Oil and gas are not the only commodities seeing a huge surge in price amid the war in the Ukraine. Prices on industrial metals have also risen considerably. This week, we examine how Africa can profit from the higher prices for the latter.
Capital News Africa: From the Trading Floor – Week 10-2022
Russia’s war against Ukraine is causing prices on industrial metals to surge. As of 4 March, the S&P GSCI Industrial Metals index stood at 609 points, up eleven percent from its level on 1 March. Should the war continue, another increase in the index is likely. Moreover, the S&P GSCI Palladium index is up 18% since the beginning of March, while the price for palladium is up 10.2% to USD 3,308 an ounce.
Along with fossil fuels, Russia is one of the world’s biggest suppliers of precious and industrial metals. These include gold, iron, tin, nickel, copper, cobalt, lead, zinc and platinum. Russia also supplies diamonds. Indeed, a disruption of such exports from Russia could endanger the global supply of crucial raw materials.
But the disruption could also present a big opportunity for mining companies in Africa. The continent is already a leading supplier of precious metals like gold, silver, palladium and platinum. It also ticks the box for industrial metals like bauxite, copper, iron, cobalt, chromite, lead and nickel. And finally, other important raw materials like phosphate rock, manganese and diamonds come from Africa.
However, Africa mostly exports the raw commodities instead of making them into the industrial and consumer goods that are needed. As a result, it doesn’t benefit from the lucrative manufacturing business. Let’s take bauxite as an example. Bauxite becomes valuable when electricity is used to transform it into aluminium. But in Ghana, an aluminium smelter run by the company Valco had to close temporarily some years back due to a lack of electricity supplied by a local water works. The water works was unable to generate power due to a prolonged drought. The lack of investment in the African raw materials industry repeatedly leads to bottlenecks that hinder economic growth across the continent.
There are only a handful of aluminium smelters in Africa. The Valco facility has an annual capacity of 200,000 tonnes. Other smelters include Alucam’s Edéa facility in Cameroon (annual capacity: 100,000 tonnes); Ikot Abasi in Nigeria (400,000 tonnes); and two facilities in South Africa (820,000 tonnes combined). All told, Africa has an annual capacity for aluminium production of 1,520,000 tonnes. This is far too little to compete with Russia, whose four smelters can produce up to 8,065,000 tonnes of aluminium annually. China’s capacity is even higher.
The situation is not much better with other industrial metals. This is partly due to the fact that European investors were not really interested in helping Africa boost extraction and supply of such metals. The Europeans’ reasoning: The business is too dirty, too hard and hence too unpopular in their home countries. This is unfortunate, as materials such as cobalt, copper, lithium and rare earth elements are essential components in producing electric vehicle batteries or wind turbine blades.
Along with Chinese investors, Russian oligarchs have entered Africa in a big way. Russian mining companies, whether publicly or privately owned, are extracting plenty of important commodities. One good example is a gold mine in Sudan. According to a report in the UK newspaper “The Daily Telegraph,” hundreds of tonnes of gold has been extracted from the mine and smuggled into Russia on small planes.
The magazine African Business cites several other examples of Russia’s exploitation of African raw materials. It quoted the investment bank Renaissance Capital as saying: “The African countries with Russian mining interests are Angola, where the diamond company Alrosa operates, and Guinea, where Rusal, an aluminium company, owns and operates bauxite mines and an alumina refinery.” Renaissance Capital added: “Russian companies also operate in Zimbabwe (platinum), Sudan (gold) and Nigeria (Rusal). We expect sanctions on Russia to dampen FDI inflows into Africa over the medium term. Countries with mining operations owned by Russian corporates will likely be most affected.”
African gold mine operators are currently profiting the most from the tighter global supply of raw materials. Two examples are Sibanye Stillwater (ISIN: ZAE000259701), a leading producer of gold and precious metals in South Africa and Gold Fields (ISIN: ZAE000018123), one of the world’s largest gold-mining groups. Sibanye has gained 15% in the last seven days to trade at ZAR 73.60 (EUR 4.38) a share. Gold Fields’ stock has put on as much as 18% in the past week to trade at ZAR 232.73 (EUR 13.85). Yet gold is a raw material that, after its extraction, can hardly be made into something else.
It is our view that if Africa would like to replace Russia as a supplier of many precious and industrial metals, it must invest more in their manufacture and processing. Indeed, this would broaden African capital markets and, in doing so, make them more attractive. Another important issue is how the upsurge in commodity prices will affect the African economy. While several exporters like Nigeria, South Africa, Zambia or the Democratic Republic of the Congo (DRC) would initially benefit from such an upsurge, such a gain could be erased by higher inflation in developed countries. Why? Because the prices on imports of finished goods to the African countries would also rise.