Collapse of mineral prices poses a challenge to African reform agenda

The collapse of commodity prices, falling demand and the near-evaporation of external financing, all induced by the global financial and economic crisis, pose a major threat to a multi-layered reform agenda to improve the benefits of mining to African nations and their populations, write Abdulai Darimani and Kwesi W Obeng.

GROWTH in Sub-Saharan Africa (SSA) will plummet to 1.7% from a high 5.5% only a year ago in part because of declining exports and falling prices for commodity exporters, says the International Monetary Fund (IMF).

Due to shrinking world trade, declining domestic demand and withering access to external financing, emerging-market growth is also expected to fall sharply to 1.5% in 2009, from 6.1% in 2008. This, according to the Fund, is the weakest expansion rate since the 1990s.

The high demand for commodities such as minerals and metals was a key factor in the decade-long rally of commodity prices and explosion in the profit margins of mining companies, oil-exporting nations and a handful of countries with improved extractive laws and regulations.

As the ongoing global financial crisis and economic downturn deepen, prices of commodities from copper to diamonds and to oil have come under severe strain. With the notable exception of gold, prices of almost all other major commodities have come crashing down from the boom in prices of the previous years.

At the peak of the commodity price boom, copper, a major material in the electronic and auto industries, was going for over $8,000 a tonne. Today, the price of copper has more than halved - it now stands at around $3,200 per tonne.

The collapse in the prices of these commodities, on which a large number of African countries are heavily dependent for foreign exchange and jobs, has dealt a major blow not only to the short-term revenue and employment figures of these nations but also (and perhaps more crucially) to their long-term aspirations - to turn the mining sector into a bedrock to expand and improve Africa's manufacturing base by adding value to create better and more sustainable sources of national revenue and decent jobs for the continent's teeming young unemployed and underemployed. Such sharp evaporation of high prices will doubtlessly reduce growth, if any at all, to the barest minimum, and thus exacerbate poverty levels.

No windfalls

Minerals account for between 60 and 90% of the total exports of several African countries - including Mali, Democratic Republic of Congo, Gabon, Botswana and Zambia.

In 2008, the price of Africa's strategic commodities - metals, minerals, oil and natural gas - experienced a historic rise. The price per tonne of copper, which rose from $1,560 in 2002 to $6,620 by the third quarter of 2006, soared to over $8,000 by the middle of 2008. Gold went up from an average of $455 per ounce in 2005 to $920 in February 2008. In July 2008, a barrel of oil was sold at $149, representing about a 15-fold rise over the 1999 price.

Unfortunately, the windfall expected by African governments eluded them due to inadequate fiscal regimes.  While the mining industry described the mineral price boom as 'good times rolling', African governments did not see a correlative increase in their mineral revenue.

Disappointed with the failure to capture the windfall despite years of dedicated liberalisation, and emboldened by the price boom, a number of African governments called for reviews of various contracts and/or specific fiscal provisions in their mining and minerals agreements and codes. In particular, governments of Congo DR, South Africa, Tanzania and Zambia have amended their mining tax legislation or contracts in order to increase their revenue from mining rents.

In the specific case of Zambia, the move to renegotiate mining contracts started long before the 2008 boom and was expected to conclude in 2007. The move to renegotiate was necessitated by a six-year surge of copper and other base metal prices on the world market.

An interview with a Member of Parliament of Zambia indicated that the renegotiation was stalled and could not be concluded in 2007 due to unwillingness on the part of the mining companies. The copper price boom in 2008 inspired a relaunch of the negotiation. The renegotiation was preceded by policy reforms. By April 2008, the Zambian Parliament had passed the Mines and Minerals Development Act No. 7, 2008, which repealed the Mines and Minerals Act of 1995.

The new act imposed slightly higher taxes than the 1995 version.  For instance, it raised royalty for metals including copper from 0.6% to 3% of gross value; gemstones or precious metals from 3% to 5% of gross value; and minerals other than base metals and precious metals introduced at 2%  of gross value. In addition, corporate tax was increased from 25% to 30%. The law also introduced annual operating permits and provided a requirement for all mining licences to lapse in April 2009. These legal provisions compelled the mining companies to return to the table for renegotiation of investment agreements with the Zambian government.

Liberalisation

The lived experience of over 20 years of liberalisation and the national processes of reforms inspired the United Nations Economic Commission for Africa (UNECA) to launch a mining policy reform agenda for Africa. In the 1980s, the UNECA tried to generate policy alternatives for Africa. The institution was later captured in the mono-culture policy syndrome coming out of Washington. Under the leadership of a former World Bank employee, the UNECA became a real centre of policy sterilisation, maintaining a neo-liberal paradigm for Africa. Today, the UNECA not only recognises the need for policy reform for Africa but is also leading the process for mining policy reform for Africa.

In February 2007, the UNECA, in collaboration with the African Development Bank (AfDB), organised a meeting dubbed 'the Big Table' in Addis Ababa, Ethiopia. The meeting brought together ministers and senior officials from 11 African countries and high-level representatives from the Africa Union (AU), Organisation for Economic Cooperation and Development (OECD) countries, the IMF and the World Bank. The main purpose of this meeting, according to the Big Table Report, was 'to advance discussions on the challenges of effectively managing Africa's natural resources for growth and poverty reduction on the continent. It also discussed an agenda for future action.'

According to the summary report (2007), the meeting provided a platform for 'a frank and honest exchange of ideas on five main themes pertaining to natural resources: Governance; Ownership, Participation and Intergenerational Equity; Bargaining Power, Value and the Role of Emerging Global Actors; Environmental Stewardship; and Capacity, Partnerships and Regional Integration'. The meeting concluded that despite Africa's unique position with regard to mineral resource potential coupled with its dedication over many years to liberalisation, the continent did not gain the best possible benefits from the exploitation of these natural resources. In view of this, the meeting called for urgent action to evaluate the African experience in natural resource development and make recommendations for ways to ensure that natural resources contribute to the economic and social development of African societies in a sustainable and equitable manner.

Danger

Initially underestimated, the global financial and economic crisis is now sending shivers down the spine of African governments. It is now abundantly clear that Africa will not go unscathed by the global plunge. Since the beginning of 2009, the IMF has repeatedly revised growth figures in Africa downwards as the crisis deepens in the developed economies of the West and Japan.

The IMF warned early in the year that strides made in Africa over the last decade are 'at risk' from the 'tremendous challenges' of the financial crisis. Growth forecasts for the continent mirror those for the rest of the world.

'The downturn in the advanced economies has been stronger than expected, commodity prices have dropped more sharply than anticipated, generalised external funding pressures have surfaced, and risk appetite among foreign investors in Africa has deteriorated,' said the IMF's deputy managing director Takatoshi Kato.

U-turn

The devastating collapse of commodity (especially mineral) prices from the middle of 2008 is already unpicking initial steps embarked on by individual African countries, sub-regional and continental bodies principally to position these countries to safeguard the environment and maximise the benefits of the extractive sector to mineral-rich Africa.

Indeed, the global recession has hammered African states into withdrawing some of their innovative policies which sought to maximise their returns and link the extractive industry to the larger economy, as well as safeguard their environment.

One such example is Zambia. As copper prices dipped on the back of the financial turmoil, the Zambian government early this year withdrew the windfall profit tax and other levies the country had successfully slapped on mining companies in April 2008. This is made worse by falling remittances and revenues from tourism and a further projected fall in aid.

In Congo DR, the cash-strapped Joseph Kabila government has slashed taxes and royalties owed by mining companies in a desperate attempt to encourage companies still working to continue to export. Hit hard by the falling prices and demand, the government has cut duties on exported minerals to 1% of their value from the previous rate of 5%.

The global downturn has also sparked widespread plant closures, cutbacks on operations and retrenchment of thousands of mine workers in Congo DR, Botswana, South Africa and Zambia.

A number of Chinese mining entrepreneurs have abandoned their smelters as the price of copper sank. The Chinese had been part of the rush by foreigners to exploit the countries' rich copper deposits as the price of the commodity soared in the middle of this decade. These entrepreneurs had been part of the Chinese government's small-scale, private sector-led engagement with Africa.

The governor of Katanga Province, which lies at the heart of Congo DR's copper belt, has vowed never to let these Chinese return to the province. 'No, no, no. Not as long as I am governor. Katanga is not a jungle. They worked as if it was a jungle,' Moise Katumbi told the media. The Congo DR government signed a $9 billion minerals-for-infrastructure deal with China at the height of the mineral price surge. 'They (the Chinese) didn't pay their people. They didn't respect anything. We have already written to them to ask them to give severance pay to their staff and to pay the tax due to the government. If they don't we are going to ask the court to auction their properties to pay the bills,' Katumbi was quoted as saying recently.

Job losses

Zambia's Copperbelt Province is a pale shadow of its former self. So are the copper, cobalt and nickel belts of Congo DR, the iron belt of Guinea and diamond belts in Botswana and Sierra Leone. Mine closures and attendant job and income losses have wreaked misery on mineral-dependent economies of Africa. China has, since the price slump, intensified its stockpile of these metals and minerals but that has at best only stabilised the prices, which are still far below what they were a year ago.

In mid-February, Zambia's Konkola Copper Mines (KCM) shutdown its smelting plant and sent home 700 of its workforce. The Bwana Mukubwa and Luanshya Copper mines have only maintenance staff, it has been reported. The Luanshya management has also closed down the company's Chambishi copper smelter and suspended the $355 million Mulyashi mine project.

In May, the Zambian government cautioned employers against arbitrary lay-offs and violation of their employees' rights under the guise of the global financial crisis. The mining sector is the single largest employer in Zambia after the civil service.

Botswana's Debswana diamond company, jointly owned by the government and De Beers, has retrenched and placed thousands of its workers on compulsory leave. To save jobs and the deteriorating economy, the government has asked De Beers to commit extra capital into the project. But De Beers remains reluctant.

Trans Hex, a major diamond producer, has reduced its overhead costs and placed non-cash generative assets on care-and-maintenance. The decision has affected the company's PK Plant in South Africa and the Facauma and Laurica operations in Angola.

In South Africa, Rockwell Diamonds, listed on the Johannesburg and Toronto stock exchanges, has put its Wouterspan mine on care-and-maintenance and restructured its Middle Orange River operation. The company's restructuring also involved retrenchment of employees and the release of another 40 contractors.

Currency falls

As investors move their funds to relatively safer havens, investment flows to the region are fast dwindling, leaving in its wake a run on reserves and pressure on foreign exchange rates. For example, in six months the Ghanaian currency, the cedi, has nearly lost half of its value against the dollar and other major trading currencies. Ghana is Africa's second largest gold producer. The South African rand and Zambian kwacha have also been speedily losing ground to other major trading currencies.

Governments are reacting differently to the crisis. On one level, all the governments are asking the companies not to fire their workforce. The Botswana government is forced to throw money at some of its once-prosperous joint ventures because those projects could not be allowed to fail given their strategic position in the country's economy.

If the trend continues any further, it is feared African countries may return to fierce competition among themselves for foreign investment and hence renew the race to the bottom perpetuated by the World Bank and other international financial institutions and home governments of multinational mining companies.

As yet there are no easy answers. Doubtlessly, however, the longer the commodity price depression remains, the harder it will become for African states to push through radical reforms of the extractive sector to maximise proceeds from and curb the harm done by mining on local communities and the environment.

This article is reproduced from African Agenda (Vol. 12, No. 2), which is published by TWN-Africa, the Africa secretariat of Third World Network. Abdulai Darimani is a programme officer with the Environment Unit of TWN-Africa. Kwesi W. Obeng is deputy editor of African Agenda.

*Third World Resurgence No. 227, July 2009, pp 4-7