The exodus of European and American buyers from the Russian market was expected to open doors for African exporters. Against a backdrop of skyrocketing commodity prices, producers of oil, gas and metals have raced to fill the void, hoping that Russia’s loss could be Africa’s gain. But in practice, issues over infrastructure, civil unrest and high production costs are making it difficult to turn this vision into reality. John Basquill reports.
Across almost all commodity types, the early months of 2022 were characterised by sky-high prices. Brent crude soared past US$120 a barrel in March – barely two years after reaching historic lows in the first months of the pandemic – while natural gas hit prices not seen since the global financial crisis in 2008.
Metals such as silver, platinum, copper and iron ore had already increased sharply in value during 2020, and though growth had generally tapered off by the start of this year, prices remained high.
One driving force behind these surges in price was a mismatch between global supply and demand patterns during the pandemic, after markets in North America and Europe lifted virus containment measures earlier than many of their counterparts in Asia.
Then, in February 2022, when Russia’s invasion of Ukraine prompted retaliatory sanctions from governments across the western world, a major supplier of oil, gas, metals and other primary commodities was suddenly no longer a viable trading partner.
Buyers scrambled to minimise their exposure to Russian suppliers, leading to speculation that alternative sourcing markets could be set to reap the rewards. For Africa’s commodity exporters, the situation was touted as a major opportunity.
“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,” wrote Michael Foundethakis, global head of project, trade and export finance at international law firm Baker McKenzie, in a June 2022 article titled ‘Good news for the continent’.
Foundethakis noted that EU buyers could prioritise renewable energy sources rather than fossil fuels, but posited this as a further opportunity, citing a vow by European Commission president Ursula von der Leyen at February’s EU African Union Summit to “help to connect Africa’s mineral wealth with the global market”.
The African Development Bank (AfDB) estimates that real GDP growth in net commodity exporting nations topped 8% in 2021. That trend could be set to continue, with the bank’s African Economic Outlook report for 2022 also forecasting inflation of 13.5% this year.
Foundethakis acknowledged, however, that it is “not a given” that the continent’s commodities exporters will benefit from booming prices. “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,” he wrote.
Similarly, Gabrielle Reid, associate director at global intelligence consultancy S-RM, says there has been “significant optimism around what the higher global commodity price inflation will mean for commodity exporters on the continent, but the ability to reap the longer term rewards from this boom is very much dependent on overcoming several domestic challenges”.
“These could be very similar challenges across the continent, or they could be very unique to specific markets,” she tells GTR. In practice, some of these challenges are already becoming a reality.
Gas: realising the opportunity
Africa’s gas export market has been among those tipped to benefit from the combination of supply chain upheaval and high prices.
Following Russia’s aggression in Ukraine, European importers dramatically reduced purchases of Russian gas, fearful of contravening sanctions or suffering reputational damage.
With Russia accounting for around a quarter of the world’s proven natural gas reserves, and supplying nearly half of the EU’s gas in 2021, this situation created a gap in the market.
“That’s where African gas starts to come into the picture,” writes NJ Ayuk, executive chairman of industry advocacy group the African Energy Chamber, in an August 2022 article. “If the EU doesn’t have enough Russian gas this year, it will have to make up the deficit somewhere else in order to endure the next heating season.”
Ayuk says the EU has in part turned to established producers outside Africa, such as the US and Qatar, or to smaller exporters like Peru. “But it’s also reached out to gas-producing states in Africa,” he says. “Italy, for instance, has negotiated the purchase of additional gas from Algeria in 2022 and is also looking to buy more gas from Egypt and Angola in the short term.”
Work is also underway to boost exports from the Republic of the Congo to Italy, and from Senegal to Germany, Ayuk writes, while the EU, Israel and Egypt have signed a memorandum of understanding aimed at boosting liquefied natural gas (LNG) shipments from the Eastern Mediterranean region.
“What’s more, the EU has sent Matthew Baldwin, the European Commission’s deputy director-general for energy, to Nigeria to discuss the possibility of increased gas supplies,” he adds.
Baldwin, who leads an EU task force set up to reduce reliance on Russian gas, told Nigerian newspaper Premium Times in August that “we want to build a new partnership with countries like Nigeria with whom we have an already well-established partnership to obtain more gas and LNG from you on good commercial terms”.
Whether African gas can serve as a long-term substitute for Russian exports is far from certain, however. In 2020, the entire continent produced 231 billion cubic metres of natural gas, a little over a third of the quantity produced in Russia alone, according to data from energy major BP. Africa’s top producing nation, Algeria, sells almost all of its exported gas to Europe already.
And expanding Africa’s gas exporting capacity to the levels required to compete with Russia is not simply a case of finding willing buyers on the European market, suggests S-RM’s Reid.
“There was certainly optimism and excitement around that prospect, but the countries that will be able to leverage the opportunities will be those that are ready and open for business,” says Cape Town-based Reid. “That means having the infrastructure to be able to respond quickly.”
A similar issue arose in South Africa’s coal market, she points out. A major spike in coal prices was initially heralded as an opportunity for the country’s vast mining sector, but “it quickly became apparent that the country could not rely on old rail infrastructure to act quickly enough”.
“Whether importers are going to look to new markets in Africa is probably going to be decided on a case-by-case basis,” Reid says.
This sense of caution has been echoed by influential market participants. South Africa-headquartered energy and chemicals giant Sasol warned in its annual report for 2021/22 that inflationary pressures could have an adverse effect on its oil and gas business, giving rise to risks around energy-related feedstock costs, supply chain disruption, price volatility and monetary policy.
Oil: high prices bring high costs
One of the concerns for Africa’s oil exporting nations is that higher revenues from selling crude oil during a price boom could be offset – or even exceeded – by rising costs in other areas.
A senior banking source based in East Africa, speaking on condition of anonymity, says the region is “highly dependent on refined products on the energy side, largely from the Middle East, because there is no refining capacity here”.
“There are gas reserves, for example in northern Mozambique and the south of Tanzania, and oil reserves in north Uganda and north Kenya, so of course those projects are more in the money now due to the price increases,” they say.
But exporting oil or gas to be refined elsewhere, then imported as fuel, generally proves more costly overall than extracting and processing raw materials domestically, the source points out.
“Often the margin is higher for imported finished goods once the value has been added, so although you might earn a little more on exports with higher oil prices, the cost of imported refined oil products is even higher,” they say.
There is a similar lack of refining capacity in West Africa. In Nigeria, crude oil accounts for over 90% of outgoing goods trade per year, yet Africa’s largest economy and most populous nation is wholly dependent on imported petroleum products.
A refinery in the Lekki Free Trade Zone east of Lagos – the brainchild of Aliko Dangote, Africa’s richest man – is expected to process 650,000 barrels of crude per day, making it one of the largest refineries on the planet. However, the refinery’s construction has encountered a series of delays, and is now not expected to become operational until mid-2023 at the earliest.
Nigeria’s government also provides a petrol subsidy, which this year is expected to cost around US$9bn. In effect, higher export revenue for the state-owned Nigerian National Petroleum Company is immediately offset by an equivalent rise in subsidies on imported fuel.
Criminal activity, such as pipeline vandalism and oil theft, has also dented the country’s crude oil output. In July, production fell to its lowest level in over 30 years. Coupled with growing civil unrest over rising food prices, the government is faced with an unstable domestic situation.
“Theoretically, Nigeria should be greatly benefiting from this boom, but the country is unable to refine its own fuel supply, so is also reliant on increasingly costly fuel imports,” says S-RM’s Reid.
“That’s being further hampered by currency weakness, and there are also very real issues around cost of living and fuel shortages,” she adds. “We have already seen protests over fuel shortages, and as the purchasing power of Nigerians is eroded further, there is potential for more unrest.”
There are few clearer examples of political and civil disruption limiting the chance to benefit from rising oil prices than in Libya. Despite being a major producer of crude oil, a stalemate between rival governments in Tripoli and Sirte “has led to the inability to resolve a protracted argument around oil revenue distribution, and control of security around oil facilities across the country”, Reid points out.
“Between April and July 2022 there were blockades and protests specifically targeting oil infrastructure, exports had to be paused, and that resulted in a loss of around US$3.5bn in oil revenue over that period.”
Metals: a double-edged sword
Exporters involved in Africa’s vast metals and mining sector face a similar conundrum to their peers in oil and gas.
Though higher prices have increased revenues, and demand for commodities such as lithium is growing rapidly as the transition to renewable energy accelerates, a combination of high operating costs, infrastructure limitations and socio-political disruption has clouded the picture.
As a major exporter of iron and steel, minerals and precious metals, South Africa was able to shrink its fiscal deficit as prices rose, particularly for platinum group metals. Tanzania has also been able to manage its balance of payments as a result of higher prices for gold and other minerals.
“Also, with the energy transition, demand for cobalt and copper from the Democratic Republic of Congo is really increasing,” the banking industry source says. “That combination of higher prices and increased focus on renewable energy is generating more income for these countries.”
However, in South Africa’s case, domestic disruption has again proven a limiting factor.
“We’ve seen disputes with the unions, issues with ageing and vandalised port and rail infrastructure, power outages and fears over cost of living, particularly with rising fuel and food prices,” Reid says. “Again this has limited the degree to which South Africa has been able to benefit from rising commodity prices.”
Johannesburg-headquartered gold mining company AngloGold Ashanti said in its annual report for 2021 that inflation – along with labour shortages and lingering pandemic-related disruption – prompted a downward revision of guidance in August that year.
“Inflation, which was already a concern at the end of 2021, is forecast to increase further, posing a more material risk for the global economy and our business,” said chairperson Maria Ramos in her opening statement.
The report adds that key goods and services used in production were also negatively affected by inflationary pressures.
Australian mining giant Rio Tinto, which has operations in South Africa, Mozambique, Madagascar and Guinea, says in its financial statements for the first half of 2022 that price inflation reduced its underlying EBITDA by US$595mn, in part due to higher fuel prices for trucks, trains and ships, as well as higher costs associated with site closures.
A report published by the UN Conference on Trade and Development (UNCTAD) in July 2022 suggests that many African commodity exporting countries may be stuck in a “resource-curse trajectory”, which it labels “a primary concern”.
In this scenario, commodity-dependent countries increase expenditure during price booms, buoyed by soaring export revenues from the metals and energy sectors. Theoretically, gains made during positive cycles could be used to build resilience for future downturns.
In reality, however, such expenditure typically causes debt to grow, creating longer-term fiscal weaknesses.
“The evidence shows that the overall economy in commodity-dependent countries is destabilised when prices drop sharply,” it says. “Tax revenues fall, governments discontinue public expenditures on selected public goods, domestic economic activity shrinks, credit dries up and debt increases, along with the number of firms’ non-performing loans and bankruptcies.”
UNCTAD finds that 45 African economies are classed as “commodity dependent, with highly volatile revenues due to the price boom and bust nature of the market”. It gives that label to any country whose primary commodity exports make up more than 60% of all goods sold internationally.
According to the report, the solution to this issue is not a short-term one. “The remedy for dealing with commodity dependence is export diversification,” it says. “The central motif of this policy lies in the improvement of the country’s resilience against the kind of external shocks that affect commodities prices.”