Supporting Current Trends In The Value Chain

Clyde & Co's April 2012 'Current trends in the value chain' Commodities Report (Report) analyzed two years of data on M&A in the mining and commodities sector, to illustrate how those businesses were responding to the threat of resource scarcity in the face of rising demand, by moving up and down the value chain.

In this article, we map the trend towards vertical integration identified in the Report as exhibited in Mozambique, the Lusophone rising star of East Africa's natural resource sector.

Going to the source

Current trends1

There is no doubt that, while companies are keen to secure supply, they are cautious about the amount of capital they are prepared to commit, particularly as the outlook for commodities demand becomes less certain in the short term. As a result more companies are pursuing joint ventures, minority stakes and contractual arrangements such as supply chain collaboration.

This caution over pricing is also a factor influencing softs deals, where companies are starting to revisit upstream integration to control supply - whether through contract farming with cost-plus pricing, or the acquisition of farm land rather than attempting to manage uncertainty through more traditional means - the trading community and hedging tools.

Mining giants have invested heavily in Mozambique's hard commodity resources in recent years. Anglo American's purchase of a majority stake in the Minas de Revuboe metallurgic coal project in July 2012 was the latest entry into a market already crowded by Australian miners Rio Tinto and BHP Billiton, Brazil's Vale and Kazakhstan's ENRC. Substantial coal finds in Mozambique have also been complemented by discoveries of iron ore and titanium Mozambique is therefore a market in which companies are prepared to make significant capital investments though the exact commitments being made remain uncertain since development costs cannot immediately be quantified Anglo American is said to have increasingly turned its focus from major deals to smaller, bolt-on acquisitions in key commodities and the Revuboe acquisition would be one example of this The mining sector currently makes a 3% contribution to Mozambique's GDP, but Government plans to increase its participation in the sector by securing a stake in strategic mining projects. This strategic involvement will see a rise in the joint venture, minority stake and contractual arrangements contemplated in the Report In terms of soft commodities, cotton and sugar...