The State of Mining Value Chains in Africa

The State of Mining Value Chains in Africa 1 September 2014 Isabelle Ramdoo Deputy Head, Trade and Economic Transformation Programme ECDPM

PART I: State of mineral value addition in Africa ECDPM

1. Mineral, minerals everywhere….. Mining in Africa:2012 Mineral Resources: % global resources Est. Oil and Gas Reserves, 2012 ECDPM

…. But too concentrated … Oil and gas as a % of merchandise exports, 2009 Export concentration, 2010 Ores and metals as a % of merchandise exports, 2009 ECDPM Source: World Bank (2010, 2011)

And economic contribution still to low… BUT: Immense potential and largely untapped ECDPM

PART II Value Chain and spillover experiences across Africa ECDPM

1. On Bauxite and aluminum production Key players in Africa: Guinea by far the largest; Ghana, Cameroun, Sierra Leone have some reserves and production Guinea: refines into alumina, but no refinery. Mostly sent to Ukraine; Ghana & Cameroun: small smelters Biggest smelters are in Mozambique and South Africa, both do not mine bauxite. Both source their bauxite from Australia; Some challenges to the bauxite sector: Ownershipof companies: Most companies are foreign owned. Not a problem in itself. Problem is that big mining companies in the sector are also vertically integrated and possess their own refineries and smelters all over the world. This allows them to ship parts of the value chain to the cheapest place of production; BHP sources its bauxite and alumina from its own mining companies elsewhere. As a result, difficult for African countries to join the club of competitive world class producers due to a variety of constraints: ECDPM

b. Infrastructure: the other weak link: Increases the cost of transport across the continent (sometimes cheaper to use resource corridors from pit to port and ship out than send to neighbouring country where production costs may be cheaper). Port logistics insufficient Energy: Smelting is the most energy-intensive aluminum production process and energy inputs account for up to half production costs. Insufficient production, unreliable supply and cost is too high; ECDPM

3. The regulatory framework in place largely favours attracting FDI with insufficient emphasis on transformation locally; 4. Other challenges to be addressed: Lack of technology and technical know-how as well as skills prevent development of local suppliers; stiff business climate; cross-border trade facilitation; 5. Consumption demand (hence market) for aluminum in Africa is still very low and companies operating smelters already have their markets elsewhere (mostly China, which consumes about 50% of global production); ECDPM

Generally: linkages are too few and often quite “shallow” There are 3 ways countries look at spillovers and value chains: • Through FDI and contribution of investment to economy; So far, in most resource rich countries, much FDI were concentrated in “extraction”, which traditionally fosters little linkages. Where those linkages exist, they produce few spillovers (miners are not necessarily manufacturers) 2. Through value addition, that is how much value is added to raw materials, either through backward linkages, for those that supply the extractive sector; or through forward linkages (i.e through the transformation of commodities into final products); 3. Through the use of local content requirements, notably through use of local suppliersand staff (not the same as VA) ECDPM

When looking at value addition and linkages, it is important to pay particular attention to: • The number of economic activities that can be developed from the linkages (i.e the “breadth” of linkages) (even if those add little value); • The actual value that is added locally through linkages (i.e the “depth” of linkages). While both are important for the domestic economy, they may require different capabilities, and will have different impact on how a country wants to use its natural resources and the types of policies that may be put in place. ECDPM

1. Examples of countries where linkages (i.e no. of activities + value added) has progressed Results are overall, quite mixed, but few examples where countries have made some progress in (i) enlarging the number of activities that are linked to the extractive sector (both backward and forward); and (ii) add value, although by international level, more needs to be done. Eg. are: • Ghana: developing backward linkages in the gold sector • Second largest gold producer in Africa; mining contribute to approx. 6% of GDP, 43% of Ghana’s exports • Reforms to promote localisation policy and facilitate local content, notably through 10% Gov. stakes in large-scale mining Preference for local sourcing; Preference for local staff and training requirements ECDPM

Results: Large number of companies reported to increasingly use local suppliers, notably in metal and metal working, civil engineering, logistics support and business services (backward); Local purchase from locally produced goods and services account for some 30% of aggr. spending of mining companies. However, forward linkages (i.e adding value to finished products) remain quite low; Local sourcing is not in the sectors where the highest value added are; But overall, over last 10 years, Ghana has increased the number of local companies working with mining companies and has started to add value locally (although much more still to be done, as reforms policies are implemented) ECDPM

2. Nigeria: (essentially backward oil sector) Oil represents a third of GDP and significant portion of government revenue. Largest oil producer in SSA So far, only 4 refineries, but operating only at 40% of full capacity due to technical and governance challenges; Long history of local content policy, mainly through tradition of protecting Nigerian firms, joint operation agreement, production sharing agreements, and use of selected local services; Current estimate of local content: Rose from 3 – 5% in 70’s to 39% in 2009, higher than in any other African oil rich country (but lower than global standard) ECDPM

Case of Nigeria is complex to assess: • There has been some important degree of backward linkages, in terms of VA, in certain activities (fabrication & construction; well construction; control system and ICT) but still largely insufficient, given Nigeria’s capacity; • Forward linkages – e.g refineries still to be fixed. Large investment expected ($9 billion project) to build largest African refinery; Nigeria still net importer of fuelfor domestic consumption • All reforms not finished: The Petroleum Bill still to be passed; Significant progress made, but Nigeria has the capacity to do much more. ECDPM

3. Angola(backward linkages into offshore oil production) • 2nd largest SSA oil producer; Rep. 50% of GDP, 60% of Gov. Rev. • State manages resources and concessions (through Sonangol) ; • Sonangol: active investor in extraction & in forward oil processing. Responsible for driving backward linkages, with local firms. But results rather mixed • Has been pushing for local content policy, notably through: Preferred local employment and obligation for companies to pay levy for development of human resources; Preferred treatment for local firms: key rule is exclusivity for local firms, if activity does not require high capital value and specialised know-how; and not more expensive (by >10% than imports) ECDPM

So far, only 2 linkages of significance developed (a. cables that enable communication between sub-sea production systems and rigs; b. flow lines to enable two-way flow of crude from sub-sea to surface) Other basic goods and services (accommodation, catering, cleaning, stationary) procured locally. The rest, still imported. ECDPM

2. Examples of countries where number of activities increased, but linkages quite shallow • Botswana: (Forward) linkages in the diamond sector • Attempts in the 80’s to add value largely failed, in part because the company was not convinced abt the policy; • Reforms triggered by the slow depletion of the resource • Key date: 2005: License of main company (DeBeers) was up for renewal. Govt insisted that the condition for renewal was to help Botswana to create a viable and sustainable cutting and polishing industry; • As a result, 16 companies licensed to operate in Botswana, under condition that they would transfer skills locally; • Govt also negotiated for DeBeers to transfer aggregation activities (i.e mixing of supply of diamonds from different sources for sale) to Gaborone ECDPM

Results: • 3000 direct new jobs were created in cutting and polishing industry; • By 2012, aggregate activities were transferred from London to Gaborone; • This is expected to create significant spillovers – it will bring international sales to Botswana – notably in hospitality, finance and transport sector; • Too early to assess overall impact of both policies, but Botswana managed to broaden its participation along the value chain ECDPM

3. Examples of countries where value chains became thinner over time.. • South Africa: Interesting case for 2 reasons: • Most diversified African economy, where mining played a significant role in industrial development; • A regional hub: many companies (multinational) use S.A as a springboard to invest elsewhere or well-established S.A companies have expanded their activities regionally First, value chain development in S.A S.A has a well-developed industrial sector and mining has extensive linkages in the economy However, mining has declined over the years – from 8.8% to 6.3% of GDP bet. 2000-10. ECDPM

For many years, policy was to: • Provide a good envt for mining companies, notably by keeping labour cost low; • Advanced backward linkages, by protecting local industries through tariff protection • But new policy now is to promote forward linkages – through beneficiation in 10 strategic commodities, to feed into 5 value chains; namely: Energy commodities VC (coal, uranium, thorium); Iron and Steel VC (iron ore, chromium, nickel, vanadium; manganese) Pigment and titanium metal production VC (titanium; vanadium); Autocalyticconverters and diesel particulate VC (platinum) Jewelry fabrication (gold, platinum, diamond) ECDPM

Results: • Backward linkages: SA has developed capabilities (technology and skills) and hence expertise to build world-class backward linkages and has developed clusters of firms in mining equipment and related services; • Forward linkages: too early to say how far the policies will be implemented and what impact they may have. But S.A has a good track record in the mining sector. True that backward and forward linkages require significantly different types of capabilities due to the different types of activities, but its experience will be a great asset; S.A as a regional hub: Important as companies use SA as a base to expand activities elsewhere in Africa, notably due to possibility to use SA’s existing mining activities. ECDPM

2. Zambia: Copper sector • Copper rep. about 9% of GDP; 80% of exports earnings • Copper sector was privatised as a result of SAPs in the 1990s. Since then, no vision on mining adopted and no provision in legislation regarding local content or linkages; • Existing linkages quite developed • Forward linkages: Copper mostly exported in refined form; new investments to expand production capacity • Some further forward linkages take place (semi-fabricates) but quite thin – One big chinese investment (large-scale semi fabricates manuf co.) may deepen this • Backward linkages: Also quite substantial: Around 200 suppliers are recorded to supply inputs to the industy • Large mining companies also report to procure between 60 – 86% of their inputs from local supply chains ECDPM

But looking closely at those linkages: • First tier suppliers – some manufacturing firms exist – metallurgic, plastic & rubber products or engineering products; Local value added quite important, but increasing competition from outside; • Subsidiaries of MNEs and large-scale providers – lower value addition but they specialise in capital intensive activities and specialised transport for e.g. quite competitive firms; • Large amount of small-scale suppliers with very low levels of local content. They outnumber the 2 above, but add the least value. Activities include importation of supplies; intermediary activities etc. • But Zambia is experiencing thinning of its supply chain: Privatisation (and re-structuring of industries) led to companies shifting from local suppliers to imports – due to lack of local capabilities (skills, technological) ECDPM

Linkages and value addition are multidimensional processes: need multi-layered policies and simultaneous efforts ECDPM

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The State of Mining Value Chains in Africa