A fraudulent loan and a bogus consultancy firm have put a damper on Nigerian oil producer Lekoil which, since it discovered and announced the fraudulent nature of an $184m loan arrangement with the Qatar Investment Authority, has suffered heavy losses on the London Stock Exchange, where its market cap fell £35m ($45.6m) in less than a week.
Afarak’s South Africa woes show risks of mining geared to China
South African miners that are geared to Chinese demand are walking a tightrope between high domestic electricity costs and the prospects of economic slowdown in China.
Afarak, the chrome producer listed in London and Helsinki, said on June 12 that it was idling two furnaces at Mogale in South Africa, due to high energy costs, falling ferrochrome prices and US-China trade uncertainty.
- Afarak is currently in the process of a tender offer to buy back shares at 1.015 euros.
- The offer runs until July 1. The current market price of 0.87 euros is well below that, suggesting the time is right for holders to exit.
The company is also subject to a special Finnish audit of accounts between 2015 and 2018 at the demand of minority shareholders.
China is the world’s largest producer of ferrochrome, a key element in the production of stainless steel. But has no chrome ore supplies of its own.
- Three quarters of of the chrome ore imported by China in 2018 came from South Africa.
- Yet the country’s cost advantage in terms of chrome ore input are whittled down by energy costs, researchers led by H.H. Pariser wrote in the Journal of the Southern African Institute of Mining and Metallurgy in June 2018.
Power utility Eskom is central to South Africa’s failure to exploit its natural resource endowment.
- Afarak CEO Guy Konsbruk says that, in addition to the US-China trade war, “the sky-rocketing energy costs in South Africa have forced us to review our strategy”.
- Merafe Resources, a junior partner in a chrome joint venture with Glencore, has said load shedding by Eskom is the biggest challenge it is facing in 2019.
- The Minerals Council of South Africa has said that the latest round of inflation-beating increases granted to Eskom put 90,000 mining jobs at risk.
China is not likely to bear these costs forever. Capital Economics argued in April that GDP growth in China is set to slow to 2% by 2030.
An ageing Chinese population will mean a shift from investment to consumer spending that will hurt commodity producers, the piece argued.
- China’s capital stock is already significantly above countries with at a similar level of development, Capital Economics said, making it harder for China to increase productivity growth.
The headwinds from the US-China trade dispute are also unlikely to ease any time soon. There is a perception that Trump is likely to back down to limit the economic impact of tariffs ahead of elections in 2020. But that is only half the story.
- Goldman Sachs in research this month cites Michael Pillsbury, Director for Chinese Strategy at the Hudson Institute, who argues that the US has underestimated the influence of Chinese hardliners who object to Beijing’s concessions to secure a deal.
Bottom Line: Lower industrial electricity costs in South Africa are urgently needed in the context of Chinese metals demand which won’t continue to grow forever.