In mid-August, a deal was struck between Frelimo, Mozambique’s ruling party, and the main opposition, Renamo, to allow the latter to govern in several provinces where it won the majority of votes in national elections two years ago. While talks are still ongoing and there is no time frame as yet, not to mention the need for the cessation of violence, recent developments could have a decisive impact on Mozambique’s political fortunes and, by implication, its economic prospects.
Since the 2014 elections, simmering and increasingly uncompromising issues between the main protagonists have steadily been escalating in the country, which only emerged from a 15-year-long civil war in 1992.
Renamo, an organisation that has roots in the Rhodesian conflict of the 1970s and was accused of being a proxy of apartheid South Africa in the 1980s, refused to accept the results of the last elections. Renamo’s traditional strongholds are in the central and northern regions, where the most important mineral deposits are mostly to be found.
Both organisations have been holding on/off talks since violence began again in 2013, with a series of hit-and-run attacks attributed to Renamo, which have killed hundreds of people so far. The conflict has particularly impacted transport links – and mining companies have been among the most affected.
It remains to be seen whether a deal is conclusively cemented and, more importantly, if it brings a final resolution to the instability that has scared off investors and hampered infrastructure development. If it does, it will be of great benefit for Mozambique, which promised so much as a country but has run into a series of economic and political crises of late.
In late June, for instance, the IMF visited the country following earlier revelations that the government had hid the granting of more than US$1 billion in loans to several state-owned companies. The uproar over the loans followed accounts of a US$850 million bond that was issued to set up a tuna fishing company, but instead purchased naval patrol-type vessels that had no fishing use. There have been widespread allegations that politically connected people close to Frelimo, particularly those with military associations, benefited from this. As the scandals widened, the IMF and several other donor countries halted all funding and insisted on an investigation.
Mozambique’s government bond yields jumped to a record 18.94% after the IMF warned that the country’s public debt was ‘at an unacceptably high level’. As the crisis has escalated, the once stellar growth has slowed to 4.5% for 2016 (it was 6.6% last year) and the currency – the metical – has weakened more than 20% so far in 2016 against the US dollar, making it the second-worst performing currency on the continent after Nigeria’s naira.
In May, inflation topped 18%, forcing the central bank to raise interest rates for the third time in 2016 alone. The government has reacted quickly, saying it will take steps to stabilise the situation and promised to stimulate growth.
It will be of great benefit for Mozambique, which promised so much as a country but has run into a series of economic and political crises of late
Mozambique has been one of the continent’s fastest-growing economies in recent years, particularly with regard to the potential of offshore gas discoveries, which have attracted a frenzy of investments. Chief among these have been in the Rovuma basin, lying off northern Mozambique.
However, it is not just gas that Mozambique has in abundance. Mining also has huge potential, with coal in particular attracting massive investment mostly around the Moatize basin in the Tete province (one of the areas dominated by Renamo). It is estimated to hold one of the world’s largest untapped coal reserves, especially coking coal, which is used in the steel production process.
Foremost of the coal miners is Brazilian giant Vale, which is the majority owner of the country’s largest mine, Moatize (the fourth-biggest coal mine in the world). It has an estimated operational capacity of around 22 million tons per year (actual production was 900 000 tons in the first quarter of 2016).
Although Vale wrote down its Mozambique investment by US$2.4 billion earlier in 2016, it is putting effort into expansion – Moatize Phase II will come into production this year. Vale had been transporting coal via the 575 km Sena railway line to the port of Beira. The line, which can transport around at least 6 million tons a year, has been hampered by flooding, as well as attacks by Renamo.
Vale also operates the Nacala corridor, which runs in excess of 900 km (partly through Malawi) to Nacala-à-Velha, a new port on the country’s northern coast in the Zambezia province. The line can accommodate approximately 18 million tons a year. Vale has been concentrating on the Nacala line, moving 747 000 tons on it in the first quarter of 2016, compared to 241 000 tons in the last quarter of 2015.
Apart from Vale, Indian companies have started to show interest in Mozambique in the last couple of years, as evidenced by the selling by Rio Tinto in 2014 of its coal assets in the country to International Coal Ventures Limited (ICVL ) – a joint entity representing several Indian state firms – for US$50 million (widely considered a bargain by analysts). ICVL acquired a 65% stake in the Benga mine in the Moatize region (35% shareholding is with Tata Steel) and 100% each in Zambezi and Tete East mines.
In early July 2016, the Economic Times of India reported that ICVL was interested in setting up a 200 MW coal-fired power station in Mozambique, eventually ramping capacity up to 2 000 MW with the aim of supplying power not only locally but also to neighbouring countries.
Other Asian companies, such as Japan’s Mitsui – which acquired a 15% stake in Vale’s Moatize and a 35% stake in the Nacala corridor in December 2014 – are also active in Mozambique. New coal entrants, however, ‘will have to overcome the significant cost challenges involved in constructing a mine and related transport infrastructure in a low-cost coal environment’, according to an analysis of Mozambique by BMI Research, quoted in a World Coal report.
Aside from logistical challenges, the lack of sufficient and reliable energy has also been widely cited as a dampener on the country’s mining sector.
In addition to coal, there are also gold deposits in the Manica belt near Zimbabwe, with mostly artisanal mining taking place. As far as commercial operations go, in March this year Xtract Resources, a London Stock Exchange-listed company, announced it had bought a concession from Auroch Minerals only for reports to surface in May that Xtract had sold it on.
There are also rich deposits of tantalum, used in electronics. Mozambique is one of three historical tantalum producers in Africa, along with Rwanda and the DRC. Commercial tantalum operations have generally been small-scale in nature, and several mines have recently closed or been sold.
Despite the recent political setbacks, there is much to be positive about the country. As KPMG puts it: ‘Despite its infrastructure constraints, Mozambique’s sound business environment has been favourable to investment for two decades.
‘This fact, in conjunction with low taxes and a general lack of political interference, places the country and Southern Africa at the forefront of attractive mining destinations.’ Much is now dependent on the peace process.
