Ebbs and flows: the 3 issues that will keep investors busy in Africa’s mining sector

It has been a bumpy ride for some, but 2016 may herald the end of mining's winter

DESPITE the gloomy climate in Africa’s mining sector, driven by the recent global commodities slump and the slowdown of China’s economy, the 2016 Mining Indaba managed to kick off on a cautiously optimistic note.

It was Mosebenzi Zwane, South Africa’s minister of mineral resources who set the scene, almost poetically.

“There is an ebb and flow to life. There are highs and lows. The 2016 Mining Indaba comes at a time when the mining industry is in its winter season.”

The “winter season” in Africa’s mining sector has had a far-reaching impact on African economies and investor confidence.  The declining demand from China led to the tumbling of commodity prices between 2014 and 2015 - hurting many sub-Saharan countries dependent on commodity exports.

In his speech, Alan Davies, Rio Tinto’s chief executive for diamonds and minerals, noted how developing better relationships with governments would become an imperative for mining companies seeking to navigate the headwinds in the sector.

“Almost every tradable commodity has diminished by value over the past twelve months. Times are tough, but its time for us to life our heads from the daily ticker,” Davies said.

2016 might be a better year for Africa’s mining sector. The World Bank expects sub-Saharan Africa to grow by 4.2% - up from 3.4% in 2015.  Behind this optimistic forecast, is the belief that commodity prices will stabilise while still remaining relatively low through to 2017.

If the World Bank is right, investors in Africa’s mining sector should withstand the headwinds and hold on to their bets. But with diminished investor confidence, this won’t come easy.

Overall, then,  this a list of top 3 issues that will likely dominate the agenda of investors in Africa’s mining sector in 2016.

1. China, China, and China

Once the darling big-buyer of Africa’s commodities, China has been the subject of much finger wagging over the past few months. When China was still notching double-digit economic growth figures, it bought a lot of Africa’s commodities - iron ore, platinum, and copper - to power its investment-led strategy in growing its economy.

China’s appetite for commodities has since diminished as it begins normalising its economy, in favour for a more consumption-led strategy for economic growth.

Africa’s close - and growing - relationship with China means that what happens in the proverbial East reverberates in here in the South. In 2016, Africa’s mining investors will pay a closer look at how the economic giant alters its economy.

2. Africa’s infrastructure deficit

Investors are quick to remind governments that mining does not happen in a vacuum—road, rail, port and power infrastructure are the building blocks that hold the sector together.

2015 report from the US-based think-tank, Brookings, argues that while public sector budgets for infrastructure remain dominant, this is not enough. Financing infrastructure—that particularly benefits mega sectors like mining—should also be the preserve of the private sector.

The numbers are telling. According to the report - with figures from the IMF - countries in sub-Saharan Africa finance about 65% of their infrastructure build. That’s almost $60 billion, or about 45% of sub-Saharan Africa’s GDP.

With a growing appetite for public-private partnerships and other financing models for infrastructure, the current climate is ideal for investors to dig deeper into their pockets and invest in infrastructure.

It’s a sensible investment: 40% of productivity in sub-Saharan Africa is lost because of poor infrastructure, according to the World Bank.

3. India next-frontier for African commodities?

Mark Cutifani, Anglo America’s CEO, was quick to remind delegates attending the Indaba that while the door for Africa’s commodities may be closing, all is not lost.

“India could be the next frontier for African commodities”, Cutifani said.

As one of the world’s largest oil consumers, its economy expected to lead the  pack in 2016.

After his election in 2014, India’s Narendra Modi has been bold about his plans to ramp up his country’s poor infrastructure in roads, housing, and transportation—all which require commodities like steel. These could hopefully open a window of demand for Africa’s commodities.

Macquarie, the global investment banking, and financial services firm, expects India to drive the consumption of commodities for the next 10 years.

But despite this opportunity, it is unlikely that India will “replace” China’s super-consumption in the short term.

A research note from Old Mutual Wealth argues that while India may be the next growth frontier, it will take a while for it to reach the levels of Chinese consumption during the boom.

“While we are in agreement on India’s position as the new growth engine, we are unlikely to see it happening in the short to medium term, which is certainly not what iron ore producers are hoping for,” said the note.

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