articles in conclusion

Congo's mining sector suffers amid violence

OXFORD ANALYTICA

Exclusive

November 24, 2008

EVENT: Long-overdue decisions on the future of the mining industry in the Democratic Republic of Congo have been further delayed by the continuing upsurge of fighting in the east.

SIGNIFICANCE: Renewed fighting between government and rebel forces, the impact of the freezing of international credit markets, the economic slowdown in developed economies, and the consequent collapse of commodity prices over the past three months, have ruled out any prospect of a revival of Congo's dormant mining industry in the short term.

ANALYSIS: Last week, Victor Kasongo, the influential deputy minister for mines, admitted that the fighting in North Kivu province and attempts to bring about a new negotiated settlement had forced Kinshasa to delay long-awaited decisions on the future of the mining industry. Mr. Kasongo's announcement was anticipated by the 61 foreign mining houses awaiting the outcome of the government's protracted mining review.

Only days earlier, Central Bank Governor Jean-Claude Masangu announced that falling base metal prices had reduced the GDP growth estimate for 2009 to below 10 per cent – down from the 12 per cent forecast for 2008. Mr. Masangu indicated that the expected fall in revenues would also force cutbacks in existing and proposed mining projects as the government grapples with the budgetary consequences of a sharp rise in unplanned military spending in the east and imported inflation due to earlier peaks in fuel and food prices. Mr. Masangu also acknowledged that the $9-billion (U.S.) loan-investment deal with Beijing to rehabilitate Congolese mining and civil infrastructure was being adjusted as a result of slowing economic growth in China, and the consequent anticipated decline in demand for key minerals such copper and cobalt.
Oxford Analytica
The Globe and Mail

Investor confidence. The fighting in the east – including the threat made by rebel Laurent Nkunda to bring the conflict to Kinshasa – has had no direct effect on mining operations in the Katanga copper belt. Katanga is the heart of the country's mineral wealth, some 600 miles southwest of the hostilities. However, it has seriously rattled investor confidence in the medium- to long-term prospects of the country.

A surge in investor optimism accompanied the end of the 1998-2003 conflict, and was given considerable impetus in 2006 by the first democratic elections for 40 years. This optimism has now all but dissipated. Without exception, foreign resource investors who had flocked to the Democratic Republic of Congo have been scaling back, postponing or abandoning investment plans.

This process was already well under ay before fighting erupted in North Kivu, which along with South Kivu, is host to most of the DRC's columbite-tantalite (coltan) and cassiterite (tin ore) deposits. However, the fighting has seriously undermined investor confidence in President Joseph Kabila's agenda for economic stability and growth.

Eastern insecurity. Despite his threats to widen the conflict in the east, Mr. Nkunda poses little or no military immediate threat to the Kabila government in Kinshasa. Mr. Nkunda's 6,000-8,000 battle-hardened fighters have proved themselves more than a match for the estimated 25,000-strong government forces in the region. He continues to have access to the profits from small-scale and artisanal coltan and cassiterite mines in the territory he controls, but he has no need, incentive or ambition to extend his sphere of influence.

Following talks on Nov. 16 with UN special envoy Olusegun Obasanjo, the former president of Nigeria, Mr. Nkunda agreed to support a UN peace process for eastern Congo, including respecting a ceasefire, and maintaining a humanitarian corridor for refugees. Although a welcome first step, this falls far short of the direct talks with Kinshasa on the disarming and repatriation of the ethnic Hutu Democratic Forces for the Liberation of Rwanda that Mr. Nkunda is demanding – an objective likely to take many years to realize.

Mining sector. Despite the humanitarian consequences of the fighting in the east, Kinshasa's overriding problem remains the stalling of attempts to revive the mining sector, which in turn threatens to undermine government efforts to rebuild the country's economy. The delays will also increase tensions within the Alliance for the Presidential Majority – the eleven-party ruling bloc led by Kabila's People's Party for Reconstruction and Development.

The protracted DRC mining review was initiated more than 18 months ago to ensure that Gecamines, Miba and Okimo – respectively the state-owned mining, diamond and gold concerns – received significantly better terms from their foreign partners than was agreed when the contracts were first signed. The process has now taken more than three times as long as initially anticipated, and the conclusion is still not in sight:

Review delay. Katanga Governor Moise Katumbi warned in March that the slow pace of the mining review was holding up development of the country's mining heartland, and penalising investors by delaying the onset of production. The capital intensive sector requires a constant flow of cash just to stand still (e.g. pumping out water from existing shafts to maintain viability). Moreover, the development of new mines requires vast capital outlays. However, little or no revenues are currently being earned in the DRC.

Price crash. In the six months that have elapsed since Mr. Katumbi's warning, the economics of the mining sector have been completely transformed. The year-long financial crisis has caused commodity prices to tumble. Prices are currently at a four-year low after reaching historic peaks in July. Shares in DRC miners – notably First Quantum, Katanga Mining, CAMEC and Freeport-McMoran – have taken a battering in recent months. After years of being in deficit the demand-supply balance for many base metals is now expected to swing into surplus during 2009, further depressing prices.

Finance shortfalls. Over the same period, the availability of project finance has virtually evaporated. Mining houses now face significantly tougher credit terms than was the case only six months ago. Even where funding is available, the volumes are lower, for shorter durations and higher costs. Many small capitalization mining firms will not survive. Established mining houses with significant own resources or cash flows are better positioned to weather the downturn, but most are having to scale back investment plans in the face of falling revenues and rising costs.

Outlook. Investment in Mr. Kabila's five pillars of recovery – water, electricity, education, health and transport – will not now take place on the scale originally hoped by Kinshasa. Even the $9-billion Sino-Congolese deal, which had been seen as the foundation of the country's economic recovery plan, is now unlikely to take place on anything approaching the scale or speed initially expected by Kinshasa. While the government is bracing itself for the economic downturn, its expectation that growth will fall to below 10 per cent in 2009 – the World Bank finds 6 per cent growth more realistic – appears unduly optimistic.

CONCLUSION: Government hopes that the democratic dividend from the five pillars recovery program would significantly bolster its electoral appeal in polls due in 2011 are now looking increasingly tenuous. While the commodities supercycle, driven by China's urbanization, is expected to lead to a resurgence in commodity prices in the medium term, the window of opportunity to put the DRC firmly on the path of post-conflict reconstruction on the back of the 2004-08 commodity upswing appears now to have passed. Moreover, with the end of the base metal price rally, Kinshasa has lost the leverage it needed to extract additional concessions from miners.

From the Oxford Analytica Daily Brief
Founded in 1975, Oxford Analytica's 1,000+ analysts provide international organizations with monitoring, research and consultancy services that explore the strategic implications of policy, economic, financial, industry, trade and security developments around the world.