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Natural Resources in Africa


Note: This report is an extract from the book "Grow Rich in the New Africa".

Table of content: Part 1: Forests
  Part 2: Water
  Part 3: Natural Beauty
  Part 4: Minerals
  Part 5: Investments in the Mining Sector

Africa is blessed with an abundance of natural resources. Commodities as an asset class for investors started a major bull market about ten years ago. Since then, this trend has increased in strength, despite a temporary break in 2008/2009 during the preliminary climax of the world financial crisis. It can be expected that the secular bull market in commodities will continue for at least the next ten years. Accelerated population growth and the dynamic development of emerging economies, especially China, and many frontier markets are the major driving forces on the demand side, while limited resources of many commodities and higher energy prices are the most important factors on the supply side. The gap will continue to exist even though the major recession, or even depression, of the Western economies might alleviate the pressure for a while.

While the developed world has been living beyond its (financial) means for several decades, the opposite is true for Africa. The continent has not lived up to its potential, because of both internal and external influences. This is subject to change. Major shifts that can be observed in the world will clearly allow Africa to realize its catch-up potential. Some of them are mentioned in the opening chapter while others are described in Redefining Business in the New Africa. Existing yet dormant wealth will be released and activated, and new wealth will be created. Business people that are willing to invest now will be able to benefit tremendously in the future.

In this respect, the natural resources of Africa will play a key role. The continent is incredibly rich because it is endowed with a large variety of natural resources. Some resources are already known while others are still to be discovered. As Africa is still heavily under explored, a lot of surprises and some big findings can be assumed for the future. However, this will not happen automatically. A lot of investments have to be made to uncover the hidden resources and to unleash their economic potential. Geologists, engineers, financiers, and many workers are needed.

The universal law of sowing and reaping that is described in the Bible and many other pieces of world literature should be respected. Only those that are sowing into Africa now, i.e. by doing research, employing people, sending managers, founding local companies, installing production facilities, building networks, and investing money, will be able to reap the fruits that will grow over time based on their initial measures and ongoing activities. Companies that just want to sell their products and services without a willingness to invest, which means they want to reap without having sown, will not succeed. One cannot grow rich in the New Africa by focusing on short-term success and immediate returns only. This is not only true for the exploration and mining businesses, but also for agriculture, manufacturing, and service industries.

New Ways to Wealth

As a former investment banker and stock market trader, I learned to understand the importance of sound, long-term strategies and sustainable business models. I am deeply convinced that business is changing. It is changing much faster and more dramatically than the majority of market players realize.

A new understanding of wealth, and how it will be created, released, built, leveraged, protected, stewarded, and transferred, will be needed if you not only want to financially survive the challenges of the coming years, but to prosper despite economic and financial turmoil. Huge paradigm shifts are evolving and influencing business and investments, as well as all other spheres of life. In order to become successful in Africa, it is of utmost importance to fully understand the impact of the changing rules and shifting paradigms at an early stage and to act proactively.

Natural resources will still have a role to play in this new paradigm. So, the following sections will introduce you to Africa’s natural resources, distinguishing resources above the ground and resources under the ground. Above the ground assets include renewable energies such as hydro power, solar energy, and biomass. Tropical rain forests and woodlands also represent high value.

Unused land can be transferred to arable land, which is a primary process of wealth creation. Please see the research report on Real Estate for further information.

Forests

Many different kinds of forests can be found in Africa. According to the Food and Agriculture Organisation (FAO) , Africa’s forests and woodlands can be classified into nine general categories including; tropical rain forests, tropical moist forests, tropical dry forests, tropical shrubs, tropical mountain forests, subtropical humid forests, subtropical dry forests, subtropical mountain forests and plantations.

There are two regions in Africa that have large resources of tropical rain forests that can be used for wood production:

North and South of these areas of tropical rain forests there are zones where different kinds of less dense forests exist. While most areas in Northern Africa are mostly overused by a growing population, vast areas of the thinly populated countries south of the Congo basin, e.g. Angola, Zambia, and Mozambique, are virgin territory for forestry and agriculture.

Most of the other countries in Africa have little or no forests. In South Africa, less than 2% of its land is covered by dense forests. Some reforested areas are used for commercial wood production. Deforestation is a major problem in many countries, as wood and charcoal is being used as fuel for cooking by many low-income people. Deforested areas are exposed to erosion and land degradation. The following chart depicts the forest areas (including woodlands) as a percentage of total land area.

In absolute terms, the following countries have the largest forest cover:

Country Total forest (in 1,000 hectares - 2000)
Dem. Rep. of Congo 135,207
Angola
69,756
Sudan (incl. South Sudan) 61,627
Tanzania 38,811
Zambia 31,246
Mozambique 30,601
Cameroon 23,858
Central African Republic 22,907
Rep. of Congo 22,060
Gabon 21,826



Source: Trans Africa Invest

There are several opportunities in the timber value chain. First is logging and exporting. However, countries are beginning to prohibit exporting of raw timber. When the current President of Gabon, Ben Ali Bongo, came to office, he stopped exports of raw timber in order to develop a process industry in the country. Recently, the Gabonese government established a special economic zone at Nkok for the purpose of producing wood products. The National Wood Company of Gabon is building a processing facility for timber. So, processing will be a growing industry on the continent, pushed in part by government regulations altering the existing value chain.


From left: Golf course surrounded by tropical forest, Nigeria; sawmill in Bulembu, Swaziland; re-forestation in the highlands of Swaziland

Also, as reforestation projects are key elements of environmental programs in many African nations, they offer excellent opportunities for long-term investors. Growing wood is an attractive natural dividend. In addition, in the short to medium term, re-forestation projects can be developed as climate change initiatives, which earn revenue from carbon exchanges. The Nile Basin Reforestation Project, an initiative of Uganda’s National Forestry Authority (NFA), is doing just that while creating local jobs.

On the whole, as wood reserves are limited and forested areas are still in decline in Africa while its population is rapidly expanding, it is safe to say that wood prices and the value of forests as a commercial asset will appreciate over time.

> Continue to part 2