Security of supply set to
drive deal-making in 2023

In recent years, the drive towards decarbonisation, compounded by geopolitical considerations, has accelerated the energy transition. This trend is driving strong demand for  “green metals”: copper, nickel, and cobalt as seen from the commodity price boom.

On the supply side, disruptions threaten the ability of mining companies to deliver to the market  and thereby lose out on the rising commodity prices while on the demand side, customers such as global motor vehicle manufacturers are experiencing bottlenecks in receiving green metals just as demand for electric vehicles is taking off. Not only will they lose sales, they face significant fines for missing regulatory emission targets.

Issues around security of supply have caused many companies in the mining value chain to re-think their operations and supply chains. “Security of Supply” is therefore a key theme in the sector now and is informing the corporate activities of many of our clients.

Supply risk is mainly driven by constraints in mining capacity, energy security, access to quality infrastructure, and geopolitical tensions.

An example of constraints in mining capacity is in South African mining exploration where it is estimated that there are over 5,000 applications awaiting review and approval from the Department of Mineral Resources and Energy (DMRE). Other resource-rich countries such as Zambia and Guinea have seen Foreign Direct Investment (FDI) decline sharply in the recent past and have recognised that the only way to reverse this is to implement business-friendly policies which will attract new investment.

Energy security is a major theme across the globe and the African continent has not been spared as chronic shortages and rising input costs continue to impact supply. Many commodity businesses have invested in primary generation projects over the last few years and in September 2022, the South African government began to engage the likes of Sasol and Sappi to purchase their excess energy. Several mining companies are seeing the opportunity to convert their energy operations from a cost-centre into a new source of revenue – particularly with the Net Zero commitments taken into consideration.

Another key issue is access to quality transport infrastructure. Business Leadership South Africa and The Minerals Council of South Africa have bemoaned the state of South African ports. They estimate that the country has lost out on between R35bn and R50bn annually between 2020 and 2022 due to the declining state of rail and port infrastructure at a time when they should be enjoying windfall gains from commodity prices.

We have seen increased geo-political tension between Russia and Ukraine as well as the US, China, and India as they jostle for prominence on the global stage. With Africa still possessing limited manufacturing capacity and technical skills, this leaves many of the operators unable to effectively plan or pivot their supply chains in response to global events.

We expect Security of Supply to be a key catalyst for M&A activity in 2023 driven by the consolidation of smaller tier-two and tier-three African mining companies, and vertical integration. Consolidation will give smaller players the critical mass to build supply chain resilience and compete effectively. Vertical integration will be driven by manufacturers acquiring upstream mining operations to ensure supply certainty.

As a leading Pan-African banking group, Absa is bullish about the prospects for further corporate activity in 2023. The events of recent years have prompted a rethink of global supply chains and the perception of “Security”. There are significant rewards to be reaped as the energy transition gathers momentum. Ultimately, the mining companies that build resilient supply chains will be the winners.