The Green Revolution: Where Does Africa Fit In?

Cobalt

Various countries across the African continent are poised to participate in the green drive as commodities such as copper, cobalt, tin, and manganese are bountiful.

Investment in the mining of these minerals could contribute to diversification efforts in countries like Gabon and Côte d’Ivoire and dramatically contribute to the development of the DRC.

In turn, South Africa remains highly dependent on its platinum group metals (PGMs) sector, but the country is also host to the largest manganese reserves on the planet.

The global drive towards greener energy has accelerated swiftly as more countries pledge their commitment towards achieving net-zero carbon dioxide emissions over the next few decades.

As a result, the world’s attention is turning towards commodities that are set to play a key role in the so-called Green Revolution.

Africa, with its rich mineral reserves, will undoubtably be pivotal in the shift towards greener energy. This will require significant investment in the mining of these commodities as extraction activities have typically revolved around more traditional metals and oil.

Commodity prices have recovered strongly since collapsing last year due to the Covid-19 outbreak. However, the recent rebound in prices is largely due to supply constraints and supply-chain disruptions, implying that the rally may be short-lived.

Yet, commodities earmarked for the green transition are likely to benefit from increased demand in the medium- to long term, while limited capacity on the supplyside may result in elevated prices in the short run.

While South Africa has benefitted from the recent commodity price boom, mining activity in the country mainly revolves around PGMs, gold, coal, and diamonds.

This mineral profile is not entirely future-proof, and South Africa needs to join the green drive to ensure the longevity of its mining sector.

As the country accounts for 40% of the world’s manganese reserves, there is substantial scope to increase extraction of the mineral.

Copper and cobalt reserves hand the DRC the key to a greener future

African nations are well-renowned for their rich gold and oil reserves. However, various countries also possess the resources needed to partake in the green revolution.

The Democratic Republic of Congo (DRC) is particularly well poised to benefit from the shift towards more sustainable energy as it sits on notable reserves of cobalt, copper, and tin.

According to the United States Geological Survey (USGS), the DRC produced 95,000 tonnes of cobalt in 2020, accounting for 68% of global output.

Moreover, the country possesses 3.6 million tonnes of the world’s proven reserves, equating to nearly 51% of total global reserves. China was the largest buyer of cobalt last year, with over 80% of its consumption utilised in the rechargeable battery industry.

Other producers on the continent include Morocco, South Africa, and Madagascar. Morocco and South Africa produced 1.4% and 1.3% of total output in 2020, respectively, while Madagascar’s share declined to 0.5% from 2.4% in 2019 as cobalt mining was halted to prevent the spread of Covid-19.

After the DRC, Madagascar has the second-largest stock of cobalt resources on the continent with 1.4% of global reserves.

In May 2021, Reuters reported that Glencore intends to restart operations at its Mutanda mine in the Katanga Province of the DRC as early as 2022.

The mine, which has been on care and maintenance since 2019, is the world’s largest cobalt mine that also produces significant amounts of copper.

The decision to suspend operations in 2019 was based on soft cobalt prices, rising costs and high taxes. However, the recent recovery in cobalt (and copper) prices has revived the mine’s economic viability.

The DRC is the largest copper producer in Africa, accounting for 6.5% of global output last year, while Zambia followed with 4.2%. Copper is seen as pivotal in the renewable energy drive as it is a key input in everything from electric vehicles (EVs) to solar panels and power grids.

Mining magnate and founder of Ivanhoe Energy, Robert Friedland, believes that the DRC holds the key to a greener future. Invanhoe Energy’s Kamoa-Kakula project recently started mining copper in the DRC with the initial aim of producing 200,000 tonnes a year.

However, Friedland believes that continued exploration could potentially lead to output increasing tenfold as much of the country’s mineral wealth remains undiscovered.

Despite the DRC and Zambia both possessing the resources to partake in and benefit from the green revolution, various hurdles persist.

In the DRC, political instability, security concerns, unfavourable regulations, and inadequate energy and transport infrastructure weigh on the mining sector, while, in Zambia, concerns of nationalisation and interventionist policies continue to inhibit mining activity.

Tin and manganese offer diversification opportunities in Africa

In addition to copper and cobalt, tin and manganese are also considered as vital inputs in the green transition. While tin has long been used in the production of electronic goods, more recent research has found that the metal serves as a cost-effective way to increase the amount of energy that lithium-ion batteries can hold, thus significantly increasing the driving range of EVs and allowing more efficient renewable energy storage.

In 2020, the DRC produced 17,000 tonnes of tin (6.3% of global output), while Nigeria and Rwanda produced 6,000 and 1,200 tonnes (2.2% and 0.4% of global output), respectively.

In Nigeria, mineral extraction took a backseat in the 1950’s following the discovery of oil, meaning that mining of tin has long been neglected.

Rwanda, who relies heavily on coffee and tea exports, also stands to benefit from increased investment in tin mining operations.

According to the USGS, the DRC accounts for 3.7% of tin deposits globally, while reserves in Nigeria and Rwanda are currently unknown.

Consequently, increased exploration efforts in the latter two nations may not only contribute to the diversification of their respective economies, but also present potential investment opportunities.

High-purity manganese has become increasingly important in the production of batteries used in EVs and as backup storage for electricity harvested from renewable sources such as solar and wind.

South Africa is the largest producer in the world as the country accounted for over 28% of global manganese production last year.

Gabon, a country that is heavily dependent on oil for growth, revenues and exports, made up roughly 15% of manganese output while Ghana and Côte d’Ivoire accounted for 7.6% and 2.5% of global production, respectively.

As is the case in Gabon, increased manganese mining in Côte d’Ivoire could reduce the country’s dependence on a single commodity – in this case cocoa.

China is the largest import market for manganese as the mineral is used in steel production and the manufacturing of batteries.

According to the Wall Street Journal, 75% of the world’s lithium-ion batteries and 50% of all EVs are produced in China. As manganese’s role in the drive towards green energy should sustain demand over the medium- to long term, there are various investment opportunities in Central and West Africa.

South Africa: shift in focus needed to ensure long-term prosperity

South Africa is the largest producer of platinum-group metals (PGMs) in the world, as the country accounted for 50% of global production last year.

More remarkably, South Africa sits on over 91% of the world’s PGM reserves. The prices of PGMs have increased significantly since last year as the Covid-19 crisis led to a marked supply crunch.

While the near- to medium-term price outlook remains generally positive, the long-run view is blurred – 60% of the PGM mining industry’s revenue comes from the sale of catalytic converters to automotive manufacturers.

As the number of countries committing to netzero emissions grows, the long-run outlook for PGMs (particularly platinum, palladium, and rhodium) deteriorates.

Cars powered by internal combustion engines sit at the centre of governments’ plans to reduce carbon dioxide emissions, with China and the US investing heavily in making EVs a more viable mode of transport.

In December last year, the UK announced that it intends to ban the sale of new diesel or petrol-powered vehicles by 2030 and the sale of all hybrid cars by 2035. This plan is accompanied by a £1.3bn package to build more EV charging points and subsidise EV purchases.

Whilst the drive towards greener energy is expected to take much longer in developing countries in general, South Africa’s government has also committed to reaching net-zero by 2050. Looking beyond 2030 then, the future of PGMs becomes unclear.

Besides PGMs and precious metals, South African mining exports are reliant on coal – considered the bogeyman in the green transition. With the largest mining companies in the country sitting on near-all-time high cash levels, questions around what to do with the money arise.

Along with using the funds to pay out dividends to shareholders, PGM mining companies have invested in extending the lifespans of existing mines and the replacement of declining assets.

According to Royal Bafokeng Platinum CEO Steve Phiri, however, it is unlikely that miners will pump cash into greenfield investments that will bring new ounces to market given the future uncertainty as this requires a capital investment that takes 10-15 years to bear fruit.

Considering the projected decline in the PGMs market from 2030 onwards, South Africa’s mining industry should start to zone in on those commodities set to benefit from the green drive to ensure the longevity of the sector.

With the country sitting on 40% of the world’s manganese reserves, South Africa is sure to play a role in the green drive. This role may be amplified if copper, cobalt, and rare earths mining operations get a boost.

Challenges to overcome in the green transition

Although authorities around the world have set their sights on fast-tracking the transition towards greener energy consumption, the rate at which this shift can take place will largely depend on the supply chain of inputs in the production process of green energy solutions such as wind and solar farms and EVs. This brings two challenges to the fore.

Firstly, the mining and processing of minerals utilised in the generation of renewable energy is markedly more concentrated than the drilling of oil and gas.

Chinese firms own a large stake of many vital mineral supply chains while also dominating battery manufacturing and representing half of the global EV market.

As such, China has the ability to impact prices of input commodities. Secondly, investment in the mining of ‘green’ minerals remains relatively low.

Revenues from coal, the fossil fuel with the largest carbon footprint, remain higher than those generated from the mining and processing of minerals used in the production of cleaner energy.

In 2019, global investment in new projects for copper, nickel and lithium amounted to less than $25bn, equating to only 5% of funds invested in upstream oil and gas.

As we expect capital expenditure to rebound this year, the combination of increased demand for green energy and EVs and positive price signals caused by shortages may see more cash dedicated to the green transition.

This raises another question: will supply be able to keep up with demand? Although battery costs have decreased by 83% since 2012, much of this decline has come from design and process enhancements and economies of scale.

Raw inputs now comprise between 50% and 70% of battery costs, up from 40%-50% over the past five years, thus increasing the susceptibility of battery prices to commodity price shocks.

While we expect that the current supply constraints will be temporary, and thus that commodity prices will moderate over the next few years, supply shortages (and subsequently higher prices) of ‘green’ commodities over the medium- to long term could reduce the competitiveness of the renewable energy sources that they power. This again highlights the need for investment in production and processing of these commodities in coming years.

In the African context, the typical challenges to mining on the continent persist. Copper mining is impacted by political instability, unfavourable regulations, and inadequate energy and transport infrastructure in the DRC, while mining opportunities in Zambia are suppressed by concerns of nationalisation and interventionist policies.

In countries like Ghana and Zimbabwe, issues with illegal (or so-called ‘artisanal’) mining persist, while mining and exploration efforts pertaining to commodities key to the green transition continue to take a backseat in Nigeria and South Africa.

Although the continent’s participation in the drive towards a greener future is all but certain, adequate investment and effective regulation are required to ensure that Africa shares in the spoils over the next 30 years.

Full report link here: https://resources.oxfordeconomics.com/hubfs/press-release/The-Green-Revolution-where-does-Africa-fit-in.pdf?utm_campaign=PR-Global&utm_medium=email&_hsmi=136980829&_hsenc=p2ANqtz-8O8pZ0pRuFlPny61YVu_gwUCwjGTvKUbPzQwlXsvlailX4xlq5apZsGXtbHqiXwals9UxDkon9an7NHC4eQmCYvxwblQ&utm_content=136980829&utm_source=hs_email

NKC African Economics’ June 28th 2021Research Brief On Africa