Value addition of raw materials in Africa: The market, not politics, is king

Clear competitive advantages, not nationalistic sentiment, should determine what steps are taken towards value addition of raw materials, if any

CAPE TOWN: Value addition is often held up as the panacea to Africa’s industrialisation and poverty challenges - if a country is exporting raw coffee beans, it should develop factories to make and export processed, packaged coffee instead; or manufacture steel bars instead of exporting iron ore, and so on. But this may be missing the mark.

Instead the market, not nationalistic sentiment, should determine what steps are taken towards enhancing the value of resources and earning more revenue, the Mining Indaba taking place in Cape Town heard Tuesday. 

“Most of the times we have rushed to put value addition policies such as export bans and levies even if they don’t work yet domestic markets cannot absorb them,” senior industry advisor at the African Union Commission Frank Mugyeni said. 

Several African countries restrict trade in exports through measures ranging from taxes and quotas to requirements on local ownership and outright bans, according to the OECD. 

But Mugyeni said that value addition must be viewed from the perspective of making a business case and not as affirmative action. A country’s competitive advantages should be weighed before setting up processing plants—often the decision is pegged on national pride and not the economic value. 

Namibia for example processes some of its gold in South Africa as it did not make business sense to build its own plant back home, the AU official said. 

Egypt, South Africa and Morocco, which do not produce any green coffee of their own,  make more money re-exporting value-added coffee—ironically sometimes back to the continent— than most primary African growers.

Value addition could also in some cases be better done at sub-regional level, the meeting heard.

Economies of scale were a further consideration—such as setting up of clusters. America’s famed Silicon Valley actually had its origins in this path, while Ethiopia’s increasingly-renowned shoe production industry was created along this path. Such approaches would help push the continent towards more labour-intensive economies. 

“The best way for Africa to create jobs and wealth is through industrialisation,” he said.

One to watch

Ivory Coast is among the countries to watch with regards to value addition. The world’s largest cocoa producer in May opened its first industrial-scale chocolate factory.

The numbers appeared to support the case: “brown gold” accounts for a fifth of Francophone Africa’s largest economy, more than half of exports and two thirds of people’s jobs and incomes, according to the World Bank. 

A growing middle class following its post-civil war gains is also providing a large captive domestic market. 

Botswana’s reinvestment of its natural resources cash was held up as an example of the prudent use of finite mining revenue. The country’s policy essentially hinges on investing the entirety of mining proceeds in education, health and infrastructure. 

Thirty nine per cent of its revenues come from mining, but the real story of its success has been the linkages of the business with the country’s social obligations. “You cannot have one existing without the other,” Mpumi Zikalala, senior vice president at De Beers South Africa said.

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