Mozambique's Coal Mining Sector: Building for Boom By - Christy Tawii
Mozambique’s Coal Mining Sector: Building for Boom By Christy Tawii
Mozambique has gone through turbulent political cycles, after experiencing two decades of a civil war, to become one of the fastest growing economies in Sub-Saharan Africa. This has been driven by economic and fiscal reforms, increasing foreign direct investment, attractive mining sector policies, as well as increasing infrastructure development.
Buoyed by the agricultural sector, Mozambique’s economy grew by 8.0% in 2010, from 6.4% in 2009. Foreign direct investment into mega-projects, notably the coal mines in Tete province, also provided significant benefits, resulting in mining foreign direct investment dominating the total foreign direct investment of Mozambique’s economy.
The Economist’s Intelligence Unit indicates that Mozambique’s economic outlook is bright, and will be underpinned by buoyant international investment in the manufacturing, mining and other supporting sectors. Mozambique’s mining sector is still in its infancy stage Mining only accounted for 3.0 percent of the country’s GDP in 2010. The country’s mining industry is predominantly driven by the aluminium sector, accounting for approximately 66.0 percent of the country’s mineral export sales revenues in 2010.
Recent geological data indicates the availability of major deposits of valuable commodities with high export potential, particularly in relation to coking coal. This has attracted significant attention from international mining companies, project development companies and financiers. Mozambique is positioned to become a significant coking coal producer in the next 3-5 years, notes Frost & Sullivan. Burgeoning demand and supply side constraints in other coking coal producing regions will spur the development of the Moatize coal field in Mozambique. The growing interest in the coal mining sectors, from international mining companies, is likely to increase the mining industry’s contribution to Mozambique’s economy which is expected to multiply two-fold from 3.0 percent currently to 7.0 percent by 2015.
There has been a significant inflow of foreign direct investment (FDI) into Mozambique’s mining industry in the past decade. The bulk of capital expenditure is invested in the construction and development projects in the coal mining sector, accounting for 61.0 percent of the total mining projects value. The International Energy Agency’s latest outlook expects world coal consumption to increase by 56% until 2035. Mozambique has major coal deposits and is expected to benefit from this increasing demand.
Furthermore, the growing global energy demand, rising coal prices and the rapid industrialisation and urbanisation in China and India are just some of the factors which are expected to accelerate the development of coal sector projects in Mozambique. This demand has resulted in international miners expanding existing facilities as well as investing in new facilities and infrastructure in Mozambique. Mining investment inflows have been originating from large scale mining companies in South Africa, Australia, Ireland, Brazil and India, with operations spread across Mozambique’s provinces of Manica, Tete, Zambezia and Nampula.
The Moatize coal field hosts large scale coal development projects which include Vale’s $1.66 billion Moatize coal project, Beacon Hill’s $61.0 million Moatize mine, Riversdale’s $1.50 billion Benga and Zambeze coal projects and Ncondezi Coal Ltd’s $376.0 million Ncondezi Coal project.
Mozambique’s coal production output has been range bound between 15,000 tonnes and 40,000 tonnes in the past decade, states Frost & Sullivan. Total coal production drastically declined to 3,400 tonnes in 2005 following production, equipment supply and infrastructural challenges. Beacon Hill Resources’ Minas Moatize is the first operating colliery in Mozambique after taking over the Mina Moatize from state company Chipanga XI mine in 2010. Coal production output increased sharply from 25,900 tonnes in 2009 to 35,700 tonnes in 2010, as a result of the re-opening of the Mina Moatize mine.
Frost & Sullivan projects the country’s coal production to grow sharply to 20.0 million tonnes of coal per annum by 2015. Rising foreign direct investment into coal sectors, coupled with the development of large scale coal projects such as Brazil’s Vale Moatize and Rio Tinto’s Benga and Zambeze coal operations, will account for the bulk of the increase in production.
In total, there are currently eleven large scale coal development projects that are collectively worth $7.6 billion in Mozambique’s mining industry, of which eight are pre-feasibility stage projects and three construction stage projects. The 8 pre-feasibility stage coal development projects are collectively worth $5.06 billion, while the 3 construction stage projects are collectively worth $2.00 billion. Rio Tinto’s Benga and Zambeze and Vale’s Moatize coal projects are collectively worth $5.50 billion and are the largest projects in Mozambique’s coal mining industry. This is followed by Talbot Group and Nippon Steel’s Minas de Revuboe $500 million project and Jindaal Steel and Power’s $440 million project.
In the foreseeable future, Frost & Sullivan predicts Mozambique’s coal production is likely to further increase to 110.0 million tonnes, as a result of expansion projects by other companies such Mozambi, Jindaal Steel, Nippon Steel, Eurasian Natural Resource Corporation, Eta Star and Coal of India. Mozambique is expected to become the second largest producer of coal in Africa, after South Africa, when these projects become fully operational. These large scale coal development projects are set to radically transform the country’s mining industry, as coal exports are projected to overtake aluminium exports, which traditionally dominated the country’s mineral export sales.
Increased global demand for coal, and the steady rise in coal prices in recent years, is pushing massive investment into Mozambique’s coal mining industry. Mining companies are planning to spend significant amounts of money in exploration, expansion of production capacity in existing mines, and the development of new mines and infrastructure to respond to the rising demand for commodities. Capital expenditure is expected to rise sharply, as mining companies in Mozambique invest in developing mineral reserves, equipment purchases and upgrading mining infrastructure. The significant increase in planned capital expenditure reflects the mining industry's confidence in the medium and long term outlook for Mozambique's mineral resources.
The absence of Black Economic Empowerment (BEE) requirements, coupled with substantial benefits and incentives, such as tax exemption from payment of customs duties and value added tax for investors, are some of the factors that will fuel or drive the continued growth of Mozambique’s coal mining sector. Furthermore, logistical and transportation costs of coal exports, to China and India, are expected to be significantly less than the costs of coal exports to these countries from South Africa.
However, a number of infrastructure issues need to be addressed for the Mozambique’s coal mining to become the hub of coking coal mining in Africa, notes Frost & Sullivan. The Tete province, that hosts the coal development projects in Mozambique, does not have sufficient rail and road infrastructure links with the ports at Beira, Nacala and Maputo. The anticipated increase in coal production is likely to highlight the inadequate transportation infrastructure, raising concerns on how to transport the minerals to the country’s major ports of exit. The Moatize-Beira railway is estimated to have an annual capacity of 6 million tonnes, which is insufficient to transport the combined maximum production of anticipated 50 million tonnes from Riversdale’s Benga and Zambezia projects and Vale’s operation in Moazite. The refurbishment of infrastructure through public and private sector partnerships and the government of Mozambique are assisting in providing efficient rail and roads. The Mozambique’s Ports Development Company is also planning to invest $1.00 billion over the next 20 years to improve infrastructure in the country's main ports to meet international standards.
Skills shortages, evolving mining legislations, environmental concerns, water shortages, regulatory concerns, and electricity supply shortages are some of the other issues that are likely to impede the development of new coal mines in Mozambique.
The continued push towards poverty reduction, infrastructure and investment in resource development and business friendly environment will ensure broad policy continuity for economic growth in Mozambique. The vastness of unexploited coal resources that Mozambique is endowed with represents major investment opportunities for the exploration, extraction, and mineral processing companies. A significant amount of capitalisation is required to improve infrastructure and develop capacity processing plants equipment and machinery. Furthermore, there will be a need for the supply of mining consumables, banking, mining equipment and related services. Mining is also expected to spur growth of other supporting industries in Mozambique, such as telecommunications, power generation, government services, infrastructure development, and transportation.
Frost & Sullivan concludes that this increase in capital expenditure and investments in developing coal reserves, equipment purchases, and upgrading mining infrastructure is likely to drive long-term export growth for the Mozambican coal mining industry.
Christy Tawii, is a Mining and Minerals Research Analyst at Frost & Sullivan
