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Africa: Higher prices for commodities – Good news for the continent, but challenges remain

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In brief

Countries in Africa will benefit from the increase in commodity prices and the growing demand for green energy, but the continent must address its infrastructure gap to better enable it to do so. At the same time, the commodity bull run, and growing focus on ESG policies, is boosting investor interest and unlocking finance for Africa’s infrastructure development.


Contents

  1. The EU and Africa
  2. The challenges
  3. Addressing Africa’s infrastructure gap
  4. A commitment to ESG

Commodity markets have been boosted by the prospects of an improvement in the global post-pandemic economy, disciplined global monetary and fiscal policies, the impact of successful vaccine programs and a general post-pandemic increase in investor confidence. Commodity prices have also risen due to the more disciplined operations of the global commodities sector, especially with regard to the implementation of environmental, social and governance principles in mining operations. According to the Institute for Security Studies, since April 2020, oil prices have recovered by almost 300%, copper prices have reached an eight-year high and liquefied natural gas prices have recovered by over 700%. Further, S&P Global Commodity Insights noted that demand for West African bauxite and iron is surging, with China importing record amounts of bauxite in the first two months of the year – 55% of it from Guinea. The World Bank’s global economic prospects regional overview for Sub-Saharan Africa were also positive, predicting elevated commodity prices to support near-term recovery across the region, with higher oil prices and the gradual easing of OPEC+ production cuts specifically benefiting Nigeria and Angola. 

Geopolitical challenges in 2022 have led to a number of countries turning to Africa to fulfill their requirements, and increased demand, for commodities. The continent is known for its large supplies of metal and mineral commodities such as bauxite, chromium, cobalt, copper, diamond, gold, iron ore, platinum group metals, lithium, rare earth metals and zinc. This has put Africa in a position to be able to benefit from the commodity bull market, which would greatly assist pandemic-stricken countries to balance their fiscal deficits.

The European Union (EU), for example, recently noted that it would look to Africa to help fulfill its energy needs, especially with regard to its oil and gas requirements. Countries in Africa, notably Nigeria (oil), Mozambique, Nigeria and Senegal (gas) and Morocco (hydrogen) are expecting an increased demand for both their renewable and non-renewable energy sources, although the EU has made it clear it intends to prioritize clean energy sources. At the EU African Union (AU) Summit in February this year, European Commission President Ursula von der Leyden said that Africa was rich in hydro, solar and wind power and that to end climate change, the world needed Africa. The EU also noted at the Summit that it would help to connect Africa’s mineral wealth with the global market.

It is not a given, however, that the global commodity rebound currently underway will continue, nor that it will continue to benefit Africa’s major metals and mining producers. Global conflict could lead to a moderation of global economic growth and trigger a downward correction in commodity prices globally and there are several infrastructure and social obstacles to ensuring the continent gets the most out of the top of the cycle. For many African countries, the expansion of mining production due to increased demand is being impacted by a variety of uncertainties, including the climate crisis, intensifying regional conflict, serious supply chain disruptions and infrastructure gaps.

Africa’s massive gaps in infrastructure, especially in terms of utilities and transport, have been hampering the ability of African countries to make the most of the global demand for commodities. Transport challenges in African countries, made worse by the pandemic’s impact on global supply chains, has been causing trade blockages, especially with regard to transporting raw materials to, and out of, the continent’s ports. Further issues ranging from severe weather events, infrastructure tampering and lack of machinery needed to transport heavy metals are also affecting the commodities supply chains in Africa and blocking opportunities to export raw materials. For Africa to make the most of the boom in commodities prices, the continent must address these challenges, especially in terms of infrastructure developments.

Projects are already in progress to boost continent-wide infrastructure needs. For example, Tanzania’s construction of the Standard Gauge Railway (SGR) Project is expected to provide a safe and reliable means for efficiently transporting people and cargo to and from the existing Dar-es-Salaam port. Other large projects underway include the Trans-Maghreb Highway in North Africa, North-South Multimodal Corridor, the Central Corridor project and the Abidjan-Lagos Corridor Highway project.

The African Continental Free Trade Area (AfCFTA) has been acting as a strong impetus for African governments to address their infrastructure gaps, as well as to overhaul regulations relating to trade, cross-border initiatives, investment-friendly policies and capital flows. The trade-in commodities in Africa will benefit from these reforms, but the massive infrastructure development that is needed to facilitate the movement of goods across borders will take time to address.

Baker McKenzie’s report – New Dynamics: Shifting Patterns in Africa’s Infrastructure Funding, which analyzed data from IJ Global, showed that market fundamentals across the continent were signaling a region with underlying resilience and, as the global economy recovers, finance for infrastructure development is being unlocked. The report pointed out that there are already positive indicators of forthcoming investment, including the rise in commodity prices. The report noted that infrastructure gaps in energy provision, internet access and transportation have resulted in an urgent imperative to identify and enable new sources of finance outside traditional lenders and international partners. The report revealed that development finance institutions were increasingly anchoring the infrastructure ecosystem in Africa, serving a critical function for project finance as an investment facilitator and a check on capital and that local and regional banks, specialist infrastructure funds and private equity and debt were stepping in to collaborate with them.

Post pandemic, infrastructure development in Africa also has a heightened focus on improving Africa’s capacity for green, low-carbon and sustainable development via, for example, clean energy, community healthcare, green transport, sustainable water, wildlife protection and low-carbon development projects. A commitment to environmental, social and governance (ESG) principles is taking center stage in the quest for infrastructure funding, with access to capital for large infrastructure projects very likely to contain sustainability requirements.

Africa can benefit both from the rise in commodity prices and the demand for renewable energy, but it needs the infrastructure to do so. The rise in commodity prices is highlighting the demand for improved infrastructure to better enable the continent’s trade in commodities while at the same time boosting investor interest and unlocking finance for Africa’s infrastructure development. A commitment to good ESG policies is also assisting in attracting the infrastructure funding needed to ensure the continent can make the most of this commodity boom and future commodity bull runs.

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