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Could African mining spark another super cycle?

Armenuhi Knyazyan Armenuhi Knyazyan

As I write this representatives from our Grant Thornton African and UK mining teams are at the Investing in African Mining Indaba Conference 2016 in Cape Town.

One thing we are keen to find out is whether African mining has the potential to kick-start another commodities super cycle. I believe it could.

Though it has been another challenging year for the sector, medium- to long-term prospects are exciting if it can address a number of important issues.

Weakening growth in emerging markets and global oversupply have halted the commodities super-cycle and continues to impact the sector. Job cuts could be looming in the shorter term, leading to potentially tough labour market issues.

Africa’s infrastructure still needs work and mines are suffering power cuts and inadequate water, road and rail links. Finding more investment to address this will be a crucial theme at Indaba.

Sustainability, transparency and cooperation between governments and mining players will also be important topics. There has been some progress in these areas recently but investors want to see more as political certainty is a key factor in their decisions.

However, I can detect signs of investment confidence amid the gloom. For example, gold mining projects are attracting the capital they need and last year Japan said it will increase support for African mining investment.

African mining stock prices have started to rebound, helped by a weaker US dollar, and I think this rally could continue, as globally investors seem to think the worst is over for miners. Also the gold price is likely to keep rising this year and gold miners, who have become much leaner, are generally doing better. This could create a positive ripple effect.

But even if exports continue to struggle, I think the big opportunity for Africa will be to tap into burgeoning domestic demand. As discussed in Grant Thornton UK's recent it is one of the fastest-growing regions in the world and its middle class and overall population are set to mushroom over coming decades.

With the right investment, infrastructure and political conditions, African economies could be set to grow exponentially, boosting demand for their own natural resources. With its low labour costs, the continent could become an attractive destination for manufacturers. This would feed further demand for commodities, which could kick-start the next commodity super cycle.

Our teams at Indaba are looking forward to finding out more about what present opportunities there are to invest in these developments; and to discussing ways that mining executives can set their strategies to attract buyers or sellers, and to access funding from traditional areas and from the many existing and emerging alternative sources.

Continuing to drive cost efficiencies and productivity improvements to enhance funding and valuation prospects will be crucial.

Many are still focusing on survival. But when the cycle turns, the survivors will be lean, fit and well placed to take advantage.

Linda Beal is Global Leader - Energy and Natural Resources for Grant Thornton