sector. Some key projects in the advanced stages are the Wahgnion, Sanbrado and Bomboré mines.

Although South Africa still hosts the largest mining sector in dollar terms, at US$32bn, its value is expected to contract over the next two years due to a lack of high project investment.

Figure 2.7: Individual country’s mining industry value (US$bn and % y/y growth) – 2019

Note:
These figures represents the mining gross value added (GVA). GVA measures the contribution to the industry of each individual producer. It is the total of all revenues from final sales and (net) subsidies, which are incomes into businesses. In practical terms, those incomes are then used to cover expenses (wages and salaries, dividends), savings (profits, depreciation), and (indirect) taxes. More important than the absolute number, the growth rate of the global (and regional and country/territory) industry value figures will give an indication of where/when we see growth in the mining sector.

Source: Fitch Solutions

From a regional perspective, the mining sector in West Africa has the most promising long-term outlook in Africa, especially if demand from China holds. Most of the region’s economies have vast untapped mineral reserves and a positive foreign investment outlook, although this will be moderated by inadequate infrastructure and political instability.

Opportunities for investment in the West African mining sector

• Some of the world’s largest untapped mineral deposits, particularly in iron ore and gold.
• The majority of iron ore deposits are high grade, averaging about 40%-60%, benefitting company profit margins.
• Low production costs across the region will incentivise further investment.
• Positive infrastructure investment outlook as China’s investment in West Africa will contribute to new roads, railways and ports to move mined minerals to market.

Investment challenges in the West African mining sector

• Inadequate infrastructure to meet all the demands of the mining sector (especially electricity and transport routes).
• Political instability remains an elevated risk in the region.
• Mining deposits are not very diversified (iron ore and gold dominate), making the region’s mining sector more vulnerable to commodity price volatility.
• A re-emergence of the Ebola virus could affect the region and halt mining operations.

As highlighted, the future value in Africa’s mining sector will be driven by increased project investment. So where is this investment going? Below are the largest mining projects by capex in SSA.

Table 2.3: Largest mining projects by capex in SSA

Download table 2.3 Source: Fitch Solutions

Africa’s mining policy and regulatory environment

Mining sector investors face significant policy and regulatory risks as local governments demand a larger share of mineral resource wealth, damaging investor sentiment in the region. Although with a small sample of ten African countries, Fraser Institute’s Policy Perception Index (PPI) measures the overall policy attractiveness deducted from the surveying of mining companies across the world. Botswana ranks the highest due to political stability and security, low trade barriers, and investor certainty regarding protected areas. Interestingly, Zambia and Tanzania show an improvement in the policy environment between 2017 and 2018, however, we believe this perception could change in the next survey: Zambia had since increased mineral royalty rates and duties on exports and imports, while Tanzania’s unresolved fine between the government and Barrick’s Acacia mine has caused a drop in investor sentiment. Other key highlights include:

• The DRC: In 2018, the government raised royalties for copper and cobalt, and increased its stake in mining projects.
• South Africa: Regardless of the revised mining code draft being less restrictive than the original, it will increase compliance costs for miners. Also, a legal challenge against the new code will fuel ongoing policy uncertainty in the sector.
• Mali: The government announced that it may alter its mining code to increase mining royalties.
• Zimbabwe: The government changed its indigenisation law to limit majority ownership by state entities to only diamond and platinum subsectors and not the entire mining sector as provided in the previous legislation.

Figure 2.8: Policy Perception Index

Note:
Policy factors examined include uncertainty concerning the administration of current regulations, environmental regulations, regulatory duplication, the legal system and taxation regime, uncertainty concerning protected areas and disputed land claims, infrastructure, socioeconomic and community development conditions, trade barriers, political stability, labour regulations, quality of the geological database, security, and labour and skills availability.

Source: Fraser Institute

EY provides a comprehensive summary of mining and metals tax rates globally, which includes the corporate income tax for mining companies, royalties and government equity stakes. Visit their website for more details.

Combining sector value with regulation — where are the most investable mining environments in Africa?

It is crucial to combine the value of the mining sector with the regulatory environment to assess which jurisdictions are the most attractive for investment. As an example, the DRC shows strength in its mining industry value growth, however, the country’s mining sector still battles with stringent and unpredictable regulations. On the flip side, South Africa’s regulatory environment is more conducive to investment than most other African nations, but it underperforms on an industry value growth perspective.

We use the Fraser Institute’s Investment Attractiveness Index, which combines policy factors such as regulation, taxes and infrastructure with the pure mineral potential of a jurisdiction, to understand what drives mining companies’ investment decisions. The survey found that 40% of mining companies’ investment decisions are determined by policy factors, while 60% are based on their assessment of a jurisdiction’s mineral potential. The survey is limited to ten African countries out of 83 jurisdictions globally. Botswana again made the top ranking for Africa due to its vast mineral deposits as well as easy regulatory environment. It ranked 32 out of the 83 jurisdictions (where Nevada in the US is ranked the most attractive globally, and Venezuela the worst).

Figure 2.9: Fraser Institute’s Investment Attractiveness Index

Source: Fraser Institute

We have also looked at Fitch Solution’s Mining Risk/Reward Index (RRI) which assesses potential returns on investment, both in terms of industry size and forecast growth and broader country characteristics like the regulatory environment. Countries with relatively stable political and economic environments, specifically Ghana, Botswana and South Africa, ranked highest in the RRI. Mauritania ranked the weakest on the continent and was only slightly ahead of the world’s worst-performing country in the index, Venezuela.

Figure 2.10: Mining Risk/Reward Index

Source: Fitch Solutions

Oil and gas

Energy needs across the African continent continue to grow unabated, bolstered by a rising population, industrialisation and extensive rural-to-urban migration. Despite the increased focus on cleaner forms of energy such as solar or wind, the major sources of energy globally remain oil and gas. It’s a simple matter of price, access and infrastructure that has allowed these two forms of energy to be prevalent — this is clearly visible in the automotive industry where the bulk of the value chain relies on fuel from refined oil.

As the industry evolves, it seems that the 2020s might be characterised by significant shifts in household and business energy sources as cleaner forms of fuel gain momentum. As renewables prices are slated to come down over time, players like BP Energy believe that by 2040, the main energy supply in Africa will stem from renewables. This scenario, however, still excludes the transportation sector, which is likely to remain heavily reliant on fuel. Therefore, oil exports remain critical for various African countries, and price developments therein will set the tone for investment in the sector. On the gas front, the continued increase in global demand for gas, and the consequent investment into the sector could catapult total production on the continent. Table 2.4 shows the favourable price increases in gas that should bolster production efforts over the next few years.

Table 2.4: Bloomberg consensus forecast for oil and gas

Source: Bloomberg

Oil outlook: Growth to soften in Africa

The crude oil and condensates production growth outlook for Africa remains soft over the next few years. It is expected to come in at under 2% (according to Fitch Solutions) based on various projects currently in the pipeline and on future demand. The sector is facing numerous price pressures as increased supply, particularly from the US, lowers the market equilibrium. Additionally, fears of a global economic slowdown over the next few years have meant that prices have remained sticky around the US$60/bbl level.

Currently, 8.1% of global oil production stems from Africa, with Egypt, Libya and Algeria fortifying production from Nigeria and Angola. Unfortunately, Africa’s top two producers, Nigeria and Angola, have failed to garner momentum since the massive price slump experienced from 2014 through to 2017. This period was not only characterised by lower oil prices but also significant production cuts by the Organization of the Petroleum Exporting Countries (OPEC) at the above-mentioned jurisdictions.

Table 2.5: Top oil producers in Africa in 2019

	Average annual oil production (‘000 bpd)
Nigeria	1,989.2
Angola	1,593.0
Algeria	1,258.7
Libya	1,039.0
Egypt	638.9
Congo	340.5
Gabon	195.8
Ghana	172.8
Chad	132.0
South Sudan	125.9
Sudan	95.0

Source: US Energy Information Administration

Additional output after exploration successes in Angolan waters (where Italian major Eni has been accumulating oil discoveries within offshore Block 15/06) should boost production levels in the country over the long term. However, OPEC’s production cuts coupled with a fragile policy environment will keep production numbers at bay in the short term. Nigeria seems to be facing similar production concerns in the short run as increased security risks along the Niger Delta suppress investments. Despite this, prior investments by both Shell and Total should lead to an additional 300,000bpd upon completion of both projects by 2023.

Meanwhile, oil production in Libya recovered strongly in 2017 after internal conflict severely affected the sector’s output. The country’s leadership plans to double production to 2.1m bpd by 2023 through a US$60bn injection into the sector. The supply disruptions have been limited since 2017, despite the continued fighting between Field Marshal Khalifa Haftar’s supporters and the UN-backed Tripoli government. But the tensions will invariably have a long-term impact on the sector, and the country will battle to reach its goal by 2020, let alone the 3m bpd output seen in the 1970s.

Table 2.6 and 2.7 show Africa’s top oil producers, and their forecast production and consumption levels.

Table 2.6: Forecast oil production by African countries (‘000 bpd)

Source: Fitch Solutions, EIA

A few key production highlights from Table 2.6 are:

• Ghana’s production is expected to ramp up based on plans by British oil and gas firm, Tullow Oil, to drill and complete new wells across the TEN and Jubilee fields.
• While still in its infant stages, Mozambique’s oil sector is expected to grow over the next few years as Sasol boosts production numbers in an oil field situated close to the Temane natural gas field.
• Kenya’s oil production should ramp up, pending final investment decisions by Tullow Oil. According to Tullow, oil from the Lokichar Basin is expected to cost US$25/bbl to extract and transport, however, the aspect of transportation is yet to be resolved, making their estimates questionable. A study by the Oxford Business Group indicates that there is a relatively high wax content in the oil, which could put a dampener on the final production price — likely to trade less than the global benchmark of Brent crude. A study by NGO Oxfam International pegged the breakeven price for Lokichar oil at US$42/bbl.

Table 2.7: Forecast oil consumption in Africa (‘000 bpd)

Source: Fitch Solutions, EIA

Refinery in Africa

Refinery has become crucial in Africa to ensure that the full value chain of production is captured within the continent. This, however, does not imply that the continent is close to its full potential. While several countries are making strides in this area, opportunity still exists to do more.

Figure 2.11. Africa’s refinery capacity forecast by 2023 (million bpd)

Source: Fitch Solutions, EIA

The largest refineries are in Nigeria, South Africa, Egypt and Algeria. Nigerian businessman Aliko Dangote is set to finalise a US$15bn oil refinery investment by 2020, which would be the world’s largest refinery. The timing, however, might be off given the numerous issues facing the project, these include construction delays, security issues and bureaucratic processes.

Gas to pave the way for growth in the energy sector

After renewable energy investment, gas investment, production and consumption are expected to grow the fastest in the energy sector in Africa over the next 30 years. The largest proven gas reserves on the continent are in Egypt, Nigeria and Algeria, according to Fitch Solutions.

Figure 2.12: Gas reserves in Africa in billion cubic meters (bcm)

Source: Fitch Solutions, EIA

From a production perspective, BP expects natural gas output to increase by 50% across Africa by 2040. This production is, however, contingent on the development of gas reserves in East Africa.

Tanzania expects construction of its LNG export project to begin in 2022. The US$30bn project is to be constructed in the Lindi region by Norway-based Equinor, Royal Dutch Shell, Exxon Mobil, Ophir Energy and Pavilion Energy, in collaboration with Tanzania Petroleum Development Corporation.

In Kenya, Tullow indicated that it is continuing to explore additional gas reserves in the country. This comes after the discoveries made in early 2012 and 2013 which suggested that Kenya’s gas reserves could be the largest deposit in the region. The discoveries have meant that companies like Tullow and Zarara Oil and Gas (Mauritian firm) have been able to extensively explore the country with positive outcomes. While the sector remains in its infancy in Kenya compared to Tanzania, politics could easily push Kenya to the top of the East African ranks in gas production (and potentially oil as well) over the next decade.

A few key production growth numbers in Table 2.9 are worth highlighting:

• Cameroon has become a net LNG exporter in 2018 with the start-up of the Kribi fields and the Hilli Episeyo floating LNG facility.
• Congo’s numbers err on the side of optimism after the government announced increased licensing for untapped gas fields.
• Algeria’s production growth remains conservative and does not include Sonatrach’s efforts to ramp up production through new technologies as tentative figures are yet to be provided.
• Mozambique’s gas reserves are also estimated to be among the largest in Africa. The government approved the development of the Eni and Exxon Mobil led Rovuma LNG project that is expected to generate US$46bn. The final investment decision (FID) is set to be taken before the end of 2019. In June 2019, Anadarko reached FID on the development of one of the offshore LNG fields in Area 1 of the Rovuma Basin. The project involves the construction of a gas liquefication and export terminal and is worth US$25bn.