The Crisis in Mozambique Could Mean Trouble for India's New Energy Enclave

As the African nation undergoes a period of intense crisis, questions must be asked about whether its mineral investments-driven development strategy is viable for India’s energy plans.

Brazil Vale in Tete. Credit: Marcelo Coelho/The Mozambique Resources Post

Brazil Vale in Tete. Credit: Marcelo Coelho/The Mozambique Resources Post

When Prime Minister Narendra Modi visited Mozambique in July 2016 as part of his four-day trip to four African nations, energy was a key factor for discussion. Energy in the form of gas has become the latest attraction for Indian and other foreign investors, where coal had dominated for the past decade. Mozambique’s experiences in coal mining are, however, far from encouraging for the emerging gas industry. The southern African country is living through a set of intertwined crises affecting its economy, politics and national security which – combined with a prolonged drought – has not only crippled everyday life but most economic activities in the country. In such a scenario, questions must be asked about whether its large-scale mineral investments-driven development strategy is viable for India’s energy plans.

From stability to crisis

The coal area in the Tete province, in far north-western Mozambique, is a periphery within a country that is admittedly on the periphery of the global economy. Managing supplies and transporting a bulky product like coal out of this area was always going to be a major concern. Mozambique, which declared independence from Portugal in 1975 – only to get drawn into an extended civil war, lasting until 1992 – has never been able to establish any significant infrastructure. Its road network is very limited and so are the railways and port facilities. Consequently, the coal trade has never been able to pick up and Brazilian Vale had to build its own railway and port at an estimated cost of $4.5 billion in order to ship coal out of the country.

After the lengthy civil war of the the 1980s made way for the 1992 Rome accords, Mozambique appeared to be finally entering  a period of political stability. Successive elections have been held. The dominant Frelimo party has always been in power but its presidents have stepped down after the constitutionally limited two periods in power, something which has been much more difficult to accomplish in neighbouring countries. The former guerrilla outfit, Renamo, joined electoral politics in 2014 and a fragile peace has been in place since then. But with Renamo being kept out of power nationally and in the central and northern provinces (where it is the strongest), peace could soon disappear. Allegations of electoral fraud have been made by Renamo and outside observers. Mediators have not been able to arrive at a compromise, despite lengthy talks. Much of rural northern and central Mozambique is on the brink of a return to civil war, with military convoys protecting traffic on the main highways. And the coal trains have more or less stopped running as they were being fired on.

The consequent economic instability completed the picture of radical investment uncertainty in Mozambique, which only a few years ago, was one of the most promising destinations for foreign investment in Africa. Several secret loans of more than $2 billion were taken by private companies in 2012-2013 but were underwritten by the Mozambican government. In 2015, when these were revealed, a wide hole became apparent in the national budget. Without adequate explanations and accountability, much of the crucial international aid that makes up a significant part of the national budget was withheld. The Mozambican currency has devalued by 70% to the US dollar since December 2015.

In addition, regional drought is affecting the poorest sections as a backdrop to the other crises that have engulfed the country. Farmers are not able to feed themselves, while the government is out of money and unable to move goods effectively from one part of the country to another, owing to security concerns. The situation for the Mozambican population is overall very difficult with this set of interconnected crises.

The coal industry’s downward curve

It has long been known that Mozambique has significant deposits of high-quality coking coal for steelmaking in the north-western province of Tete. However, this arid, upland region, cut through by the Zambezi river, is not only far from the capital Maputo, but also from any significant markets, especially given that South Africa, the main regional economic force, has its own supplies of coal. The global mineral boom led by Chinese economic expansion did, however, turn remote Tete into a major investment destination in the early 2000s.

Developing large-scale coal deposits is fraught with uncertainties, not only about the size and quality of the deposits themselves but also in relation to transport and regulatory concerns. The costs involved in opening the mines, relocating the displaced, getting railways and ports in place and transporting the coal to markets all proved much more cumbersome than expected, especially when Mozambican state support was not forthcoming. Jindal Africa, a subsidiary of the Naveen Jindal-led Jindal Steel and Power of the Jindal Group, was an early investor together with multinational mining investors British-Australian Rio Tinto and Brazilian Vale.

The industry hit a major roadblock when prices dropped around 2010, a situation from which it is yet to recover. ICVL, or International Coal Ventures Limited – the international investment company of the public sector Steel Authority of India, NTPC, NMDC, Vizag Steel and Coal India – assumed it had a bargain on its hands when it secured the Tete coal assets from Rio Tinto in 2013.  ICVL paid just $50 million in stark contrast to the $4 billion the company had spent to acquire the coal assets only three years earlier in 2010 when international prices were still high.

Satellite view of the Zambezi. Credit: Wikimedia Commons

Satellite view of the Zambezi. Credit: Wikimedia Commons

Continuing low coal prices, however, have meant losses of up to $100 million per year for ICVL since it took over the mine, leading to a complete halt in mining since December 2015 until international prices recover. In the meantime, Coal India and Tata Steel have left the Tete coalfields. Tata Steel still owns 30% of the Benga mine, together with ICVL, but has decided to leave operational decision-making to ICVL in the absence of prospective buyers. Lesser-known Indian companies have been quick to secure mining leases in Tete but are yet to start actual mining.

Midwest Africa, a subsidiary of Hyderabad-based Midwest Granites, is one of the more prominent companies holding mining leases in Mozambique. Essar has attempted to mine but has apparently not moved forward. The main Indian investors in Mozambique have been followed by a number of India-related contractors – including an India-Lesotho Joint Venture and MGC-RST Mining Lda, which is in charge of doing the actual mining work for Jindal at Tete – and consultancy firms, which do part of the planning reports like the environmental impact assessments and resettlement plans.

The result of these and other investor activities is that almost all available land has been claimed in the coal province of Tete, leading to difficult questions about where people will live in the future or how other activities apart from mining will be possible in an economy heavily dependent on agriculture. Those displaced by mining, for instance, have been forced to relocate some 30 km from Tete city and the vital Zambezi river. At the same time, the land claimed in mining leases lies unused due to the poor market conditions.

International energy investments and development

At a time when it is increasingly clear that fossil fuels must stay in the ground to avoid aggravating climate change, Mozambique is betting its future on these fuels. Its struggling coal industry consists of a peculiar mix of state-owned companies like Brazilian Vale and the ICVL, Indian big business like Jindal Africa and various speculative investors who hope that international market prices will improve in the near future. At this point, it is hard to see how coal mining can recover from its long-term slump. Drastically higher prices are needed to support Mozambican coal, given the high transportation costs. At a time when the demand for coal is on the decline, this is a big ask, especially with the Mozambican government mired in corruption scandals, which has lowered the possibility of receiving credit in the country.

Natural gas investments might appear more straightforward to those in coal given the offshore nature of the industry. With its small land footprint, gas could appear easier to insulate from national politics at least in relation to land protests and the insecurity of civil war. This seems to be the hope of a number of Indian oil and gas majors, including ONGC Videsh, Bharat Petroleum and Oil India Ltd., who have all invested in a consortium led by American firm Anadarko to extract gas from Mozambique’s northern coastal Rovuma basin. Yet coastal investments that plan to take the gas immediately to offshore destinations must depend on both uncertain national politics and international markets. The efficacy of billion dollar investments is not easily ascertained for decades into the future.

The multiple crises that are engulfing Mozambique at present may not be directly linked to the dependence on large-scale fossil fuels. At the same time, it is difficult to think that they are not at all related. Corruption and violence have tended to follow when a certain mineral promises sudden wealth only to be appropriated by foreign investors and a small domestic elite, as seen, for instance, in the Nigerian and Angolan oil industries. Coal mining has so far yielded very little for Mozambique in terms of jobs or income but investments have been significant in infrastructure and land, both reportedly closely controlled by key decision makers in the country. Indian companies in Mozambique appear intent on repeating patterns set by Western and Chinese investors in Africa to keep the benefits of resource development in the hands of a few.

Patrik Oskarsson is based at the Swedish University of Agricultural Sciences.

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