19 March 2018

Promises and pitfalls of Africa’s mineral resources

By Jeremy Wakeford, Senior Macroeconomist, QGRL | Articles

Africa is often portrayed as a vast storehouse of natural resources, ready for investors from around the world to extract and monetize on global commodity markets. Certainly, Africa is richly endowed with numerous resources including hydrocarbons, minerals, forests, fisheries and wildlife. The commodity price boom of the early 2000s highlighted Africa’s potential. Many countries were able to significantly lift their economic growth rates, and some have successfully reinvested the revenues generated by commodity exports in infrastructure and social development. But other countries have struggled to manage the political and economic pitfalls associated with resource wealth, with some damaging social and environmental consequences.

Minerals are Africa’s second-largest export category after hydrocarbons and comprise roughly 10 per cent of the continent’s total exports. Africa boasts large global shares of several major metals and minerals, including platinum group metals (96%), gold (12%), chromium (40%), manganese (34%), uranium (18%), diamonds (50%) and phosphate rock (81%). Other notable minerals produced in Africa include coal, copper, iron ore, bauxite, nickel, tin and zinc.

Africa is also home to some of the world’s largest deposits of strategically important minerals that are critical inputs in emerging technologies such as renewable energy equipment, batteries and electronic devices. For example, the Democratic Republic of Congo (DRC) and Rwanda together account for nearly 70 per cent of global production of coltan, a rare mineral used in products like cell phones.

Another striking example is cobalt, an essential ingredient in lithium-ion batteries used in electric vehicles and all manner of electronic gadgetry. The DRC is home to roughly half of the world’s cobalt reserves and is the top producer of the metal, accounting for over 50 per cent of global output last year after mine output grew by 16 per cent. On the back of soaring demand driven by the electric vehicle revolution, the price of cobalt has tripled since 2016, generating big profits for the mining companies.

The DRC, naturally, wants to capitalise on its dominant position in the global cobalt value chain. To this end, President Joseph Kabila signed a new mining code into law on 9 March. The code paves the way for royalties on cobalt – designated as a strategic metal – to rise from 2 per cent to 10 per cent. Executives from the world’s major cobalt mining companies – including Glencore, China Molybdenum and Ivanhoe – had descended on Kinshasa in an effort to dissuade President Kabila from signing the bill – but to no avail. Nevertheless, Glencore – the world’s top cobalt miner – aims to boost production from its DRC mines from 39,000 tonnes in 2018 to 65,000 tonnes next year.

In theory, higher royalties should mean that more of the DRC’s mineral wealth will benefit its people. But all too often, Africa’s mineral resources have not been used to uplift local communities. Instead, many countries have fallen prey to the so-called ‘resource curse’. This refers to a combination of political and economic ills such as rent seeking and corruption, a lack of economic diversification, susceptibility to commodity price volatility, and the ‘Dutch disease’ (an appreciation of the real exchange rate linked to resource exports, which in turn makes other export sectors like manufacturing uncompetitive). In some cases, social dislocation or conflict has also resulted from competition over access to resources and resultant revenues.

Fortunately, there have been important exceptions – countries that have bucked the resource curse trend. A shining example is Botswana, whose government entered into a 50/50 partnership with international mining giant De Beers. Diamond revenues have been used to finance social and economic infrastructure like education and transportation. Excess revenues have been channelled into a sovereign wealth fund, a long-term investment facility that provides for future generations. It’s currently valued at about $5.5 billion.

The DRC – like some other African countries – is in a precarious position. The country’s vast mineral wealth could be a blessing for its impoverished population if managed responsibly – but could be a curse if it fuels corruption and civil conflict. Global investors and mining companies, for their part, have a responsibility to play a positive role in sustainable development by helping to ensure that mining brings long-term benefits to African communities. And increasingly, consumers higher up the value chain are beginning to care about what happens on – or under – the ground.

By Jeremy Wakeford, Senior Macroeconomist, QGRL

Dr Wakeford holds a Masters Degrees in Economics from the Universities of Cape Town and Cambridge (UK), and obtained his PhD in Sustainable Development from Stellenbosch University, South Africa. Before joining QGRL, he was an Extraordinary Senior Lecturer in the School of Public Leadership at Stellenbosch University. Dr. Wakeford has also served as a consultant to international organisations, several national government departments, and a range of private sector clients.

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