The journey to revive Nigeria’s mining industry could be similar to walking through a minefield that will keep blowing holes in the government’s pocket.
Upon election as President, Buhari vowed to help diversify the economy and ease the country’s dependency on revenues from oil.
In a sign that President Buhari considers the mining sector as a key part of his economic agenda, and that he plans to take it very seriously, he singled out one of the more cerebral and loyal politicians at his disposal, Dr. Kayode Fayemi.
Dr. Fayemi is a highly regarded member of the presidents’ executive team, and one of the select few touted as Buhari’s political ‘sons’: a designation that is seen shared with Babatunde Fashola. Fayemi was the head of strategy for the APC party during the presidential election.
The government is justified in trying to crack open other sectors of the economy to raise revenue. But will the focus on the mining and solid minerals industry pay off?
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The current state of the commodities market does not suggest so.
In addition to the subdued oil market, the mining sector is flailing as much, if not worse.
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Doubts that the sector will be a viable revenue contributor to the economy is very well founded.
Although the mining sector, which has being neglected for so long, needs to be paid attention to, the current state of the market for mined commodities doesn’t not provide an economic justification for a renewed focus on the sector, because the costs will far outweigh the economic benefits from investing in the sector.
This year the Bloomberg World Mining index has averaged -4.3% since turning negative at the end of September.
The price of iron ore has fallen 23.34% year to date. Copper has slipped -25.55%, while gold is down 11.46%.
Tin has fallen by -24.03% in the global market, lead has fallen by-14.22%.
The economies that are hinged on mining are not faring any better too.
South Africa’s economy, in which mining accounts for 60% of exports, has been flirting with recession, contracting 1.3% in the Q2 2015.
Australia home to one of the biggest mining companies in the world (BHP Billiton Limited) has its thermal coal price off 62 percent.
Recently, the chief financial officer of Barrick, the world’s biggest gold miner, Shaun Usmar, in an analyst call, ascribed the company’s fair performance down to favorable currency movements and lower fuel prices rather than the company’s own efforts in the its third-quarter earnings. This suggests that the company would have fared far worse, were it left to the vargaries of commodity price fluctuations.
As a matter of fact the only mining companies generating any economic value that doesn’t round to zero are two state-controlled coal miners: India’s Coal India, whose share price is up by 10.8% and China’s China Shenhua, up just 1.2% this year.
Their performance is due to unmatched strategic advantage. For instance, Coal India produces around 81.1% of India’s overall coal production, and it commands nearly 74% of the Indian coal market, feeding 82 out of 86 coal-based thermal power plants in India.
Coal India accounts for 76% of total thermal power generating capacity of India’s utility sector.
Rio Tinto, one the world’s largest mining companies squeezes out a paltry 0.3% spread over its cost of capital.
Newmont , another mining giant, scrapes in with 0.1%.
Most other mining companies are loss making. These figures are bound to get worse if interest rates rise and drive capital costs higher.
Just like the oil sector, which is also in a down-turn, there is not enough demand to keep the industry afloat.
Though, we do not completely know Fayemi”s game plan with regards to Nigeria’s mining industry, but improving transparency and cleaning up the sector to generate 3rd party investment interest should be the focus rather than government’s own investment. President Buhari and Dr. Kayode Fayemi will really have their work cut out, and might be walking through a mine field in their long journey to revive this sector.