Cautionary tale from Mozambique

2013-04-18 00:00

MOZAMBIQUE’S transport system offers a cautionary tale to African mining ventures, as investors play poker with the government over fixing links that remain shambolic two decades after its civil war.

Foreign mining companies are betting in Mozambique on one of the world’s largest untapped reserves of premium hard coking coal relatively close to Africa’s east coast. But they have run into a problem facing many minerals exporters across Africa. “If you can’t take those goods to the market, you are wasting your time,” said Sipho Nkosi, CEO of South African coal producer Exxaro, explaining the difficulties experienced by many such projects on the continent.

Tens of millions of dollars have poured into the only rail link between Mozambique’s remote coal fields and Beira, its export gateway. But despite the upgrades, heavy rains flooded parts of the Sena line in February, paralysing exports.

Brazil’s Vale declared “force majeure” on coal shipments due to the two-week shutdown, invoking clauses in supply contracts covering disruptions beyond its control. A mine run by the Anglo-Australian Rio Tinto group also ground to a halt, leaving rows of empty railway wagons at Dondo, about 20 kilometres from Beira.

About $20 billion is needed to revive Mozambique’s railways and ports, industry leaders estimate, a massive cost for a country the United Nations lists as the third poorest on Earth.

While Vale is spending heavily on a separate line to the northern coast, rail investments have generally fallen short of needs so far. A concession deal to bring the Sena line back into full operation fell short of expectations and infrastructure development is generally slow.

Mozambique’s government insists that any infrastructure development projects also serve other uses such as non-coal cargo, shipments from neighbouring states and passengers.

“We are not building infrastructure just for coal,” Transport Minister Paulo Zucula said.

Much is at stake for the former Portuguese colony, where the average annual per capita income is just over $400. The government is counting on mining and new transport routes to boost economic growth and create jobs, in coal and elsewhere.

Rio Tinto’s January announcement of a $3 billion write-down on the value of its Mozambican assets, partly due to problems in getting coal to port, was a wake-up call to the mining firms and the government. They worry that buyers of coking coal may turn to other markets.

With coking coal markets oversupplied due to lower demand from steel mills and higher domestic production in China, the delays may favour the mining firms in the short term. They hope prices will have recovered to highs hit in 2011 by the time they can export Mozambican coal in greater quantities.

But as in Guinea, Democratic Republic of the Congo and Africa’s biggest economy, South Africa, the same question hangs over Mozambique’s need to link its mines to its ports: who will invest the billions of dollars needed for railways and terminals, and who will control them once they are running?

At one stage, the government asked mining companies to commit themselves contractually to specific planned shipments so it could use this to obtain the billions of dollars of financing needed for infrastructure. Many firms declined. Investors are sceptical, too, about Mozambique’s promise that it will be able to move up to 120 million tons of coal per year by 2020.

“This is an annoying poker game in which every side wants the other to do something without committing,” said Joseph Hanlon, a senior lecturer at Britain’s Open University and an expert on Mozambique.

With a gross domestic product of just under $13 billion, Mozambique says the private sector must find the billions required to fund infrastructure development. But recent drops in coal prices are making financiers cautious.

“You have less value for minerals, less capital, which is compounded by the lack of decisions regarding the completion of the infrastructure to get the coal out,” said Stephan Morais, deputy CEO at Mozambican investment bank BNI.

Eurasia Group Africa analyst Mark Rosenberg said not only did CFM suffer from its own management problems, but the entity was “a channel for the political and commercial interests of President Armando Guebuza and senior members of the ruling Frelimo party, introducing further inefficiencies”.

CFM says it will soon set up an independent operator to manage the various rail lines, while rates and access will be administered by a state regulator. — Reuters.

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