Will Oil and Mineral Prices Impact African Infrastructure?

Andries Rossouw Director at Price water house Coopers

It’s hardly any secret that 2016 is going to be a tough year for both mining and oil and gas in Africa. In January, crude briefly traded below the $30 a barrel mark before picking up ever so slightly.

Likewise, mineral prices have never looked bleaker. Copper and iron ore are both trading at near record level lows, and a number of mines are either putting operations on freeze, or simply closing shop. Construction projects at large are going to take a huge hit, across the region, but to what extent will the slump affect the future development of African infrastructure development?

Essentially, lower oil and lower mineral prices are decreasing revenues for most African governments. When this happens, governments put major infrastructure projects on hold as they represent unjustifiable expenses during times of austerity.

Andries Rossouw Director at PricewaterhouseCoopers (PwC) Inc explains that, “Africa is a tough market at the moment with low commodity prices. Lower oil and gas prices certainly dented the ability of many countries to spend on infrastructure.

The low commodity prices of copper, coal, and iron ore, have played a massive role in bringing down income streams for many governments; and in Africa we are still a very much commodity price driven economy.”

“The reality on the ground is that the market cap of construction entities at the moment is trading at about 70% of book value,” explains Rossouw. This is a shockingly low number bearing in mind that a construction company does not have a lot of fixed assets, but rather working capital positions on contracts. This gives a clear indication about what the market feels about the industry and where it is going.

Chris Botha, Operating Group Managing Director of Aveng states, “The challenges created with the commodity cycle being at a very low point, means that the mining houses are not spending. In Africa we would generally chase blue chip mining clients.” The mining sector in Africa has historically played an important role as a catalyst for infrastructure development, and this looks set to change.

According to David Humphrey, Global Sector Head: Power and Infrastructure, at Standard Bank, “There has been a 10-15% decline in the number and quantity of public sector led initiatives in 2015 and I suspect it will continue to decline in 2016 at a macro level. Individual countries will have different experiences, but throughout Africa we will see that the squeeze of the macroeconomic conditions are going to cause an overall impact on infrastructure spend.”

“In Africa we need to be cautiously optimistic,” continues Humphrey. “The drop in prices for oil and commodities is compounded by the overall reduction of demand from China, and the slowing of the world economy and the relative weakness of emerging market currencies like the rand and most other African currencies in Africa.

This makes buying imports from the likes of Europe, America, and even China, even more expensive. This is putting a break on growth, and it is making the burden of paying debt in dollars more expensive in local currency.”

“What we are seeing is the growth of consumer led spending into the private sector. How this feeds into the construction and infrastructure space, is an interesting dynamic, and this will continue to grow and help rebalance the level of business, ” says David Humphrey.
He continues, “You cannot have everything led by government, at some stage the private sector has to take over. While these are challenging times, this is a dynamic we will begin to see increasingly more.”

In this light, as economies develop in terms of their middle income spending, development would logically be accompanied with the construction of office blocks, individual high-rise towers, shopping malls, as well as the roads that go with them.

Standard Bank seems to understand the nature and implications of the drop-offs in construction. The bank works with a number of development and commercial banks, and driving Public Private Partnerships (PPPs) with governments is becoming a lot more critical.

Jaz Vanmali, ‎Head: Construction and Cement at Standard Bank Group elaborates the bank’s strategy, “We are trying to look at this from the private perspective, and are attempting to encourage the private sector to take equity into specific government projects, and then see how we can free the actual strain from government in terms of financing a lot of corporate bank risk.”

There is no doubt that PPPs represent enormous potential in bringing financing back to infrastructure projects. Moe Shaik, General Executive: International Finance from the Development Bank of Southern Africa (DBSA) assures that African governments are onboard and open to discussion. “Private-Public Partnerships will lead the increased investments into infrastructure,” says Mr Shaik.

From an upper tier perspective, this would seem to hold potential in securing business across the infrastructure sector in the future. However, companies actively involved in major infrastructure projects will need to weather the storm until such a time as the market comes back into balance.

A number of these companies are now diversifying. This includes mining company DRA. Paul Thomson, CEO at DRA Global explains that back in the nineties, “We realized that we were particularly vulnerable to the commodity cycle and we began to diversify our commodity offering and later our country offering.”

Despite the drop in commodity prices, the DRA has expanded rapidly over the past few years and is now established as a company that drives infrastructure development across the African region.

In many ways the current crisis is skewed such that investments into infrastructure such as roads, rail, and power would be of immense help to the mining and petroleum industries in terms of helping them cut costs to weather the downturn.

The tragic twist being that the slow down in infrastructure build is partly to blame on drops in revenue from the mining and petroleum sectors, and the failure of these sectors, and governments, to adequately reinvest capital during the boom to prepare for any potential downturn.

However, there is hope that PPPs along with some savvy capital expenditure support from the private sector will get a number of infrastructure related industries back on track. And while the slump in mining and oil and gas has certainly hurt African infrastructure, it has not killed it.

Andries Rossouw from PwC explains that, “We are not going to see an overnight fix. It will take some time. However, we are looking for clever solutions in order to make big projects happen now so that the continent stands to gain from the future.”
First published by http://access-africa.com

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