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An Emerging Shift in Leveraging Natural Resources in Africa

Columnist.

Lauri Elliott in South Africa.

With the growing global population and consumption by that population of food, water, and other resources, money will flow to the regions that have those resources and Africa happens to be the prime location. 

I won’t provide the statistics because you can find that information in many places. However, I will share one statistic - 60% of the arable land available in the world is in Africa. Just in case you didn’t know or forgot how big Africa’s natural resource pool is. In fact, according to a World Bank geologist, only 30% of Africa’s mineral resource potential has been mapped.

Let me first state that in no way should Africa solely, or largely, rely on natural resource wealth for development or prosperity, but as most economists agree, the next ten to 20 years will bring strong increased demand for commodities until other solutions, such as solar power and food technology, become more mainstream to handle the increasing demand. Therefore, African countries need to leverage every option to spread development and growth inclusively during this period based on the strengths they have.

Every African needs to understand the strategic shift this creates for the continent. If governments and communities play the hand they have been dealt wisely, they will erase much of the poverty in communities surrounding these natural resources. First, there are very few places on the earth that have the variety and abundance of natural resources like Africa, which means developed and emerging nations will be clamoring for these resources in Africa. Second, demand for the resources will grow on the continent itself as people move up the socioeconomic scale and consume more. While other nations are panting after resources, e.g., China, to help support their growth, Sub-Saharan Africa will have the majority of what it needs in terms of raw resources and basic labor.

The result of the climax of this eventuality is that Africa will have significant geopolitical clout, which needs to be used in balance so that the global economy is not shut out because today’s economic growth involves a combination of local, regional, and global markets. While it will be evident that Africa and the world still need each other, the value Africa brings will be clearly articulated and demonstrated. Because Africa possesses an abundance of natural resources, and other strengths, you will see the world converging on Africa like it has with China (and even more so). Once this reaches critical mass, African countries will have the geopolitical clout they have been seeking.

Let me demonstrate how some of aspects of this strategic shift is occurring. One of the key world systems in place is commodities brokering, which disrupts the natural supply and demand cycle for commodities. They can push up prices and hold onto supply to make “profit.” This system doesn’t add much value to the value chain, but it ends up taking wealth from the value chain of which it is not a part.  The volatility we see in prices for commodities has a lot to do with this system. They bet to win on shortages in agriculture, oil, and minerals, exacerbating an already fragile position. Only a small percentage of people and organizations benefit from this system as it stands. But one of the losers of Africa’s strategic shift will be this way of doing business. Its current form will evolve into something different as it doesn’t add much, if any, value.

As an example, the Ethiopian Commodities Exchange (ECX) was developed several years ago so that Ethiopia would see more benefit from the crops that it produces. ECX has developed a value chain that ties commodities, like coffee and beans, produced in rural areas to the global markets. Instead of working through brokers, agricultural commodities are sold directly to the world at market prices.

Another simple example is DRC’s mining code change which will no longer allow foreign businesses to extract minerals without creating a local presence and adding value. Other countries are tightening the grip as well, e.g., the export of scrap aluminum is prohibited in South Africa, Nigeria, East Africa (soon), etc. One reason is that local demand for metals for manufacturing is growing and exports cause short supplies in African countries. Another reason is that foreign firms buy the resources cheap and then ship to facilities overseas to process, making big money on them but not bringing much inclusive benefit in African countries.

Because the demand for commodities will remain strong for a long time and the dynamics of getting access to these natural resources are changing, this will force foreign interests to re-think their business models because the demand for the resources does not go away. You will see more private investment directly into mining and processing facilities on the continent as the Chinese have been doing.

I get a lot of inquiries about commodities and I tell everyone the same thing. Business has changed. You either invest in operations in the country, do it right, and bring value, or you will find yourself locked out of opportunities on the continent within the next five to ten years.

Another interesting example is for minerals required in technology like coltan. The story of how militias have been selling coltan from the DRC on the black market while exploiting and placing local Congolese in bondage is well reported. A consequence was that industries and even governments instituted conflict-free mineral regulations to prevent companies from promoting this problem.

The conflict free minerals legislation passed last year in the United States, as part of a financial reform bill. Way before then, I shared how simple (not necessarily easy) it would be to build legitimate supply chains in the DRC to bring inclusive benefit to the country, eliminate a lot of the black market, and improve the supply to world markets. To me it was an obvious solution, but one thing about big industries and systems they do not change for the most part until something disrupts their business models.  

Now that this is law and creates a real problem for major technology companies like HP and Sony in getting adequate supply of coltan and other minerals, it was unveiled this week that 21 electronics companies, NGOs, and governmental agencies have formed the Public-Private Alliance for Responsible Minerals Trade. What is one of its primary objectives? Build a legitimate supply chain for minerals from the DRC through certified mines.

While I won’t negate that corporations can have a conscience because I believe business done right brings benefit for everyone and I think the private sector is the main tool for driving economic growth, they still didn’t change until a disruption in supply of a critical raw material occurred.

Also, I want to note that, on the whole, Africa’s natural resources are seen as commodities, which while necessary, do not give the perception of having high value except when they are in short supply. What consumers see being of value is the end product, e.g., mobile phone and clothing. Therefore, much of the potential in creating wealth is passed onto others instead of Africa because it is not producing the intermediary or end products. This piece still needs a lot of work.

However, one of the dynamics that will change in the next decade or so is the understanding of what is of value and who holds that value. In an interview I conducted with Denis Slieker of Face the Future recently, he said that a new value has been placed on African resources because of climate change. The mere fact that communities who plant trees, which helps mitigate climate control, and make money from their efforts by selling their carbon credits on different carbon exchanges means Africans are creating a service out their stewardship of the land in their control – and the world finds value in that. I believe this is the beginning of many shifts in the concept of value, which will be favorable to Africa more than any other region.

In conclusion, this push for commodities will not last forever even though it is expected to last at least another decade. The time to leverage is now. What we have to realize, and why I share about these things, is that everything has shifted so that Africa’s future is in its own hands, and not in the hands of someone else. It is extremely important for governments, the private sector, and NGOs to re-evaluate Africa’s position and leverage its assets to ensure inclusive, sustainable growth on the continent.

 

Lauri Elliott is a strategist with over 25 years of business experience, specializing in global business, innovation, technology, and new ventures and start-ups.

 

Visit Lauri Elliott's page

 

Featured image is Victoria Falls, Zambia. Source: Kounosu

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