Why the mining sector is so critical to African SME development

By David Mparutsa | Head of Enterprise Supplier Development at Absa Corporate and Investment Banking

Increased profitability in the mining sector and a rebound in commodity prices is providing a powerful catalyst to small businesses as the continent emerges from the COVID-19 pandemic. It is imperative that we use the good times in this economic cycle to develop small and medium enterprises that will be sustainable when the cycle turns.

Africa is rich in natural resources and between Mining and the Oil and Gas sectors, the contribution to Gross Domestic Product (GDP) is significant. In South Africa this contribution sits at between 8 and 10% depending on the economic cycle, in oil-rich Nigeria, this is around 7% while a country like Botswana sees nearly 35% of its economic activity centred around mining – specifically the diamond sector. While there is often a focus on the mining companies themselves, many people lose sight of the downstream impact that these operations have on the broader economy and how this impacts non-mining sectors as well.

Let’s take Botswana for example: As part of a recent visit to a mining client in the region, we learnt that this mine purchases 30 000 pairs of leather gloves every year – typically imported from China and South Africa. On its own, the figure is impressive, but one then gets to thinking more broadly: Botswana has an ideal climate and operating environment for cattle farming with an estimated 2.5 million head of cattle at any point of time, much of which is being exported out of the region.

There exists a significant opportunity for Botswana to utilise its cattle industry to capacitate the supply of leather gloves that it is currently importing. One has to imagine that if they are importing leather gloves, they are similarly importing leather boots for things like the army and police, and this demand could create a whole new local industry – there simply is no local supplier at the moment, but it is encouraging to note the work currently being performed by the Local Enterprise Authority to close this gap. This is the opportunity that the COVID-19 pandemic has presented to the continent. During the globalisation era, it was a case of looking to outsource manufacturing to low-cost destinations and not need to invest in local capacity. When major supply routes were cut off in 2020, many countries began to re-evaluate the lack of local capacity.

For Africa, the recovery in commodity prices cushioned the impact of COVID-19 on certain sectors but it is now a case of building on this before the sector turns again. The Richards Bay area in South Africa is a perfect example of why this matters. Unemployment in this area runs at between 40% and 60% at any point in time and the 2 big mining operators in the region are Glencore and South32. Tensions between the community and the operators are well documented and the lack of downstream job opportunities leads to ongoing tension.

The major businesses in the region are aggressively looking to deploy enterprise and supplier development budgets to establish new small businesses in the region who not only can service the mining houses but can also do business with each other and ultimately try and mitigate some of the risks the miners face at the next downturn. Many of the global mining heavyweights have committed themselves to the UN Sustainable Development Goals (SDG) and are under scrutiny to align their businesses with ESG-linked investment strategies. The development of quality work and sustainable small businesses aligns perfectly here.

This focus on sustainability is key and participants in the South African mining sector have set themselves a target of creating five non-mining jobs for every one mining job that currently exists. The utilisation of enterprise and supplier development budgets to achieve this aim is a key catalyst and a quick glance at the Anglo-American annual report shows that the company spends $3.1-billion on local procurement in South Africa and a further $610-million in the rest of Africa. These are big numbers, but the key is making these investments sustainable. To ensure sustainability, we are seeing far greater coordination of efforts amongst all role players and we expect this will lead to deeper value chains.

A good example of this would be in Ghana where the Chamber of Mines has begun to coordinate efforts across all of its members and driven them to focus on the development of local SMEs and suppliers. In its annual report released in June 2021, the industry body highlighted that 85.7% of producing members' annual expenditure was retained in Ghana, helping to fund local infrastructure development, build small businesses and capacitate social projects.

In South Africa, tourism and mining companies often share an ecosystem in places like Limpopo and Rustenburg. When the travel restrictions kicked in during 2020, many of the hotel and tour operators – who are major employers - were unable to sustain themselves as employers, and this led to tension in local communities where mining businesses were expected to pick up the slack in the region. Instead of being inwardly focused, sector representatives have looked to see how they collaborate to ensure stability in local communities through new venture creation and supplier development. With the African Continental Free Trade Area expected to be a significant driver of intra-African trade and this renewed focus on the capacitation of local supply chains, there is a very real energy behind Enterprise and Supplier Development initiatives on the continent.

Underlying confidence in the mining and natural resources sectors has given this some momentum but other sectors like telecommunications, manufacturing, and infrastructure are starting to latch onto this and we expect that it could be a big driver of economic activity and wealth building in Africa over the next decade.

Are you ready for it?

(First published in Business Day, 6 October, 2021)

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