Monday, February 08, 2016 2.59 PM / FDC
The Nigerian economy has remained susceptible to the swings in the global energy market for over fifty years. With crude oil accounting for approximately 70% of government revenue and 83% of export earnings, Nigeria is forced to make difficult adjustments almost every time there is a depression in oil prices.
This situation is compounded by corruption, and the poor management skills of economic managers. There has been several calls for the diversification of the economy but nothing significant has been done. Now that we are at the trough of the economic cycle, and with a new government at the helm of affairs, it is imperative for us to put on our thinking caps to explore alternative sources of growth.
Nigeria is richly endowed with mineral resources that are yet to be explored. In 2014, solid minerals accounted for about 0.14% of the GDP, significantly lower than the 10.44% contributed by oil and gas.
The Nigerian Extractive Industries Transparency Initiative (NEITI) carried out an audit in 2012 which revealed that Nigeria has over 40 different kinds of latent solid minerals and precious metals. According to the report, 70% of the mineral endowments are located in the northern part of the country.
The paradox is that the north is also the most impoverished region in the country (NEITI. 2012. “EITI IMPLEMENTATION: APPLICATION OF EITI TO THE SOLID MINERALS SECTOR IN NIGERIA” .
Investments into the mining industry would not only diversify the economy away from oil and gas but would also ensure investment into this extremely impoverished region.
Nigeria’s Solid Minerals and their Economic Value
The solid minerals available in commercial quantities in Nigeria include coal, columbite and tantalite, limestone, tin ore, gold, lead and zinc amongst others. Our focus will be on the economic value of columbite/tantalite, coal and tin ore.
Columbite and Tantalite:
These minerals are found in Plateau, Kano, Kaduna, Bauchi, Kogi and Nassarawa states. Columbite and tantalite are substitutes for one another. They are major components used in the production of condensers and micro-electronic technology (chips and processors), cell phones and nuclear reactors. They are also used as an alloy of steel to form weldable high speed steel for radio transmitting valves and heat sensitive detective devices. A research carried out by Foramfera (Foramfera. 2012. “Tantalite ore export in Nigeria non-oil export opportunity in Nigeria” ) has shown that the return on investment (ROI) on columbite and tantalite ore is between 10 – 15% and China is a major market for tantalite, where it is being sold at about $122.40/kg.7 If Nigeria could rally investment around the 14,233 tons of proven reserves, columbite and tantalite mining could be worth $1.74bn to the Nigerian economy.
Coal production in Nigeria dates back to 1909 when it was first discovered in Enugu. Commercial production commenced in 1919 and reached its peak of about 583,425 tons in 1950, with reserves across Delta, Kogi, Ondo, Plateau, Bauchi, Kwara and Nassarawa, in addition to Enugu. However, the outbreak of war in 1967 resulted in the abandonment of most of the mines and the sector has never recovered. Coal is mainly used for power generation and production of steel. Coal fired plants accounts for about 41% of global electricity output while 70% of global steel production is from coal. With huge coal reserves in Nigeria, at about two billion metric tons, the country has the potential to address its chronic power challenge while also meeting the demand of neighbouring countries in the African region, and the significant demand from China, which accounts for about 50% of the world demand. The commodity is currently trading at $43.50/ton, which would value Nigeria's estimated two billion metric tons at $87bn.
Plateau State is endowed with a significant quantity of tin ore, which is used to create bronze, a water-resistant metal alloy. The metal is receptive to polishing and used as a protective coat for other metals. Accordingly, it has huge economic value as it is used in the production of tin oxide resistors, paint, electric lead wires, paper and ink industries. However, low investment and fragmentation plague the sector, which is also riddled with illegal mining activities and poor regulatory oversight. According to Foramfera market research, the return on investment on the export of tin ore is estimated between 10-15% (Foramfera. 2012. Tin ore cassiterite export in Nigeria non-oil export opportunity in Nigeria). The commodity is currently trading at $6.07/lb, which would value Nigeria's proven reserves of 10,546 tonnes at roughly $141mn.currently trading at $6.07/lb, which would value Nigeria's proven reserves of 10,546 tonnes at roughly $141mn.
THE MINING SECTOR VALUE CHAIN
Source: African Partner. 2004. “The mining industry value chain” .Africanpartner/image/services01.gif
Imperatives for the Development of the Mining Sector
In spite of the obvious economic value in the solid mineral sector, challenges have continued to hamper the sector's development and growth. The effects of these are evident in the high rate of inefficiencies, which have cost implications and are reducing the country’s competitiveness in the global market. According to the World Economic Forum, Nigeria ranked 127 out of 144 countries in the 2014/15 Global Competitive Index. Key challenges include: infrastructure, financing, security and regulation.
The high infrastructure deficit in the country has implications for the cost of logistics in the sector. Nigeria’s infrastructure deficit is estimated at $300bn. As most of the solid minerals are located in the Eastern and Northern regions of the country, an efficient and effective rail network is required to facilitate competitive mineral exports. Poor power supply is also taking its toll on the cost of mining as the mines have to self-generate their power. However, we expect that the Buhari government's commitment to infrastructure financing will positively impact this strategic infrastructure. The 2016 budget shows that the government has earmarked N1.85trn for capital expenditure, 230.36% higher than the N560bn expended in 2015. There has been improvement in power output in recent times, which is attributable to the privatization of the power sector and increase in gas supply. We expect this performance to be sustained through the financial support by the CBN, the increase in power tariffs and effective regulatory oversight. Accordingly, the outlook for infrastructure development in the country looks positive.
The mining sector is capital intensive and requires long term investments. Macroeconomic stability and clarity of policy are key to attract the required investments. The uncertainties witnessed in recent times has seen net foreign direct investment plunge from a high of $8.1bn in 2011 to $1.6bn in 2015, hence the need for the government to be articulate about its policy direction. The active participation of the government will also encourage the banks to lend to potential investors. The Bank of Industry in Nigeria has promised to dis burse a loan estimated at N24bn to entrepreneurs willing to invest in the solid minerals sector. Accessibility to long term financing is a prerequisite for adequate investment in capital expenditure while commercial banks may be required to bridge the short term funding gaps. The CBN has continued to advocate that commercial banks should lend to the solid mineral sector. We expect to see inflows of investment into the sector in the medium to long term.
Insurgency and kidnappings are of major concern to investors and expatriates. This distorts activities and increases the cost of doing business. The commitment of the new government to tackle insurgency through increased and effective funding of the military is positive, alongside the significant drop in the rate of attacks by Boko Haram. Similar commitments have been made by the Buhari administration with regards to kidnapping and initial steps to better arm and equip security operatives at the state level are beginning to yield results. This is a welcome development and has been commended by the global community. The expected improvements to the security situation will boost investor perception of the country and attract more foreign direct investmen
A dynamic regulatory environment is vital to attract the required investment into the sector. With the changing fundamentals in the global commodity markets, it is necessary that the government review the 2007 Mining Act to reflect the new market realities. Commodity prices are currently depressed due to the oversupply in the market. The Bloomberg Commodities Index has declined by 27.98% yearon-year. Price competitiveness is an imperative globally. Some of the changes the government may consider include the downward review of the current royalties and taxes so as to enable the producers to breakeven and price their commodities competitively. The Minister of Mining has been advocating for inclusive participation by all the stakeholders including the legislators in order to revamp this moribund sector. With mining being a major pillar of the current administration, we expect the passage of investor friendly laws that will enhance its attractiveness.
Despite the fact that Nigeria is well endowed with these natural resources, it remains one of the poorest nations in the world. There is no better time to take the relevant fundamental decisions that will steer the economy back to the path of growth and stem the looming social crisis. The change in the country’s export base will reduce its exposure to exogenous shocks, lower its unemployment rate, increase government revenue and boost the value of the naira.
The Minister of Solid Minerals, Dr Kayode Fayemi, has solicited for state governments to establish investment vehicles either wholly owned by the states or in partnership with the private sector through which they can exploit the solid mineral deposits in their states. This is a step in the right direction and should translate in an increase in investment and activity in the sector. The plan to increase investment in infrastructure from about 15% to 30% of budget will also create an enabling environment required to support the sector. There is no better time to revamp this abandoned jewel than a time like this when the downward pressure on the oil price has negatively impacted on the hydrocarbon sector.