DAVID MPARUTSA: SMEs could bounce off growth in the mining sector

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 (SMEs) 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 GDP is significant. In SA this contribution sits at 8% to 10% depending on the economic cycle; in oil-rich Nigeria this is about 7%; and Botswana has nearly 35% of its economic activity centred on mining — specifically the diamond sector.

While there is often a focus on the mining companies themselves, many people lose sight of the downstream effects these operations have on the broader economy and how this affects non-mining sectors as well.

Take Botswana. As part of a visit to a mining client in the region we learnt that this mine buys 30,000 pairs of leather gloves every year — typically imported from China and SA. 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, much of which exported from the region.

There exists an opportunity for Botswana to use its cattle industry to capacitate the supply of leather gloves that it is importing. One has to imagine that if it is importing leather gloves, it is similarly importing leather boots for the army and police, and this demand could create a whole new local industry. There is no local supplier at the moment, but it is encouraging to note the work being performed by the Local Enterprise Authority to close this gap.

This is the opportunity 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 the need to invest in local capacity. When 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 ravages of Covid-19 on certain sectors, but it is now a case of building on this before the sector turns again.

SA’s Richards Bay region is a perfect example of why this matters. Unemployment runs at 40% to 60% and the two 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 tension.

The businesses in the region are aggressively looking to deploy enterprise and supplier development budgets to establish new small businesses that can service not only the mining houses but also do business with each other and ultimately try to 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 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 SA mining sector have set themselves a target of creating five non-mining jobs for every one mining job that now exists. The utilisation of enterprise and supplier development budgets to achieve this aim is a catalyst, and a glance at the Anglo-American annual report shows that the company spends $3.1bn on local procurement in SA and a further $610m 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 co-ordination of efforts among role players, and we expect this will lead to deeper value chains.

A good example of this would be in Ghana, where the local chamber of mines has begun to co-ordinate 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, the industry body highlighted that 85.7% of producing members’ annual expenditure was retained in Ghana, helping fund local infrastructure development, build small businesses and capacitate social projects.

In SA tourism and mining companies often share an ecosystem in places such as Limpopo and Rustenburg. When the travel restrictions kicked in during 2020 many of the hotel and tour operators, who are major employers in these regions, 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. 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.

Even at a banking level we have had to re-evaluate our skills base. It is no longer enough to say we simply offer credit or trade finance to small businesses. Instead, we have had to invest in our people, knowing our clients and their value chains intimately and understanding what levers we can pull to create new businesses.

With the African Continental Free Trade Area expected to be a driver of intra-African trade and this renewed focus on the capacitation of local supply chains, there is a 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 such as 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?

• Mparutsa is head of enterprise & supplier development at Absa Corporate & Investment Banking. Absa sponsors the Absa Business Day Supplier Development Awards.