Industrialization and diversification key to reverse decline caused by low commodity prices

May 17, 2016

Mozambique UN RC and UNDP Rep. Ms. Marcia de Castro addressing the meeting

The discovery of vast deposits of natural  resources including, among others, over 20 billion tons of coal and about  200 trillion cubic feet (TCF) of natural gas reserves, placed Mozambique on the map of the main producing and exporting countries of mineral resources, especially energy.

This world class reserves of natural gas, thermal and metallurgical coal, ilmenite-rich heavy mineral beach sands were seen as a “game changer” that could steer the country towards its development path with revenues resulting from direct and indirect investments in the sector and from exports.

To attain this objective, the Government adopted a Mineral Resources Strategy Policy aimed at ensuring that Mozambique promotes its economic, social and cultural development through transparent management and sustainable exploitation of mineral resources with benefits for all.

Enthused by the positive prospects, during the year 2014 Mozambique completely revised its  legal  and  fiscal  framework  for  the  mining  and  hydrocarbons  sector.  The  revised  legislation,  aligned  with  international  standards,  introduced  measures  requiring  local  participation in Foreign Direct Investment (FDI)-funded projects. The Government believed that the changes would significantly increase revenues from the sector which could be channelled to develop other economic areas.

Since  2007 multi-billion  dollar  investments  were  made  in  mega  coal  mines  and  transport  infrastructure, further raising the country’s expectations about a knock-on effect on economic development and fiscal revenues. According to the World Bank, on the fourth quarter of 2014, Mozambique extractive sector grew by 14.9%, propelled by the boost of coal exports.

However, the oil and gas sector is facing a defining moment. The positive scenario, has been affected by the decline in global commodity prices demonstrating the reality that the country is vulnerable to exposure to the vagaries of price fluctuation locking it into cyclical external shocks that cause macroeconomic imbalances that Mozambique continues ill-equipped to manage.

In fact, the sector has been representative of the challenges Mozambique faces. Coal prices halved and exports have been hampered by infrastructure and logistic insufficiencies.  Currently all coal mining projects are operating at a loss.  Rio  Tinto  decided  to  exit  the  country  with  a  loss  of  nearly  USD  4  billion,  selling  its Benga project to India’s International Coal Ventures Pvt Ltd (ICVL) for USD 50 million. Vale has also  stated  that  it was  looking  to  sell  part  of  its  stake  in  the  Moatize  project  although its  USD  4.5  billion investment  in  a  900  km  railway  from  Moatize,  through  Malawi,  to  the  Nacala  Port  become operational in 2015.

According to the Government, there has been a reduction of direct and indirect jobs, along with the significant decrease in demand for goods and services by the extractive industry, affecting thousands of Mozambican companies. There has also been a decline in tax revenues from the export of natural resources. The decline in the prices of mineral products became severe in 2014, with the prices of iron, coal and copper falling to 50%, 26% and 11%, respectively.

What can Mozambique and other resource rich nations, particularly in Africa, do to reverse this scenario?

This was precisely the question the Ministry of Natural Resources and Energy (MIREM) is wrestling   with. In a one day seminar, on May 16, organized with the United Nations Development Programme (UND) support, MIREM brought together national and international experts, technocrats, policy makers, representatives of civil society organizations and the private sector. The CEOs of Vale Mozambique, Sasol, Kenmare and Anadarko shared case studies of the dire situations their companies are facing world-wide and in Mozambique, in particular, due to the drop of commodities prices.

Mr. Antonio Pedro, Director, Sub-regional Office for Eastern Africa (SRO-EA) of the United Nations Economic Commission for Africa (ECA) and Dr. Degol Hailu, Senior Advisor at UNDP based in Addis Ababa were among the key speakers at the event.

The objective of the seminar was to reflect on the situation of the extractive industries and propose a way forward that would make them sustainable and benefit all.

“We are going through difficult times in the mining industry. This industry is characterized by investments and returns dependent on cyclical volatility of commodity prices as a result of complex interactions between demand and supply. These interactions are correlated with global economic events that cause economic and financial crisis on a global scale,” Mozambique Minister for Justice, Constitutional and Religious Affairs, Isaac Chande, representing the Government told the participants.

The Minister who was speaking on behalf of the Natural Resources and Energy Ministry added that “falling prices of mineral products since 2009 reversed the momentum that the exploration of mineral resources had been experiencing over the period 2000-2008 reflected by investment of over  US $ 14 billion between 2004 and 2013”.

Minister Chande explained that it is paramount to reflect on how to make the Extractive Industry sustainable.  “The challenge is to ensure mutual gains between investors and the Government, particularly in this situation where the markets are constrained and the industry faces enormous risks. This can only be achieved through dialogue. The objective of this seminar is to share experiences on how to make the Extractive Industries in countries such as ours resilient to external shocks,” he explained.

The United Nations Resident Coordinator and UNDP Resident Representative, Ms. Marcia de Castro told the meeting that Extractive Industries could be the engine that Africa needs to be propelled towards the trajectory of sustainable development and economic growth.

She further said that the high commodity prices in the past decade played a central role in boosting growth among resource-rich countries such as Mozambique, South Africa, Zambia and Zimbabwe. “However, this dependence has come to haunt them today since the prices of oil and metals, such as iron ore, copper, and platinum, declined substantially in 2014, and weakened further in 2015,” she warned. 

“Obviously, this has serious development and policy implications for these countries and Mozambique is no exception. The country’s strong economic performance has not been accompanied by an economic transformation. Falling commodity prices have put pressure on Mozambique's Extractive Industries sector, particularly the continued decline of global coal prices. Few jobs are being created and as a consequence there has been a very marginal impact on poverty reduction and vulnerability,” Ms. de Castro explained.

Calling on the participants to action, the UN Resident Coordinator said: “This crisis is real but Africa has now policy options and can choose to turn this crisis into an opportunity.”  She added that “the Africa Mining Vision, adopted by Heads of States and Governments in 2009, emphasizes the transformative role that the mining sector plays in the delivery of development in Africa. The vision is a roadmap for Africa's natural resource sector to transform the continent's social and economic development path in order to address the challenges of poverty and limited development. It seeks to set Africa on an industrialization path, based on its natural capital, to enable the continent to take its place in the global economy. This vision is supported by a continent-wide strategy that focuses on creating an industry equipped to bring about inclusive growth.”

Therefore, it becomes an imperative for resource rich countries to reduce their overall level of dependence on commodities and establish a reliable revenue base which can withstand commodity price volatility. It is argued that pursuing mineral linkages and resource-driven industrialization can partially achieve those objectives, she said.

Transforming natural resources capital into human and social capital, while minimizing environmental and social harm and maximizing respect for human rights is probably the major challenge facing Mozambique today and will require well thought-out, evidence-based policy interventions anchored on the principles of open, democratic and transparent Governance.

Key recommendations from the seminar
Chief Executive Officers of some major Mining Companies operating in Mozambique participated in the sector reflection seminar

Key recommendations from the seminar

  • Mozambique needs to move away from a sectorial raw mineral export development policy towards embracing an integrated minerals-energy-industrial development model
  • A resource driven industrialization development strategy not only reduces the country's exposure to commodity price fluctuations, but also contributes to building a resilient, diversified and jobs-creating economy, on the strength of superior job-elasticity and multiplier effects of the manufacturing sector.  
  • A resource driven industrialisation would require Mozambique to have an institutional, legal and regulatory framework anchored on policy coherence (between industrial, minerals and oil/gas policies in particular) and institutional cohesiveness.
  • This could include a fiscal pact that supports resource driven industrialisation, (a fiscal stability pact based on a resource rent tax which is responsive to commodity price fluctuation); a comprehensive application of a local content policy.
  • At the institutional level, there is need to have closer coordination between MIREME and other sectors, in particular the Ministry of Industry and Trade.

 

 

 

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