The talk of the occurrence of a commodity supercycle is not particularly new. We’ve seen the price of commodities like nickel, cobalt and aluminium move quite favourably over the past few months. With several economies angling to capitalise on the post pandemic expansion opportunities, one topic that has been on table since before the pandemic and remains there is green energy. Being that there is a connection between metals and energy, it comes as no surprise that a significant push for clean energy gives the metals and minerals industry a nudge as well.
Copper price movement over the past several years. Currently at USD 9,854. Source: Markets Insider
For Zambia whose main forex earner is copper, the idea that its increase in price on the global stage will mean the country makes gains is dependent on how well investments are made to propel the mining sector in a way that benefits the local economy and creates additional value to communities and supporting businesses.
Over the past few months we’ve had quite close contact with several stakeholders in the mining sector and its supply chain. The story on the ground is pretty much the same coming from the major mining companies. They are all looking to capitalise on the commodity upswing, whether that’s through increasing their investments into primary mining or improving efficiencies in their processes and yielding a higher quality product to fetch premiums on international commodity exchange markets.
The government’s target is to increase the copper output from well under 1m tonnes per year to 2m tonnes in the next few years. Realistically though, increasing output from the mines will need to come at a heavy investment cost and will take a significant amount of time to make the structural changes needed to facilitate this growth. Suffice to say, if the trend keeps up in the commodity pricing fuelled by solid underlying economic factors and solid mining policies, then long term investments for the mine growth become more rational and practicable.
One thing that stood out to me on the supply end was how much room for growth there is in the SMEs that provide the mines with essential inputs and services and how outmatched the local providers are in comparison to international players.
As one might expect, in order to fulfil orders from the mine for their input and service requirements, suppliers need working capital. More so when a good portion of these inputs are being imported into the country where the exchange rate has been very volatile and mostly unfavourably tilted against the Kwacha. The reality is that many suppliers are unable to bear the cost of warehousing the imported goods, especially without knowing precisely when they will be purchased. All this factors into the lead times and cost those suppliers offer the mines.
The time is just about right to provide tailored solutions to these issues.
So, what do they need?
The age old bane of local businesses – Access to finance. To be fair, there are a few finance providers on the market. The issue is the need for flexible financing terms catered to mid-to-lower priced contracts that are attainable for local suppliers. Financiers looking at the opportunity these suppliers present need to understand the dynamics that the suppliers are faced with and factor these into their product offering. Mines are keen to work with local suppliers albeit within the bounds of operational viability. This means quality, competitive pricing, speed and assurance of delivery. All these conditions require a healthy balance sheet.
From the suppliers’ standpoint, most have limited capacity on their balance sheets to service orders out of their own coffers and need to look to external funding options. From the moment they are awarded contracts, the pressure is on delivery. That pressure is compounded by the need for capital and sourcing of products, particularly those that need to be imported and are dependent on third party delivery.
Looking at it from a finance point of view, it’s hard not to look at the complexities of such a transaction. Providing finance to small business is difficult enough without the time pressure and the small to medium contract sizes, sometimes only a few thousand dollars’ worth. The due diligence alone might deter some. But for those who look beyond that and can stomach the leg work, there lies an interesting opportunity. The mining sector engages several thousands of suppliers and, if organised properly, the mass potential comes to the fore.
Having met with a good number of suppliers, its clear that there is an opportunity to create value in these local businesses, yielding both return and impact. These opportunities are not financial only; there is also a need for business development and technical assistance to these companies, helping them be more palatable to financiers and becoming sustainable over time. I see validation through players in the market like Prospero who are working with stakeholders in the mining supply chain to stimulate growth in local SMEs and mining communities and view this as a chance to grow the sector sustainably while creating positive local impact and making profits along the way.
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