Diamonds or Coal? … Tough choice for Botswana

Diamonds or Coal? … Tough choice for Botswana

Lack of diversity has been Botswana’s weak spot with the southern African country vulnerable to growing competition from other diamond-producing countries in the region. In the past few years, indications were that coal might be the major product in the Botswana mining sector, as production forecasts indicate a rise in the coming years.

But analysts are now warning that coal is not the best option for Botswana’s economic diversification.
Renowned local economist and former Bank of Botswana deputy governor, Keith Jeffries, set the tone this past week when he warned that coal cannot fully replace diamonds as Botswana’s main revenue earner.
Speaking at the Botswana Resource Sector Conference recently, Jeffries noted that coal is much less profitable than diamonds.
He backed up his argument by stating that the current “low price” environment for most minerals is a challenge as well as water constraints.
Botswana is currently experiencing water shortages across the country. The country also saw its coalmines shutting down due to low global commodity prices. According to Jeffries, groundwater abstraction rate is greater than replenishment rate as well as high costs of new supplies from the Zambezi River and Lesotho.
He said undiversified exports are a challenge, as diamonds accounted for 69 percent of exports in 2015. Jeffries added that historically, mineral revenues have been more than a third of government revenues.
There is high unemployment and insufficient new job creation, he observed.
Jeffries, who is the Managing Director at Econsult Botswana, further warned that diamonds will continue dominating in the foreseeable future, but will not provide the expected economic growth, as they will make a diminishing fiscal contribution.
He said the country was lucky to have discovered diamonds after independence, which could have been a different story where they discovered during the colonial era.
With diamond revenue accounting for the largest portion of government revenues, Jeffris said, fiscal revenue has fallen due to a decline in commodity prices globally.
He said there is a perception that mining is a profitable business. He said while the statement is true about the past, it is not true about the future. He, therefore, called for a fundamental change in mindset and policies.
Analysts have also warned that Botswana is at a critical historical juncture, with diamond revenue likely to decline in the near future and options for economic diversification fairly limited.
Jeffries’ worries are echoed by Ross Harvey, a Senior Researcher at South African Institute of International Affairs (SAIIA), who argues that coal exports are an option for Botswana’s economic future, but too many questions remain currently unanswered for this to be the primary policy focus.
He says proficient broad-based investment in human and physical capital is crucial for the country’s future success; diamond rents have not been efficiently invested in this respect.
Mining Weekly reported recently that there had been over-enthusiasm in Botswana over coal, which could not replace diamonds as the margins and profitability of even a large coal industry would not generate anything like                                      the volumes that diamonds had generated.
Speaking at the same event, head of Power at Jindal Africa, Neeraj Saxeena, said there should be clear policy to guide the development of coal mining, such as, development of the downstream supply chain.
He said one of the challenges the industry faced is the non-availability of infrastructure that reaches to all mining areas resulting in high transportation costs.
On a related matter, Jeffries said there is need for low-cost mining production in Botswana to mitigate the recent closure of mines in the country.
“If we think we can continue as a mining country without being a low-cost producer that will be a big mistake,” he said.
He said the real challenge was to ensure that mines could survive in tough times to enable them to thrive in times of plenty.
Jefferies said the many mines that had closed in recent years highlighted the lack of focus on low-cost production.  He said being a low-cost producer is absolutely essential.
Copper and nickel had a dismal 2015 leading to the smelter closure at Botswana’s oldest copper mine, BCL.
The same year, cash-strapped miner, African Copper announced the closure of one of its two mines, Thakadu Mine.
The company also decided to significantly cut production at its flagship mine, Mowana open pit.
Thakadu became the second copper mine to close after Discovery Metals shut down Boseto Mine in January 2015.  Hundreds of jobs were lost when these mines were closed.
Jeffries said the generation of new jobs was hugely challenging with only 1 000 new jobs created for 40 000 students coming out of the education system.
He said mining will not solve the unemployment problem and jobs would have to come from elsewhere.
Reports indicate that the tourism sector is now completely eclipsing copper and nickel, which were once Botswana’s second largest source of export revenue.
The barriers to seaborne coal export would require a big ramp up of the rail, but the US$15-billion investment needed was not likely to be made at current low coal prices and general uncertainty around coal.
Harvey agrees that tourism is Botswana’s ultimate renewable revenue stream, and its future depends on environmental sustainability.
For these two reasons, Harvey says, Botswana should do everything within its power to stimulate increased tourism demand, and to preserve its pristine wilderness.
Botswana’s GDP growth slowed down in 2015, recording negative growth (-0.3 percent) for the first time since the global financial crisis in 2008-9.
Jeffries said swings in overall GDP growth tend to be driven by mining growth. He also spoke of mining declining from a high growth of 24.2 percent in 2013 to -19.7 percent in 2015. Diamonds, followed by copper and nickel, mainly drives Botswana’s mining growth.
Official figures show that minerals dominated exports by 75 percent in 2015 and rough diamonds the largest export commodity by 63 percent.
“Minerals are the largest contributor to government revenues, but share is declining. It fell from 48 percent in 2006/07 to 35 percent in 2015/16,” said Jeffries. He added that there is need to mobilize more revenues from domestic sources, as the SACU revenue is expected to fall.
Meanwhile, the outgoing BCL Board Chairperson, Dr Akolang Tombale, warned this week that one of the oldest copper mines in the country faces an uncertain future.
He said that entity that has been operating for some time would go under if it cannot redefine its current operating model in the face of the fundamentally changed environment.
According to Tombale, BCL Limited is no exception, and its future lies in redefining its operating model to meet any emerging needs of the future.
Tombale said that BCL Limited operates some of the lowest grade ores in the world in very deep shafts, and at depths in excess of 1 000 metres underground – making these mines very costly to operate; very dangerous to operate in terms for potential accidents and difficult underground conditions, for example, high temperatures.
“The mines have been operating for a very long time – more than 40 years. As a result, the future in no longer in these mines, especially with the ability to withstand long mineral downturn price cycles.
“The future of the country lies in the development and exploitation of its mineral resources in a manner that would drive its industrialization, such as in some of the leading economics in the world,” he said.