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Last August The Economist published an interesting piece on Africa’s population transition; while still an outlier compared with the developing world, the continent’s total fertility rate, which was over six in 1990 compared with two in East Asia, is expected by the U.N. to halve in sub-Saharan Africa by 2030 and then fall below 2.5 by 2050. The article poses the question whether or not Africa will be able to capitalize on what it labels the “demographic dividend”:
As societies grow richer, and start to move from high fertility to low, the size of their working-age population increases. The effect is a mechanical one: they have fewer children; the grandparents’ generation has already died off; so they have disproportionately large numbers of working-age adults. According to a study by the Harvard Initiative for Global Health, the share of the working-age population will rise in 27 of 32 African countries between 2005 and 2015.
The result is a “demographic dividend”, which can be cashed in to produce a virtuous cycle of growth. A fast-growing, economically active population provides the initial impetus to industrial production; then a supply of new workers coming from villages can, if handled properly, enable a country to become more productive. China and East Asia are the models. On some calculations, demography accounted for about a third of East Asia’s phenomenal growth over the past 30 years.
One nation explicitly predicted to benefit from said dividend is Mozambique, a country still suffering the effects of a brutal civil war following its independence from Portugal in 1975. Yet per last week’s Economist, much has changed since the peace deal officially ending the carnage:
At the end of the civil war in 1992, Mozambique was arguably the world’s poorest country. Its transport, education and health systems were in ruins. Many Mozambicans with marketable skills had fled. But now its economy is one of the fastest-growing in the world. In the past 15 years it has swelled by an average of 8% a year, dipping slightly to 6% during last year’s global meltdown, with nearly 7% expected this year, well above the 4% the World Bank forecast for southern Africa as a whole.
After South Africa, which imports electricity from the continent’s most powerful hydroelectric plant, China and India continue to be the country’s biggest foreign investors, keen to feed their voracious resource appetites and specifically their supplies of quality, coking coal (although India is one of the world’s biggest producers of coal, it produces only limited quantities of the coking coal needed by its steel plants). In late June, China announced that it had agreed to invest $1bn in a coal project in Mozambique’s Tete province, and India sent yet another trade delegation two weeks ago to “consolidate friendly relations between the two countries.”
Coking coal could indeed be a feather in Mozambique’s macro cap, though the extent to which the country can profit from an expected continual surge in demand will be dependent on improved infrastructure, noted a recent research piece from MF Global which concluded that the coking coal market had better long-term fundamentals than the iron ore market, and furthermore that Mozambique and Mongolia have the potential to be “potential game changers” on the supply side – but only from 2015 and “conditional on infrastructure”. At present however, it noted, Mozambique suffered “severe limitations on its rail and port infrastructure.” While critics of the BRICs’ resource romp in Africa contend that the rents gained from commodity-rich governments are often inadequate and/or squandered by opaque political elite decision making, one byproduct of foreign investment is generally an immediate upgrade in infrastructure. And if coking coal can be the impetus for the above-related demographic dividend to take shape, then the commodity loss can indeed be seen as pie-expanding instead of zero-sum.
Kenmare Resources plc is quoted on the official lists of the Irish and London Stock Exchanges (London:KMR). Its principal activities center on the exploration for commercial deposits of natural resources and the development and operation of mines. For example, the firm’s main asset is the Moma Titanium Minerals Mine, located on the coast of Mozambique. The Moma Mine contains reserves of heavy minerals which include the titanium minerals ilmenite and rutile, as well as the high-value zircon mineral. In addition, Kenmare have acquired a Mozanbiquan uranium exploration license. Titanium is considered a valuable resource for industrial producers because it is added to paints and pigments to make the color more opaque. Currently, the titanium market is dominated by a small number of giant mining companies, such as Rio Tinto and Anglo American, who account for over two-thirds of the world’s supply of the mineral.
As to zircon, Kenmare recently announced that its first shipment of the mineral was made early last month. Zircon prices have increased substantially in recent months, it noted, adding that it expects that further increases will be forthcoming, which will benefit Kenmare as its zircon contracts are priced at market price.
Michael Carvill is the firm’s Managing Director, and his story is an interesting one.
Another piece, from Energyexec, details Carvill and Kenmare’s arduous journey:
20 years in the making, it has been a long road for the exploration group, but Kenmare is delighted that Moma, its principle asset, is finally up and running.
The project has had more than its fair share of ups and downs, including considerable problems with certain equipment supplied under the construction contract, which has had to be replaced under warranty, as well as a cyclone. But that is all in the past. This is now, and this is the future.
“We are delighted that Moma is up and running,” says Michael Carvill, Managing Director. “It is one of the world’s largest titanium-bearing mineral sands deposits and I think it contains more than 200 million tons of ilmenite plus rutile and another associated product called zircon. It is well over 100 years worth of mining.
Carvill also mentions the company’s social contract, so to speak, with the surrounding community.
“We have developed the Moma Development Association and have put a social development plan in place,” explains Carvill. “The plan focuses on maximizing the benefits of the mine to create secondary economic opportunities within the local communities. We hope to generate long-term sustainable economic opportunities in the local communities that are independent of the mine and to mitigate any possible negative impacts.”
Finally, it is interesting to note just how complex the financing was for Kenmare’s Moma mine to be realized, in part due to the fact that titanium minerals are not a hedged commodity, and also due to the location of the development (2,000 kilometers north of Johannesburg, a natural base for infrastructure and supply). The deal ended up being the largest structured finance package constructed by a non-major mining company, per Project Finance Magazine, winning it the “Mine Finance Award” back in 2004. Quite a coup for a company that had a market capitalization of only £81m at the time.
Of the $400 million total project costs, equity made up $131 million, while bank debt comprised $269 million. The debt was split into $203 million senior debt, and a $66 million Euro-denominated subordinate piece. Lenders included the African Development Bank; the European Investment Bank; ABSA, a South African commercial bank; and finally a Dutch development institution, FMO.
Analysts estimate that Moma could bring in annual revenues of $85m over a 20-year period with operating costs projected at $23m a year over the same interval. Sales contracts covering more than half the annual revenues for the first five years of operations are also in place.
Jatropha=agrofuel?
The frontier market for biofuels is exploding, and sub-Saharan African countries, primarily South Africa, Angola, and Mozambique, may soon become the leading biofuel and carbon credit suppliers to world markets. Biofuels, generally defined as liquid or gas fuels derived from biomass, produce significantly less ozone-damaging carbon emissions than fossil fuels such as coal and petroleum. Overall, many expect that the biofuel market in Africa will help the continent begin to realize its agricultural potential, bring real investment into irrigation technologies, and also lead to infrastructural growth and development. According to Njeri Wamukonya, an energy expert with the United Nations (UN) Environment Program, worldwide investment in bioenergy reached $21 billion (USD) last year. And as one pundit put it, “African countries are keen on [capturing some of this market] by transforming their expansive farmlands into ‘the next oil fields’.”
Under the current Kyoto Protocol framework (set to expire after 2012), the Clean Development Mechanism arrangement (CDM) permits industrialized countries with a greenhouse gas reduction commitment (labeled Annex 1 countries) to invest in projects that reduce emissions in developing countries as an alternative to undertaking more expensive emission reductions in their own countries–thus theoretically lowering the cost of net global greenhouse gas emission reduction through the financing of emissions reduction projects in developing countries that may lack the scale, expertise and capital necessary to effectively contain emissions on their own. Projects that reduce greenhouse gas emissions and contribute to sustainable development can earn saleable certified emission reduction credits (CERs). Countries with a commitment under the Kyoto Protocol can use the CERs to meet a portion of their obligations under the Protocol. The CDM operates under the guise of the UN Framework Convention on Climate Change (UNFCCC). And while the current portfolio of around 1,000 CDM projects worldwide includes very few biofuel-oriented projects, an article from July 2007, written by Katherine Constabile for The Africa Journal, states that “private and public sector institutions such as Agrinergy and the UN Conference on Trade and Development (UNCTAD) are currently working to streamline the CDM biofuel approval process, which will enable industrialized countries to facilitate biofuel projects in Africa for their benefit.” Increasingly, Constabile writes, “Africa will be a frontier for developed nations to diversify their energy supplies and attain carbon ‘neutrality.'” At present, only roughly 3% of all CDM projects are based in Africa, according to a December 2007 report issued by Yvo de Boer, Executive Secretary of the UNFCCC and the UN’s top climate change official.
Biofuel-related CDM projects in Africa are not without controversy, however. One example is a project announced in late 2007 to develop an integrated sugarcane facility at Homa Bay on the shores of Lake Victoria in Kenya, which seeks to foster a dual export and domestic system of sugarcane production, concentrating on both white sugar and biofuel production, and which may qualify for 217,000 tons worth of certified emissions reductions (CERs), of carbon credits. Once at full capacity, the project is expected to produce an annual amount of 100,000 metric tons of white plantation sugar for domestic sale, and an additional 259 million liters of fuel-grade ethanol for the export market. The project also seeks to add ethanol to Kenya’s domestic biofuel market. ‘Kenya has the agricultural capacity to produce biofuel at a good price while, geographically, being well-placed for access to the Asia market,’’ says Pierre Alain Puippe, global manager for biofuels at Fair Energy, a Geneva-based oil and biofuel company, and one of the project’s primary shareholders. ‘‘At the same time, Kenya is not a small country and can also develop an internal biofuel market.”
Proponents of the deal point out that the bagasse (the biomass left behind after sugarcane stalks have been crushed for their juice) produced by the facility will be enough to make the project self-sustainable in the long run in terms of its electricity needs, and that an additional 225,000 MWh of ‘‘green electricity’’ will be supplied to Kenya’s national power grid. But critics of the venture are quick to point out that biofuels may also exacerbate underlying problems, especially in relation to food and water supplies. Constabile writes that food industry analysts “fear [that] the introduction of the profitable and value-added biofuel market will lead many farmers to sell crops to biofuel producers instead of to local food markets, and [that] the cropfeed biofuel market will increase the price of food.” Tiberius Barasa, assistant research fellow at the governance and development program at the Institute of Policy Analysis and Research (IPAR) in Nairobi, reiterates this concern. ‘‘At the moment Kenya, like many African countries, is facing a problem of food shortages,” he says. “If, in the future, we are to use some of our corn or soy beans to produce biofuels, we could affect the supply of food in the country.’’ Moreover, some observers wonder about the risk that biofuels pose to regional water supplies, and especially to those regions particularly affected by drought.
But the relationship between biofuel production and food and water shortages is not necessarily that direct. Take Mozambique, for example, which offers arguably the most promise for biomass production in Africa, given its relatively superior governance, emerging agricultural infrastructure, production capacity and ideal agro-climatic and agro-ecological conditions for growing a myriad array of energy crops. The government of Mozambique seeks biodiesel from the shrub jatropha, an abundant, hardy, drought-resistant, oleaginous plant whose seeds produce up to 40 percent oil and which grows in harsh conditions and marginal soil that doesn’t otherwise support food crops, as well as ethanol from sugar cane. But since both feedstock have significant growth potential in the country, and because neither are significant sources of food for the local population, the issue of market distortion becomes moot. Furthermore, proponents of African biofuel production note that the net effect of biofuels may offset food’s short term price volatility. They argue that the launch of the biofuel market in Africa will actually “alleviate food insecurity as a result of technical assistance provided to farmers, lead to infrastructure improvements, and spur income generated by biofuel sales.” Thus, the argument runs, the development of Africa’s biofuel industry is in fact a means through which political will can grow for future, long term agricultural development in Africa.
Finally, how governments choose to allocate land may have the greatest impact on price fluctuations in food, rather than the mere presence per se of a biofuel industry. “Price rise will depend on whether or not oil crops are planted on arable land that could otherwise be used for growing food crops, and whether water is diverted from food crops to irrigate the biofuel plantations,” says Jeremy Wakeford, a senior lecturer in economics at the University of Cape Town in South Africa. To this extent, Mozambique’s Agriculture Minister, Soares Nhaca, pledged in January that the government would not allow the production of biofuels to compromise the country’s food security. “This is a government decision”, he said, “and work is under way across the country to identify land that can be used to produce biofuel, but always in the perspective of finding marginal land which does not conflict with food production.” And Mozambique’s government has already begun encouraging peasant farmers to grow jatropha on marginal land, he noted. As for water supplies, the hope is that biofuels will in fact be the necessary catalyst to bring attention to water capture and irrigation technologies that, as Constabile notes, are “often neglected areas in African development, as they require significant investment and technological capacity. Since developed nations benefit from the biofuel craze, political will and financial support to capture and recycle food water and tap into deep water tables will likely emerge.”
While China and the European Union (EU) are two of the main players in the continent’s current biofuels boom (the EU’s target of 5.75% of vehicle fuels being renewable by 2010 meant that one quarter of the Continent’s land would have had to be covered with biofuel crops), the government of Brazil’s President Luiz Incio Lula da Silva has established itself as the runaway leader, and countries such as Angola and Mozambique have joined forces with Brazilian companies such as Petrobras (the national oil company), for example, in the development of soybean-based biofuel. Brazil hopes to diversify its own biofuel supplies, while spurring worldwide demand, and has technical cooperation agreements in agriculture with both Angola and Mozambique, allowing for more efficient development of the agriculture biofuel feedstock industry in both countries. Petrobas recently joined with Eni, an Italian energy firm, to export biofuel sources to Italy, and the firms are reportedly planning to collaborate on the construction of future biodiesel plants in Brazil, Angola, and Mozambique. And two years ago, Embrapa, Brazil’s leading government body for agriculture and biotechnology research and the world’s leading institution for tropical research, opened an office in Ghana’s capital, Accra. Since then, Embrapa Africa has also worked in Angola to develop the country’s soybean biofuel industry, and in Mozambique, to kickstart biofuel research capacities in the country’s Institute for Agrarian Research. Constabile writes that “Angola is slated to be Petrobras’ most critical destination for biodiesel production, and Mozambique for ethanol. Both countries are large, with relatively small populations and thus, thousands of hectares available for biofuel crop growth. Angola has one of the largest non-forest agricultural lands in the world, even taking into account lands that cannot yet be tilled due to landmines and that are already tilled for food purposes. The country’s biofuel export potential is estimated at approximately six exajoules of bioenergy per year, the equivalent of 2.7 million barrels of oil per day (bpd).” As per ethanol, Constabile notes that “an average sized ethanol plant costs approximately $85 million to build–ethanol production requires much more investment than biodiesel, which can be produced relatively cheaply on a small scale,” and that “due to Mozambique’s relatively stable political and investment climate, the UK is [also] presently seeking to construct an ethanol plant in the country.” The largest announced project is the launch of the London-listed Central African Mining and Exploration Company (CAMEC) biofuel project, which was unveiled last October. CAMEC will invest $510 million (USD), and produce 120 liters of ethanol from 30,000 hectares of sugar cane. The venture is expected to create 7,000 jobs, and the plant is expected to open in 2010.
Another deal in regards to ethanol production in Mozambique was finally implemented last month, and may be a sign of things to come for CDM projects in Africa. In July, the national government approved an 18,00 hectare bioenergy park that will provide 213 Mgy of ethanol, 92 MW of energy, and 2,600 jobs. The sugarcane ethanol project will be constructed at a cost of $280 million (USD) and is expected to be completed in 2013. The project is spearheaded by Principle Capital, along with local investors, and will take place in Dombe, in Manica province. Mozambique’s President Armando Guebuza said that biofuel development “will not dislodge Mozambican farmers from their lands,” and that government policy would require the use of underutilized or empty lands, would avoid using lands used for food production, and that Mozambique will refine its own raw materials. The government has set aside over $700 million for biofuel research, production and promotion, and many energy experts speculate that Mozambique has potential to be a ‘biofuel superpower’. According to Cornelis van der Waal, an industry analyst with Frost & Sullivan, a South Africa-based consultation company providing advice on development policies, the country has “sufficient rainfall for extensive production of sugarcane, which is currently the most efficient crop for ethanol in terms of production cost, being much faster to process and producing more sugar (thanks to its water content) than maize or sorghum.”
One unusual success story for biofuels in Mozambique began at the Ross School of Business at the University of Michigan in the U.S. There, a team of students known as ‘Mozergy’ discovered jatropha while evaluating renewable-energy technologies to serve BHP Billiton’s (the world’s largest mining company) primary energy need – electricity – in Mozambique (BHP Billiton has committed $300 million to reduce its global-emissions). The students soon concluded that an agricultural/biodiesel enterprise could also help local farmers generate income. And although BHP Billiton did not want to launch into biodiesel production itself, the students eventually made Mozergy into a stand-alone business model that could help the company and the local Mozambique farming community. “[Mozergy] saw biofuels as a way to provide local farmers with an additional cash crop, to help them modernize their agricultural practices, and to diversify their agricultural mix,” says Mike Hartley, one of the firm’s founders. And if ventures into biofuel production from jatropha sound familiar, they should. This past June, Odeveza, a joint venture group of Canadian and Mozambican firms, announced that it would invest $150 million into the production of biodiesel from jatropha over the next six years. “The $150 million investment is aimed at intensive jatropha production for biodiesel extraction in an area of over 70,000 hectares identified in the districts of Barue and Gondola in Manica province and Buzi in Sofala province,” company director, Fernando Azevedo told reporters in Maputo.
JGW
Frontier Markets 