East African mining sector takes a hit

21Jun 2016
The Guardian Reporter
The Guardian
East African mining sector takes a hit

East Africa’s extractives industry is expected to slow down as investors delay capital expenditure due to weak commodity prices.

Prime Minister Kassim Majaliwa and the board chairperson of Community Banks Association of Tanzania (COBAT), Elizabeth Makwabe, share a light moment during the COBAT stakeholders meeting that was graced by the PM in Dodoma last week. Photo: Courtesy of COBAT

Mining companies in the region will cut back or delay investing as commodity prices are expected to remain low due to anticipated weak global demand and tightening of financial conditions.

The Kenya Fluorspar Company suspended mining and processing operations from April 30, due to depressed prices and increased operating costs that saw the firm return losses in three consecutive years.

Fluorspar’s traditional benchmark price for freight on board of US$440 per tonne in mid-2012 dropped to between US$300 and US$280 from 2013 to mid-2015 as global demand softened and to less than US$260 from January.

The World Bank has downgraded the 2016 economic growth rate of sub-Saharan Africa to 2.5 per cent from last year’s three per cent due to low commodity prices, weak global trade and diminishing capital flows.

“This sluggish growth underscores why it is important for countries to pursue policies that boost economic growth and improve the lives of those living in extreme poverty,” said World Bank Group president Jim Yong Kim.

Global commodities demand and prices were driven by unprecedented Chinese growth from the year 2000. China can no longer be relied upon as sole driver as it transits from a manufacturing- to a service-based economy.

PricewaterhouseCoopers (PwC) said the Chinese demand for raw commodities seen during the boom will not be replicated as growth is forecast to hover around six per cent annually to 2020.

Lower demand for minerals and the bleak global outlook since 2014 have led to a decline in prices. All companies, regardless of commodity diversification or size, have felt the pinch with traditional miners taking the biggest hit.

While China is still critical to the success of the mining industry accounting for about 40 per cent of overall commodity demand, it can no longer be relied on to supercharge returns.

PwC’s annual Mine Report of 2016 shows 2015 was a race to the bottom with world’s 40 largest mining firms, making a US$27 billion collective net loss and a 37 per cent market capitalisation decline, wiping out gains made in the commodity super cycle.

“The top 40 experienced their first ever collective net loss, lowest return on capital employed, drop in market capitalisation and an overall decline in liquidity,” said PwC Africa mining industry leader Michal Kotzé.

He said investors punished companies for poor investment and capital management decisions. The “spot mentality” of investors meant they focused on fluctuating commodities prices and short term returns rather than the long term investment horizon required in mining.

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