Mines’ war windfall may not last long
The mining sector in Africa faced unexpected and unprecedented challenges in 2020 because of Covid and the global response to the pandemic. Beyond the impact on global health, Covid created socioeconomic challenges that had, and will continue to have, lasting repercussions across Africa.
African economic activity and mergers & acquisitions (M&A) declined sharply in line with global trends, and nowhere were these challenges more keenly felt than in the labour-intensive mining sector, which relies extensively on global trade, logistics and supply chains.
In many respects, 2021 was a year of global economic recovery, and African M&A was no different, with a significant uptick in both deal value and volume across the continent.
The mining sector was a key contributor to this, though it was not the most active sector on the continent, with transactions in technology, media and telecommunications leading the way.
The world was also starting to come to terms with Covid, driven by improving vaccination rates, increased natural immunity and less restrictive measures to deal with it.
Then, on February 24 this year, after an extended period of political tension, Russia invaded Ukraine.
Russia is a relatively small trade partner and investor in most African states and we anticipate the direct impact of the conflict in Ukraine on African markets to be relatively muted in comparison to consequences elsewhere.
However, Africa is obviously not immune to the macroeconomic consequences and indirect effects of the war. The global macroeconomic consequences of the conflict have been swift and, in many cases, severe.
Global M&A in the first quarter of 2022 fell by about 30% in value terms when compared to the revival period in the first quarter of 2021.
Global inflation is rising, driven by high (and fluctuating) oil and commodity prices. Food prices are increasing sharply, driven by the adverse effect on the nearly 30% of global wheat exports accounted for by Russia and Ukraine.
The threat of Russia’s aggression spreading beyond Ukraine’s borders has also dampened global economic sentiment.
In mining terms, Russia supplies more than 10% of the world’s nickel, used in the production of stainless steel and lithiumion batteries. Shortly after Russia invaded Ukraine, the London Metal Exchange stopped trading in the metal temporarily because of spiralling prices. Russia is also a major global producer and exporter of several platinum group metals, aluminium, gold, copper and iron ore, among other things.
Along with the expected flight to gold as an investment “safe haven”, Russia’s status as one of the leading producers of these products, many of which have critical day-to-day applications (including in decarbonisation and the energy transition), has led to increased or fluctuating prices across the board.
This creates an interesting dichotomy for the mining sector in SA, and specifically investment in that sector.
Macroeconomic factors and global sentiment suggest a significant cooling off of M&A activity, certainly in the short term.
However, SA a major producer and exporter of many minerals should be primed for an influx of investment to realign global supplies and satisfy demand left by a dearth of exports from Russia and Ukraine because of the conflict and sanctions imposed on Russia.
South African interest rates remain relatively low and the rand has weakened of late.
Together with rising commodity prices, the fundamentals for increased investment in the mining sector are good.
But while South African producers and exporters of these materials are likely to experience a short- to medium-term windfall in prices and revenues, it is unlikely the sector will see a major capital investment rush.
That being said, any static or declining M&A activity in the South African mining sector will not be attributable to Russia’s invasion of Ukraine. Rather, the welltraversed and ongoing political, infrastructure and regulatory challenges in SA are likely to remain the fundamental impediments to further investment and growth.
While certain changes have been made, or are anticipated, which will have a positive impact in the sector for example, the increase in the threshold of private power production not requiring a generation licence to 100MW SA’s energy and transport infrastructure remain an impediment to any meaningful increase in mining investment.
Similarly, while the courts have recently given some comfort to investors in relation to the Mining Charter and the fact that this remains policy and not law SA’s mining sector is still plagued by regulatory uncertainty and inconsistent application of the laws by administrators.
The lurking threat of political instability of the kind seen in July 2021 serves only to exacerbate this situation.
In other African jurisdictions, particularly those where Chinese investment remains strong, the picture may be somewhat different, with ongoing opportunities for deal-making.
Among other things, Chinese demand for lithium assets is high. We have seen several attempted and completed transactions in this space in the past 18 months and this trend is likely to continue.
Investors want to hear clear commitments from the South African government on regulatory reform, specifically simplicity and certainty, and how it intends to tackle the ongoing energy crisis and infrastructure constraints on both rail and port, both of which were mentioned by President Cyril Ramaphosa in this year’s state of the nation address.
SA needs first to address these issues before it can look to blame any lack of investment in the mining sector on the war in Ukraine.
Political, infrastructure and regulatory challenges likely to limit investment and growth