Ethiopia’s new government thought that it was selling the “last Coca-Cola in the desert” when it decided two years ago to reverse decades of policy by opening up the country’s telecoms monopoly to foreign competition, according to one banker with knowledge of the auction.
After all, Ethiopia has 114m people and its economy had been growing at near double-digits for the best part of two decades. That made its telecoms market — a monopoly since 1894 when Emperor Menelik II installed the first line between Addis Ababa and the eastern city of Harar — the most important to liberalise since Myanmar opened its sector to competition eight years ago.
Yet when government officials unsealed the bids for two new spectrum licences last month they were disappointed at what they found, according to two people familiar with the process. Of the dozen or so companies that had expressed interest, including the likes of Orange, Etisalat and Saudi Telecom, only two submitted offers. One of those, a $600m bid from South African operator MTN, was rejected as too low. The licence will be retendered, possibly within months.
“I think they assumed that everyone would beat down the door to get in,” said one person advising a potential bidder. As a result, he added, the government failed to make the offer sufficiently attractive, particularly in light of growing concern over political instability.
For example, it prevented new operators from offering potentially lucrative mobile money services of the sort common in Africa or from bringing in third-party tower operators to build infrastructure, also normal practice elsewhere.
Ethiopia did accept one offer: an $850m bid from a consortium led by Safaricom, the biggest operator in neighbouring Kenya, which has one of Africa’s most sophisticated telecoms sectors and was a pioneer of mobile money.
Its M-Pesa service, which allows people to store and send money by phone, has been credited with bringing tens of millions of unbanked people into the financial system. Ethiopia’s telecoms set-up, by contrast, is slow and expensive, and subject to political interference with frequent internet shutdowns.
Abiy Ahmed, Ethiopia’s prime minister and a driver of the privatisation process, put a brave face on the auction, declaring it the biggest foreign direct investment in the country’s history. The new consortium, officials said, would invest more than $8bn in the network and help create up to 1.5m jobs.
Analysts agree that, despite the rocky start, Ethiopia has at least embarked on a process that will revolutionise its telecoms offering.
Peter Ndegwa, chief executive of Safaricom, said that Kenya had demonstrated the power of “digital transformation” to change lives. “We can deliver a similar transformation while achieving a sustainable return to our shareholders,” he said of the Ethiopian service, which he said could be launched next year.
Safaricom, which is 35 per cent owned by Kenya’s government and 40 per cent by Vodafone and its South African subsidiary Vodacom, will control the new consortium with a 55.7 per cent interest.
Sumitomo, a Japanese trading house that has telecoms interests in Myanmar, has a 27.2 per cent stake and Vodacom has 6.2 per cent. The remainder is held by the UK’s CDC development agency, which invests in for-profit businesses with a positive social impact.
However, there are many issues to be resolved before Ethiopia’s privatisation brings the promised benefits.
First is the question of mobile money. Ethiopia originally told bidders that foreign companies could not offer cashless transactions, largely because of central bank restrictions on foreign banks. That would leave the incumbent Ethio Telecom, which launched a mobile money service, TeleBirr, only this month, as the sole provider.
Foreign companies complained that excluding the possibility of their providing similar services significantly reduced the value of a telecoms licence.
“Most of these companies generate a significant amount of their revenue from mobile money,” said Brook Taye, senior adviser to the finance ministry and part of the team overseeing the privatisation. “We were very frank with them: ‘Give the government time to work through the overall reform of the economy, which includes the financial sector, then it will gradually open up the sector further’,” he said.
After the auction was closed, Abiy indicated that new operators could offer mobile money services after all — and probably within a year. Ndegwa of Safaricom described that as “good progress” but said he wanted to see it confirmed in writing.
Another uncertainty is around sanctions. The day after the licence was awarded, the US announced measures against certain Ethiopian officials over concerns about grave human rights violations in Tigray, where a civil war erupted last November.
The US International Development Finance Corporation, the equivalent of the UK’s CDC, has offered the Safaricom-led consortium up to $500m in loan finance. That money is now in doubt, although it already came with the proviso that the consortium not buy Chinese equipment, a stipulation that could increase costs.
More broadly there is nervousness among investors over continued instability in Ethiopia and its potential to damage the economy.
A third area of concern is how much the playing field will be skewed towards Ethio Telecom, a 45 per cent stake in which is due to be sold to domestic and foreign investors later this year.
The exclusion of third-party tower operators is likely to increase the dependence of new licensees on the state-controlled operator — and if regulators drag their feet on opening up mobile money services then Ethio Telecom, which has 46m subscribers and reported 47.7bn birr ($1.1bn) in revenues last year, could cement its lead.
New operators also worry about access to foreign currency, notoriously problematic in Ethiopia. They will need dollars to import equipment during the rollout phase and, eventually, to pay dividends.
“We’ve spent quite an amount of time looking at the opportunity in Ethiopia, because the market is just amazing,” said a senior executive of one of the companies that withdrew from the process. “But you don’t have enough visibility for your forex, you don’t know how you will invest, how you can take your cash out.”
Still, telecoms privatisation marks a decisive step away from the past state-led development model that promoted national control of banking, logistics and telecoms. A year from now Ethio Telecom should have a foreign partner and be preparing to compete with two new foreign entrants. Both Orange and MTN are likely to consider new bids for the second licence, according to analysts.
GSMA, the global mobile industry trade body, forecasts that Ethiopia will have 16m new mobile subscribers by 2025. For the first time in more than a century they will have a choice of which operator to use.
Speaking up for the mother tongue in class
Godfrey Chuo still remembers the reaction of his primary school students three decades ago when, as a young teacher in north-west Cameroon, he switched from explaining ideas in English — the official language of instruction — into his mother tongue, of Kom.
“The children were so excited and motivated,” he says. “When they are taught in their own language, they work even beyond what the teacher asks. It is fantastic.”
By contrast, Chuo has found that when pupils start learning in a foreign language, their education slows down. “They learn better in their first language, the language of the heart, which is not learnt but inherited from their parents,” he finds.
In fact, across many lower-income countries around the world — especially those in Africa — there is a strong overlap between poor overall educational outcomes and the predominant use of a former colonial language in schools (see chart). This applies to the use of English, French, Portuguese, Spanish or Arabic.
Some parents and policymakers still believe immersion in one of these languages in school is pivotal to their children’s future fluency and success. But others argue that pupils struggle when learning in an unfamiliar tongue often not spoken well by their own families, communities — or even by the teachers themselves.
By achieving greater fluency in their first language, instead, they can grow in confidence, affirm their identity and establish the building blocks to develop a deeper capacity to learn, proponents argue. It can even enable a switch to another language for schooling, in later primary years.
As Barbara Trudell, a consultant with SIL, a faith-based non-profit that supported the Kom programme in Cameroon, points out: “English is the language of incomprehensible content, of punishment for wrong answers, of examinations that determine one’s future. The mother tongue is the language of home, of play, of comfort and comprehension. When the students begin to interact with a teacher in the mother tongue, they visibly loosen up.”
Rajesh Ramachandran, a researcher at Heidelberg University, has also examined the legacy of colonial systems and observed a positive effect from introducing mother tongue tuition — including Kom in Cameroon. “You can be very successful in getting children into school but, once in the classroom, it’s going to be challenging preparing them for the world if they can’t read a sentence,” he says.
In international research published by Unesco, Ramachandran calculated that 69 per cent of adults with five years of schooling in systems that used indigenous languages could read an entire sentence, compared with 41 per cent in colonial or mixed language systems. After controlling for age, religion and place of residence, this gap in literacy outcomes jumped from 28 to 40 percentage points.
Ironically, apartheid-era laws designed to discriminate against black South Africans in Natal province — by insisting that they learnt only in local languages — had a positive effect. They resulted in a higher literacy rate overall when compared with the country’s other provinces.
Since that time, other nations have experimented with switching to dominant local languages, at least in early primary years.
In Senegal, for example, USAID, the US official aid agency, has tracked improved outcomes through Lecture pour Tous, a programme that offers instruction in Pulaar, Seereer and Wolof before switching to French for older students.
Similarly, Ben Piper, senior director for Africa education at RTI International, a non-profit research institute, has measured important gains in literacy in schools in Kenya that switched from early years teaching in the national languages of English and Kiswahili to local tongues.
But Piper cautions that there are few rigorous studies on the overall outcomes. Many factors can reduce the apparent benefits, including the complexity of local languages, the quality of teachers (who may lack fluency), and the often poor quality of resources including textbooks — especially in languages with little written tradition.
Others highlight the difficulties of implementation in countries with multiple local languages — the choice of which can inflame ethnic and political tensions. Steve Walter, an associate professor at Dallas International University, points to “a political tug of war” in East Timor, where he supported a shift but “a strong, outspoken element still wants Portuguese”.
Nonetheless, Walter sees a move towards greater interest and debate in the field. “When I started attending comparative international education society meetings 25 years ago, if somebody talked about mother tongue education, people snickered and said they were extremist,” he says. “Now, there will be 10-20 sessions devoted to the issue. There’s a lot more openness.”
Cameroon’s own experiment in mother tongue schooling in the north-west has faltered with a civil war that has closed schools in the region for the past three years. But Chuo, who is currently based in the capital Yaoundé, remains determined.
He is training a new generation of teachers in his techniques and hopes to open complementary classes for Kom émigrés. “The communities are asking me to come back and do something,” he says.
Sex education ignites online culture clash in Ethiopia
Seyoum Antonios, an Ethiopian celebrity surgeon and Christian campaigner, has a message for his many online viewers: halt the introduction of “Comprehensive Sexuality Education” in schools, or face the wrath of God.
In a video posted last year and viewed more than 160,000 times on YouTube, the doctor said there was an “agenda that has come upon us called an all-inclusive sexual education, which is intended to spread homosexuality as well as abortion on Earth”.
He added that organisations were trying to insert this into the Ethiopian school curriculum “to teach our children in their young age that homosexuality is natural, that carrying out abortions is not problematic. We have to cry in front of God and get this thing to stop.”
In an almost two-thirds Christian country — the most recent census, in 2007, puts Ethiopia’s Orthodox, Evangelical and Pentecostal believers at 63 per cent of the 114m population — analysts believe such messages are turning many against Comprehensive Sexuality Education (CSE). Seyoum has amassed more than 1m views on video platforms since 2018, according to Signify, a data science company specialising in ethical research and data governance.
“We have to be very careful” when teaching sexual education to children, says the head of a local organisation that is promoting CSE in the regions of Oromia and Amhara in a low-key way. “There are informal groups trying to discourage these kind of activities via social media, particularly [on] YouTube,” the person adds.
Researchers, charities and international organisations say that such online discourse underpins political lobbying to keep CSE off curriculums. Many worry about the impact in Africa’s second most populous nation, where the median age is 19.5 years.
“There’s a huge misinterpretation of sex in young people who really, really need CSE,” says Siyane Aniley, a researcher on sexuality education at the Centre for Comparative Education and Policy Studies at Addis Ababa University. “CSE helps a lot in stopping early marriage, female genital mutilations, promoting safe abortions and the use of condoms.”
The most widely known organisation opposing such teaching in Ethiopia is Stop CSE, a joint programme with groups including Family Watch International, an Arizona-based Christian conservative organisation of which Seyoum is Africa director. Stop CSE is promoting the Protect Ethiopia Children Petition, “to ensure no instruction or materials, including highly controversial comprehensive sexuality education, be given to children in our schools”.
The campaign alleges that “the ultimate goal of CSE is to change the sexual and gender norms of society, which is why CSE could be more accurately called ‘abortion, promiscuity, and LGBT rights education’”. It claims that CSE “is highly explicit and promotes promiscuity and high-risk sexual behaviours”.
Advocates of CSE deny this and say that it addresses early pregnancy prevention, sexually transmitted infections, consent and violence — providing youngsters with skills and knowledge to help them have healthy relationships.
Data from the latest Ethiopian demographic and health survey, in 2016, show that 58 per cent of women then aged 25-49 married before they were 18, while half gave birth before the age of 20.
Saba Kidanemariam, Ethiopia director for Ipas, an international women’s reproductive health and rights organisation, says: “If we don’t provide the right information, many women may actually lose their lives.”
Family Watch did not reply to a request for comment, but its campaign garnered high engagement on social media, says Joe Harrod, co-founder of Signify. He estimates the reach of the Stop CSE petition at 1.9m views.
Befekadu Hailu, an Addis Ababa-based social media analyst, says: “Seyoum and others can have this kind of power [using social media] because the norm here is resistance against knowledge-based sexuality education, which is believed to be against religion, against culture.”
Tiruwork Amare, a manager in Ethiopia with Marie Stopes International, the family planning organisation, says: “Teenage pregnancy is high, unintended pregnancy is high, unsafe abortions are high . . . The reasons are lack of information or sexual education, much misinformation, fear of stigma, and religious influences.”
For Imran Ahmed, head of the Centre for Countering Digital Hate, a London-based advocacy organisation: “The effects of this in a country like Ethiopia can be devastating because of the speed of transmission of misinformation and the fact that many people aren’t resilient to it.”
YouTube says it supports freedom of expression and that two videos featuring Seyoum highlighted by critics as misinformation do not violate its guidelines. A spokesperson says it removes any “harmful or hateful” content.
The UN guidance on sexuality education shows that some countries are implementing science-based education adapted to national contexts. Unesco supported several African governments to develop policies that strengthen health education while engaging with parents and communities. In Ethiopia, such efforts were thwarted last year amid opposition, according to some people with knowledge of the matter.
“It was the basics, really the basics — there was nothing controversial,” says an official from an organisation working with Ethiopia’s education ministry to develop a curriculum including sexuality education.
“Fear-based messages were seeding moral panic based on misinformation, and government officials don’t want to take the risk,” says another official involved. Senior officials at Ethiopia’s education ministry did not reply to requests for comment.
Joanna Herat, a Unesco specialist for health and education, says the organisation “believes access to good quality education is a human right for all, and CSE is a key part of that . . . These subjects can be sensitive in some regions, and some groups build on these through misinformation where there are already fears and concerns.”
Seyoum disputes his critics’ claims, saying: “Any dissent from their CSE orthodoxy [is labelled] as ‘disinformation’. We challenge UN agencies to stop their disinformation, claiming that CSE will magically prevent teen pregnancy, STDs, bullying, sexual abuse, domestic violence, toxic masculinity etc.”
He says Unesco and other UN agencies had been co-opted by donor countries and groups supporting abortion rights for women and were “promoting radical sexual rights at the expense of sexual health . . . This is not just cultural imperialism, it is sexual imperialism.”
For Siyane Aniley at Addis Ababa University, the situation is simple: “In general, society is easily convinced because the anti-CSE activists quote verses from the Bible, which is something people respect and follow. So, they relate instantly. It’s much easier for Ethiopian society to believe the Dr Seyoum kind of people rather than Unesco.”
France to cut back military operations in Sahel
France will cut back its military operations in the Sahel to focus more narrowly on the fight against Islamist terror, but will continue to co-operate with the armies of its African and international allies along the southern fringes of the Sahara, French president Emmanuel Macron said on Thursday.
Paris has maintained a large force in the region — currently over 5,000-strong — since Macron’s predecessor François Hollande sent troops to Mali to stop the country falling into the hands of jihadis eight years ago.
Like the Americans who have fought the Taliban, al-Qaeda and Isis in Afghanistan since 2001 and are now withdrawing, Macron made clear that France was fed up with the failure of the Sahel’s governments to administer effectively territory briefly reclaimed from jihadis by military operations.
“It’s not France’s role to substitute itself for ever for the states of the region,” Macron told a news conference in Paris before the G7 summit of major democracies in the UK this weekend. “The time has come.”
He gave no troop numbers or timeframe for the drawdown of French forces, but said Operation Barkhane would end in its current form, and be replaced by a “new framework” with two pillars: a continuing campaign led by French and allied special forces against Islamist terrorists, and co-operation with national armies in the Sahel and the Gulf of Guinea.
In February, Macron delayed a previously planned reduction of forces in the Sahel, but warned that he wanted to do so eventually to avoid “infinite war”.
France’s presence in the region has grown increasingly unpopular as its operations have worn on, sparking anti-French protests in some cities. Many politicians and ordinary citizens remain suspicious of their former colonial power, which maintains strong cultural, economic, diplomatic and political influence in Africa.
French forces have killed several Islamist leaders in recent years, and many observers argue their presence is essential to preserve what little stability remains in the region. But violence, including massacres of civilians by Islamist extremists, has steadily spread from northern to central Mali and across the borders into Niger and Burkina Faso.
Extremist groups linked to al-Qaeda and Isis have taken advantage of long-running communal tensions and filled the void of largely absent governments across the region to capture wide swaths of territory.
France has been criticised by both Sahelians and European diplomats in the region for offering lip service to improving governance while remaining focused largely on the security response — despite widespread acknowledgment that there is no military solution to problems in the Sahel.
Macron again rejected the idea of negotiating with Islamists who were killing French soldiers and citizens, although locals weary of violence often favour such talks.
Despite Macron’s warnings, authorities in both Mali and Burkina Faso have already engaged in negotiations and brokered some temporary ceasefires in a region where a man might be a smuggler, a bandit, an ethnic militia member or a jihadi, depending on the day and the situation.
Additional reporting by David Keohane in Paris
South Africa eases path for companies to generate power
South Africa is to allow companies to produce more electricity on their own as it tries to mitigate the impact of the rolling blackouts that have crippled the economy.
Investors, including some of the world’s biggest miners, will be able to set up independent power generation of up to 100 megawatts without having to go through a complex licensing procedure, President Cyril Ramaphosa said on Thursday.
South Africa is in the middle of “the worst economic crisis in our country’s recent history” and it urgently needs to liberalise energy supplies to avert the “massive risk” of blackouts, Ramaphosa said.
State-owned Eskom generates nearly all of South Africa’s electricity, but its fleet of mostly coal power stations suffer regular breakdowns after years of neglect and graft under Jacob Zuma, the former president. This has forced the indebted utility to impose frequent cuts on mines, smelters and businesses, hobbling promises that Ramaphosa made to turn South Africa’s stagnant economy around.
As breakdowns have worsened, rolling blackouts have returned in recent weeks at the start of South Africa’s winter, in the middle of the country’s mass rollout of coronavirus vaccines.
The rise in the limit for so-called ‘embedded’ generation, up from a previous threshold of one megawatt, is double what business and mining groups had been asking for. Meridian Economics, a South African energy research firm, estimated that up to 5,000 megawatts of pent-up independent power projects could be built in South Africa in the next four to five years if the limit rose to 50MW.
The increase is an “excellent starting point,” said South Africa’s minerals council, which represents miners. “Our initial estimates are that this development could lead to additional short and medium-term investment by the industry solely in embedded generation projects of around R27bn [$2bn],” it said. The generation threshold will be lifted in the next 60 days, Ramaphosa said.
Eskom supported the move to allow some of its biggest customers to supply more of their own electricity because it will relieve pressure on the utility and allow it more time to repair the broken coal fleet, Ramaphosa said.
While analysts say that the move could leave Eskom with even less cash to fund maintenance, Ramaphosa said: “This is not a death spiral for Eskom. When Eskom is able to solve its current problems, it will resurge . . . if anything it could be the rebirth for Eskom.”
The unexpectedly large increase also signals that Ramaphosa is willing to push major reforms to open up the economy despite resistance in his party. Gwede Mantashe, the mining and energy minister, said as recently as last month that companies were “not ready” for an increase beyond 10MW.
Ramaphosa’s government also plans to resume procurement of renewable energy from independent suppliers this year. The government is also in the final stages of a separate multibillion dollar plan to procure emergency power from so-called powerships.
BioNTech prepares expansion into Africa alongside EU
BioNTech is planning a push into Africa, aiming to establish mRNA vaccine production facilities on the continent as part of a long-term effort to tackle diseases beyond Covid-19.
The German biotech’s plans come as the EU moves to bolster vaccine manufacturing capacity in Africa, which imports more than 99 per cent of the jabs it uses.
BioNTech co-founder and chief executive Ugur Sahin outlined the effort on a joint video call with Ursula von der Leyen, European Commission president, ahead of the G7 summit in Cornwall.
“From the technology side, there is no reason why [vaccine production in Africa] should not be possible,” Sahin told the Financial Times. “And because there’s no reason any more, we have to make it possible.”
Von der Leyen said the EU wanted to help foster a “strong initiative to invest in mRNA, together with our African partners”, adding that it was important that the technology is brought to the continent. “We are joining forces in a way that everyone brings in the best competences they have.”
Africa, and many of the diseases that afflict populations, such as malaria, has long been neglected by the pharmaceutical industry in favour of research into more profitable medications.
Now wealthy nations and companies are under intense pressure to boost the availability of Covid-19 vaccines on the continent. Only 39m jabs have been administered in Africa so far — just over 2 per cent of global vaccinations.
Last month the EU and the drugs industry were wrongfooted when the Biden administration called for an outright patent waiver to expand global vaccine access to the shots and save lives. Brussels has countered that the focus should rather be on the removal of export restrictions, the expansion of production, and the use of existing intellectual property rules to allow necessary patent licensing.
Washington will also announce new commitments to lower-income countries ahead of the G7 summit, with plans to purchase 500m doses of the BioNTech/Pfizer jabs at cost and donating them to the Covax scheme, backed by the World Health Organization.
But developing vaccine manufacturing in Africa will take time. Sahin said he aimed for BioNTech to have found and trained a partner in Africa to “fill and finish” vaccine doses in around 12 months, which would enable the continent to import vaccines in bulk.
Establishing capacity for the earlier, more technical stages of manufacturing, when mRNA is produced and then combined with lipid nanoparticles, would likely take about four years, he said.
Advocates of mRNA argue that the new technology, which only had its first big breakthrough with the development of coronavirus vaccines, could be an extremely useful tool to fight disease in developing countries. Facilities producing mRNA can be adjusted within weeks to make different vaccines, and can usually produce larger amounts in much smaller facilities.
BioNTech has revised production targets for its Covid-19 vaccine, developed with US pharmaceutical company Pfizer, up to 3bn from 2.5bn for 2021, but the majority will be sent to higher and middle-income countries. About 1bn of those doses are expected to be sold at-cost for lower-income nations.
An mRNA vaccine for tuberculosis, which the German biotech is developing with support from the Gates Foundation, is likely to be one of the first potential candidates for African production. BioNTech is currently aiming to start clinical trials for the treatment within a year, Sahin said. “HIV is a difficult beast,” he added. “So that comes last for vaccine development.”
All of BioNTech’s future facilities in Africa would produce treatments at non-profit rates, for middle and low-income countries, Sahin said.
Von der Leyen, who last month announced a plan to invest €1bn in vaccine production in Africa, said she believed the African Union’s goal of producing 60 per cent of the continent’s vaccine consumption within the continent by 2040 was both do-able and realistic. The EU plans to invest in strengthening the regulatory framework in Africa, helping boost local skills and universities, and building on an existing clinical trial network targeted at infectious diseases.
“We need to join forces here,” she said, adding that the EU was in discussions with countries including Senegal, South Africa, Rwanda and Ghana. Support from institutions such as the European Investment Bank would help incentivise investment as the EU took on some of the risk, she added.
At the G7 summit where leaders will discuss ways of broadening the availability of Covid-19 vaccines, Von der Leyen is likely to call on more countries to increase their exports to other parts of the world. By the end of the week the EU will have produced 700m doses of Covid-19 vaccines, of which around 350m have been exported, she said.
“We would be really happy if other vaccine producers would follow our example, because then it would be a completely different situation where fair distribution of vaccines is concerned.”
Copper boom: how clean energy is driving a commodities supercycle
Kamoa-Kakula in the Democratic Republic of Congo is a rare commodity in the modern resources industry: a high-grade copper mine that one day could produce enough metal to satisfy more than 5 per cent of China’s annual demand.
Surrounded by small villages, the mine employs around 7,000 workers and has its own road for trucks to carry rock to a nearby smelter. The company is also upgrading a 40-year-old hydropower station on the Congo River to provide electricity to run the mine.
The first phase of the $2bn project began operating in May, more than four years after the last big copper mine of similar scale, MMG’s Las Bambas, in Peru, came online. Despite these projects, years of belt tightening mean the pipeline of new copper projects is running dangerously thin just as demand for the metal — used in everything from wind turbines to electric vehicles — is set to soar.
Governments around the world are launching huge stimulus programmes focused on job creation and environmental stability.
The coming together of such demand and potential supply shortages has many people on Wall Street, and in the City of London, hailing the arrival of a commodities supercycle and asking if copper is set to become the new oil, a strategically important raw material.
“We see potential for a multi-decade commodity cycle ahead driven by decarbonisation of the global economy and shift to cleaner energy,” says Tal Lomnitzer, a senior fund manager at Janus Henderson. “It has more legs to it than the China boom of the early 2000s.”
Commodities have enjoyed a dizzying run over the past year, initially on the back of strong demand from China, and more recently other big economies. Supply disruptions have provided further impetus. Copper, iron ore, the key ingredient needed to make steel, palladium and timber all hit record highs in May, while agricultural commodities including grains, oilseeds, sugar and dairy have also jumped.
While there is no agreed definition of a supercycle, it has been commonly used to describe a period where commodity prices rise above their long-term trend for between 10 and 35 years. These cycles are typically triggered by a structural boost to demand that is large enough to register globally and to which supply is slow to respond, according to Capital Economics.
There have been just four sustained periods of above-trend commodity prices over the past 120 years. The first came with the emergence of the US as an economic powerhouse in the 1880s and the last with China’s rapid industrialisation in the early 2000s.
“Most people in commodities markets thought we were never going to see another Chinese urbanisation story. But it is now pretty clear that the green capital expenditure story is going to be bigger and multiples bigger because it is global”, says Ben Cleary, a partner at Tribeca Investment Partners, a boutique fund management group based in Australia.
“I also don’t think the China green capex numbers are fully appreciated,” he adds, “it’s $2tn a year for 40 years to get to net zero carbon. The numbers are mind blowing.”
The green effect
It is not a universal sentiment. Many economists believe the current boom in commodity prices is cyclical rather than structural and can be explained by strong Chinese demand, a post-pandemic economic recovery in Europe and the US overlaid with supply chain disruptions. They expect the rally to peter out as China — still the world’s biggest buyer of commodities — tightens credit.
Indeed some raw materials have already fallen in price. Iron ore is down 10 per cent from its recent record high of $233 a tonne in May as Beijing has moved to cool runaway prices.
“Commodity prices have rallied because demand is so strong,” says Ric Deverell, chief economist at Macquarie in Sydney. “But in large parts that is a cyclical rebound from a very large recession. And, of course, it has been turbocharged by stimulus.”
Sceptics are also quick to point out that not all commodities are in short supply. A case in point is oil, where Opec and its allies have yet to fully unwind the huge production cuts enacted in April 2020.
“When we are talking about a supercycle, we are talking about something bigger and that has to involve the major commodities, such as oil and iron ore,” says Mark Williams, chief Asia economist at Capital Economics. “And, for those commodities, the demand outlook is weaker.”
However, when it comes to copper and other metals linked to investment in green technology, such as cobalt and nickel, even sceptics accept the outlook is bright, because supply is constrained and demand is set to accelerate.
“In terms of trying to decarbonise the world, the only possible way we can do that is through copper. There’s really nothing else that can conduct electricity as well,” says Jeff Currie, head of commodities research at Goldman Sachs and one of the strongest proponents of the idea that we are in a new supercycle.
“That’s why we say it is as strategically important as oil, because if you want to decarbonise transport and industrial fuels through electricity, you are going to need copper,” he adds, “and a lot of it.”
An electric vehicle contains 5 times more copper (60-83kg) than a car fitted with an internal combustion engine, according to Goldman, while a 3-megawatt wind turbine uses up to 4.7 tonnes of the metal.
Goldman is not alone in forecasting strong demand growth. To achieve net zero emissions by 2050, the International Energy Agency says the total market size of critical minerals such as copper, cobalt, manganese and various rare earth metals will have to grow almost sevenfold between 2020 and 2030.
“Every supercycle in commodities has been tied to redistribution policies,” says Currie. “What’s the redistribution story this time around? Tackling income inequality. And it is pretty clear we are going to tackle it the same way Franklin Roosevelt did in the 1930s, through green capex, just like the Hoover Dam.”
Currie points to US President Joe Biden’s jobs plan and Europe’s Green New Deal as evidence for that view. But just as demand is expected to take off, the copper market is arguably the closest it has ever been to peak supply, due to big miners curtailing investment in new projects. That trend started around seven years ago, after a brutal downturn in commodity markets pushed many miners with bloated balance sheets and unsustainable dividend policies close to financial ruin.
“Mining companies are likely to continue to prioritise capital returns and balance sheet strength over investment in long-lead-time, capital-intensive growth projects,” says Christopher LaFemina, an analyst at Jefferies. “The economics of these projects are moving targets that are in many ways beyond the control of the mining companies.”
Fall off in capital spending
Robert Friedland started searching for copper in the DRC more than a quarter of a century ago. Many people thought he was crazy. At the time the country was in the midst of a brutal war.
“Our team of geologists worked 15 years in the bush to find this deposit against a great deal of scepticism,” Friedland says of the Kamoa project, a joint venture involving his company Ivanhoe Mines, China’s Zijin Mining and the government of the DRC. “It is unquestionably the largest discovery in the history of the African copper belt.”
While the copper market is relatively well supplied for the next couple of years, thanks to developments such as Kamoa and Quellaveco — the $5bn Peruvian copper mine Anglo American expects to bring online in 2022 — beyond that the pipeline of new projects looks thin.
“People look at the supply numbers, but they don’t filter in how difficult it is to get that supply,” says Farid Dadashev, co-head of European metals and mining at RBC Capital Markets. “The last time the copper price was high in 2011 and 2012 there were a couple of new projects in the market but they were all delayed and the capital expenditure was extremely high.”
After blowing billions of dollars in the last commodity boom on overpriced deals and over ambitious projects, the mining industry has dramatically scaled back spending and focused on returning cash to shareholders, who have now become used to receiving fat dividends from the sector.
“All the major producers have been returning capital for the best part of six or seven years with a gun to their head from shareholders who don’t trust their ability to reinvest profits into growth,” says Cleary from Tribeca Investments.
As a result, global mining and smelting capital expenditure, which peaked at $220bn in 2012, only reached half that level last year, according to data from Wood Mackenzie. Exploration spending has also dropped sharply from $35.7bn in 2012 to just over $10bn last year, according to Tribeca.
In spite of rising commodity prices — copper has almost doubled in the past year, recently hitting a record above $10,500 a tonne, although it has since slipped almost 5 per cent — miners are either unwilling or unable to sign off on new copper projects.
Unless that changes, Goldman sees an annual supply shortfall of 8.2m tonnes emerging by 2030. To put that figure in perspective, last year global refined copper production was 23.5m tonnes.
It is becoming increasingly difficult to find high grade copper projects in safe mining jurisdictions.
Ivan Glasenberg, the long-serving boss of miner and commodity trader Glencore, told the Financial Times recently that the copper price would need to rise 50 per cent to meet projected demand from the global green revolution. “You will need $15,000 copper to encourage a lot of this more difficult investment,” he said. “People are not going to go to those more difficult parts of the world unless they are certain.”
It is not just in the more difficult parts of the world where there are problems. Proposed tax changes in Chile and Peru — gripped by the most divisive presidential election in recent history — could make it very difficult for foreign miners to invest in the world’s two biggest copper producing nations.
“Fiscal uncertainty is likely to deter investment and impact future supply,” says Liam Fitzpatrick, an analyst at Deutsche Bank, who has identified $50bn of projects in Chile, Peru and Zambia that are up for approval over the next decade but could be delayed.
Ageing mines and declining ore grades present other challenges for the mining industry. These are particularly pronounced in Chile, where state-owned Codelco — the world’s biggest copper miner — needs to spend $35bn between now and 2030 to keep annual output steady at 1.6m to 1.7m tonnes.
It can take up to 10 years to develop a new copper project, assuming all the approvals are in place. So even if the mining industry, swayed by higher prices, decides to open the purse strings now, it may already be too late to prevent large supply deficits from opening up later in the decade.
“If we knew how hard it was going to be to find a major copper system and bring it into production with hydroelectricity in the Congo,” says Friedland, “I can assure you we would have given up.
“That’s the problem with mineral exploration,” he adds, “very few efforts come to fruition”.
Aluminium as an alternative
Not everyone is convinced that copper is set for a supercycle. Julian Kettle, vice-chair of metals and mining at Wood Mackenzie, says higher copper prices will incentivise substitution towards aluminium, which has a lower conductivity than copper, but is much lighter.
In May, London-listed Tirupati Graphite said it had developed a graphene-aluminium composite material that it said had conductivity similar to copper. The company is working with Rolls-Royce on using it to replace copper in thermal, power and propulsion systems, according to a person familiar with the company.
During the last China-driven commodity supercycle, Kettle estimates the copper market lost 2 per cent, or between 400,000 and 500,000 tonnes per year, of demand due to aluminium substitution when prices rose above $6,000 a tonne.
“If raw materials prices are rising quickly, you look at opportunities for thrift,” he says. “It’s back to the law of physics: if the supplies aren’t there, then you cannot consume. The notion the price will go to fanciful numbers on a sustainable basis . . . that [scenario] tells the market you can’t deliver supplies and consumers will look elsewhere.”
But even Kettle concedes that the outlook for the copper market is relatively bullish. It needs to double in size by 2040 if the world is to meet the targets set out in the Paris climate agreement. “If there is one commodity where you will see supercycle characteristics it is copper. But the fundamental drivers aren’t there just yet,” he adds.
Back in the DRC, Ivanhoe Mines has begun searching for another big copper discovery on a parcel of land close to Kamoa-Kakula. And this time the work of its geologists is drawing attention rather than scepticism from big western miners, as well as sovereign wealth funds and international financial institutions, according to Friedland.
“Kamoa wasn’t just the discovery of a mine,” he says. “It was the discovery of a whole new mineral province.”
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