Investors are paying a lot of attention to African fintechs. We feel, however, that the next growth story in Africa are commodities, whose market is set to take off. Such growth should be used to further develop the African economy.
Capital News Africa: From the Trading Floor – Week 20-2022
To avoid any misunderstandings, we’d like to first say that we applaud the start-up founders who want to make Africa a better place to live. By being energetic, enthusiastic and engaged, they are changing the continent. They deserve all the attention they get and all the means by which they can raise more capital to realise their ideas.
On the other hand, we think it’s unfair to expect that these young entrepreneurs alone can make a big difference in Africa. Their economic effect is much too small for that. They cannot, for instance, create enough jobs to gainfully employ all of Africa’s young population.
Last year, a window of opportunity opened that could change the continent more profoundly than development aid from the West and the start-ups combined. Such an opportunity, however, is something that is frowned upon by sustainable, or ESG investors: We are talking about extractive industries like those for fossil fuels and metals.
Consider that over the last 12 months, the S&P GSCI Energy Index has gained no less than 77.8%. Among the African countries that are benefiting from higher prices on petroleum and natural gas are Nigeria, Algeria, Mozambique, Angola and Gabon.
Meanwhile, S&P’s index for nickel is up 56.9% for the past 12 months, while the indices for aluminium and for zinc are up 14.5% and 19.6%, respectively. Commenting on the higher prices for such metals, Tilmann Galler, investment strategist at JP Morgan Asset Management, says: “It’s likely that we will see a boom in those raw materials which are needed for sustainable and clean technologies. (…) Demand for goods like nickel, graphite, lithium and aluminium is growing.”
This is not entirely good news for the African economy. The money that can be made from commodities does not necessarily mean that the social and economic elite will share it with an impoverished population.
Indeed, the additional income could lead some of that elite to become lazy and corrupt. The money must, therefore, not only be shared with the population but smartly invested.
Unfortunately, several African countries rich in natural resources have not industrialised as much as they should. Six decades after the end of European colonialism in Africa, these countries’ economic relationship with Europe has not changed much.
Africa still generally exports raw goods to Europe and Europe, in turn, exports finished goods back to Africa. In figures: According to Eurostat, 68% of the EU’s exports to Africa in 2021 were finished goods, while 65% of Africa’s exports to the EU were commodities. These include: oil, gas, wood, cocoa, coffee, pineapples as well as other industrial metals and farming goods.
That said, Africa has a real opportunity to turn the higher prices on commodities into its next growth story. This depends on the profits from the commodities being invested smartly – for example in the local manufacture of finished goods. Such investments as well as those in public infrastructure would make Africa far more economically robust and affluent.
Let us illustrate what we mean: In order to isolate aluminium from bauxite, a lot of electricity is needed. Guinea, Sierra Leone and Ghana have huge reserves of bauxite but hardly any power stations. As a result, these countries export bauxite, or a mineral that, by itself, is almost worthless.
Now Europe has announced that it wants to build power stations in Africa to produce “green hydrogen” they need for achieving their climate goals. We would like to know why this power could not be used to produce aluminium in Africa? This would be something that would very much benefit the continent’s economy.
China is a telling example of how a country can transform itself. Under the leadership of former president Deng Xiaoping, the country stopped just exporting raw goods for US dollars and instead began demanding western technology to industrialise. China’s success is nothing short of spectacular: In 1980, the country’s gross domestic product (GDP) totalled USD 303 billion. In 2021, its GDP stood at USD 17.5 trillion – more than 57 times higher than in 1980.
Indeed, China has produced growth rates of 10% per year and more, compared with at best 3.8% the IMF expects for the African continent this year. This is because China devised a clever strategy for profiting from its exports of raw goods.
Now Africa has a huge chance to replicate that success.