November 21, 2011 / 11:15 AM / 7 years ago

Mozambique gears up to become coking coal hub

MAPUTO (Reuters) - Mozambique is the scene of a global coal rush but the former Portuguese colony’s vast reserves will be exploited at a snail’s pace as it struggles to rebuild ports, roads and railways.

Coal loading operations proceed at Coal and Allied's Mount Thorley Warkworth mine in the Hunter Valley about 140 kms (87 miles) north of Sydney in this October 18, 2010 handout picture. REUTERS/Rio Tinto/Handout

Mining executives gather in Maputo this week to hear about possibilities and challenges for investing in the coal sector at the Coaltrans Mozambique conference which starts on Tuesday.

“The coal resource is huge. On a 5-7 year horizon Mozambique should become a pretty significant exporter,” said Andrey Litvin, an analyst at Edison Investment Research.

Mozambique’s geography and geology are promising. Lying on Africa’s southeast coast, it is in a prime position to ship coal to hungry and growing Asian markets such as India and China.

Its northwestern Tete province is believed to hold one of the world’s largest untapped coal reserves that producers compare with Australia’s coal-rich Bowen Basin.

Some $3 billion have been injected into Mozambique in the last five years alone, an IMF report showed, and analysts predict that is likely to multiply as the war-scarred country goes out of its way to attract foreign investment.

The government has steered away from the resource nationalism that is cropping up across Africa, with Zambia and Ghana moving to extract more taxes or royalties from miners and Zimbabwe forcing them to surrender majority stakes.

“That’s the reason everyone is there and getting excited about Mozambique. One of the main incentives is the fact that the government is so open,” said Xavier Prevost, a senior independent coal analyst.

Mozambique is seen as a low-cost producer and has not been plagued by the steep hikes in wages and electricity that have hit neighbour South Africa.

But the strong metical, up almost 20 percent this year against the dollar, could pressure mining margins as costs are mostly paid in the local currency while coal is priced in the U.S. dollar.

POOR INFRASTRUCTURE

While both thermal and coking coal have been found in Mozambique, it is metallurgical coal - a key steelmaking ingredient - that holds the biggest allure for investors given high prices on the back of limited available global supply.

But infrastructure remains a concern as companies gear up to bring their projects into production, yet face limited capacity on the rail line linking the Tete province with ports.

Upgrades on the rail line are ongoing, yet it will take years until they materialise on a big enough scale to meet demand from the likes of Vale, Rio Tinto and others setting up in Tete.

At the same time Mozambique is keen to have the private sector pitch in or even lead construction ventures, which could accelerate projects over the next 2-5 years.

“Nobody expects the government to build all that infrastructure because they don’t have the money, although the government is likely to take a stake in any venture or infrastructure company,” said Litvin.

This is in stark contrast to South Africa, another major coal exporter, where the state holds a monopoly on all rail infrastructure and is reluctant to get the private sector help foot the bill to speed up much-needed expansions.

Some companies in South Africa already export part of their product through Mozambique’s southern Maputo port where they can get allocation not available at South Africa’s own Richards Bay Coal Terminal and which is closer to their mines in Witbank.

This coincides with big investments to improve performance, turnaround times and efficiencies on the Maputo Corridor, a trade route linking South Africa with Mozambique.

Despite the vast deposits of coal and other minerals, Mozambique’s mining sector accounts for less than 5 percent of the country’s gross domestic product. That is bound to change.

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