China and Base Metal Beneficiation in Africa

What China is Doing to Africa

‘If Botswana wants to refine copper it will not get the voluntary agreement of the mine owners. They want off-take agreements that give them maximum flexibility which means they will want to sign agreements that are for the life of the mine. The Ministry of Minerals Energy and Water Resources must put its foot down and say no and give the copper miners the same deal that was given BCL decades ago- a five year renewable off-take agreement that terminates when Botswana has its own refinery. If we do not do this as a first step then in thirty years we will be left with holes in the ground as in the case of BCL and Tati. The next step will be to assure that a refinery is actually built.’

This week Botswana’s emerging as well as existing copper and base metals firms along with government are meeting in Maun to discuss the road ahead for beneficiation in the country. Two things are pretty clear. The copper companies will want nothing to do with  the country’s desire to beneficiate its base metals and, at least for the moment,  the iron ore and coalminers  will. It is rare that a simple answer explains  such a difference but to bend slightly President  Clinton’s very successful election campaign  slogan against George Bush the Elder in 1992- ‘it’s the price –stupid’.

For the country’s emerging and existing copper miners the price of copper remains reasonably firm and while July prices are at USD7,115 clearly off its February 2011 peak of around $9,600 per tonne these decreases do not begin to compare to the hammering that the price of  coal and iron ore have taken over the same period. South African coal export prices are at $74/tonne or  roughly half what they were at their peak of $125/tonne in April 2011. The July spot price for 62% Iron ore  is approximately $90 again  approximately half its 2011 peak. Given that it costs the same to truck a tonne of copper concentrate as it does a tonne of low grade coal and iron , coal can only be transported by rail and copper concentrate can reasonably be trucked, if governments are willing to allow the mining companies to clog up and  destroy the nation’s roads.

The interests of those who own iron ore and coal assets in Botswana is at the moment  completely different to that of the copper miners. Copper and nickel companies are not the slightest interested in beneficiation i.e. processing in Botswana. But iron ore and coal companies are, in the absence of an effective railway, desperately looking for any way to beneficiate their low cost  products locally and to find local markets. Its all about the price and the cost of transport.  The iron ore deposit owners are looking at producing pig iron and the coal mine developers are all desperate to establish power plants at their mine heads to export electricity to Zambia, South Africa and Namibia. They are unwitting but natural allies of those who do not just see commodities but see the birthright of the people of Botswana as a vehicle for its development and transformation.

Copper concentrate is approximately 27% copper and hence roughly three quarters of  the trucks going from the  mines in Botswana and the Western provinces of South Africa are simply clogging and destroying roads by carrying waste to Durban which will then be shipped to India and China. Why would anyone carry waste so far you ask, rather than ship it as refined copper cathode? The answer is -‘It’s the price stupid’

China and the Great Compression

The world’s biggest market for copper is China and they have undertaken industrial policies over the last few years that have expanded their capacity to smelt and refine copper well beyond their domestic supply of concentrate and even above what they can be reasonably acquired from mines in proximate markets. Their copper smelters and refineries were  operating at levels of capacity of around 60% in 2013 and yet China continues to build ever more and larger refineries. This over-expansion has meant they have been desperate to acquire concentrate so they can increase their rate of capacity utilization. This in turn has driven down smelting and refining margins over the last decade that there were reports that in 2011 Chinese smelters were willing to refine for prices close to zero just to get the capacity through their plants.

The consequence of the Chinese industrial policy is global. All over the world countries that were once major refiners of copper such as the USA and Australia have moved out and even the world’s biggest copper miner- Chile has not been expanding its refining capacity significantly preferring to sell concentrate to the Chinese. This ‘Great Compression’ of copper refining margins caused by Chinese subsidies and industrial policy towards its state owned enterprises is the flip side of the rising copper and base metal prices which has so enriched large parts of Africa over the last decade. African miners don’t want to build refineries and only do so when they are forced as in Zambia. Why refine when the Chinese will do it for peanuts? While the Chinese have enriched the miners and the coffers of government their policy  has meant Africa cannot easily develop beyond digging holes in the ground and selling raw material to eventually enrich China.

China has provided massive benefits for all base metal miners driving up prices to achieve the supply needed for the frenetic pace of development and industrialization. But the Chinese know that it is not just a matter of importing copper cathode for wire and pipe but, like the Japanese before them, controlling this middle part of the value chain gives your end users of those base metals  a commercial advantage over foreign competitors. Japan, which has almost no mines, almost no electricity and relatively high cost labour was for three decades in 1970s’- 2000 able to refine and smelt aluminium, iron and copper from mines they partially owned in remote locations in Asia and Latin America, which allowed them to buy the base metals at prices that gave their steel, automobile and ship builders an enormous commercial advantage over Europe and America.

By compressing the margins at the middle of the value chain for products like copper, aluminium  and iron China is pushing more and more industry towards its shores. As a result its citizens are having trouble breathing for the toxic fumes and pollution this policy creates but it is transforming the country. What Chinese policy makers are doing  is giving their country commercial advantage in a similar way to what Japan did four decades ago. And just as Japan wiped out large segments of the American and European automobile, steel and ship building industries, China will do exactly the same in its down-stream industries. There was a great deal of mystery in the 1990’s about the reasons for Japan’s success at the time. Much of the discussion was about the apparent technological and management superiority of Japan but in reality Japanese policy gave a huge price advantage to their automobile, steel and ship makers producers. It’s the price- stupid!

Where to Botswana?

For certain we will repeat the same pattern as we did 30 years ago with the huge  BCL copper-nickel project. At the beginning of the project President Sir Seretse Khama demanded that the two main partners, Anglo and AMAC build a refinery at Pikwe. AMAC, point blank refused saying it had a copper refinery at Port Louisiana and was not going to build another. It was in the BCL project because it could acquire concentrate for its own refinery. As a result we made a blunder and moved to produce matte which is 70% copper rather than concentrate. This meant that Botswana’s matte was in high demand because there was little waste to transport and hence giving even less reason for refining copper and nickel locally. 

If Botswana wants to refine copper it will not get the voluntary agreement of the mine owners. They want off-take agreements that give them maximum flexibility which means they will want to sign agreements that are for the life of the mine. The Ministry of Minerals Energy and Water Resources must put its foot down and say no and give the copper miners the same deal that was given BCL decades ago- a five year renewable off-take agreement that terminates when Botswana has its own refinery. If we do not do this as a first step in thirty years we will be left with a hole in the ground as in the case of BCL and Tati. The next step will be to assure that a refinery is actually built.

A copper refinery, in and of itself, is really not much of a development for Botswana. It is capital intensive, creates few jobs and normally lots of pollution. But if we connect the dots by having refineries and of copper and nickel and zinc and iron there is much that can be done to assure that the youth of Botswana have a future with relatively good jobs. This is especially so if we price electricity to reflect our abundant coal resources. If we want to walk a road to industrial development it is not impossible as some economists suggest. We do not have to put the nation’s youth into dead end jobs in call centres to export services. We obviously cannot copy China and Japan as we have to find and walk our own road, but what they have shown is that when you have the right policies, the right infrastructure and the right prices great things can be achieved.

These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.