Seeds of Opportunity: The African Growth Series
March 2022 | Issue 5
In this week's issue, you will learn more about:
- The 5 Pillars of the Modern Energy Landscape
- The Huawei and Ozow Partnership
- Cloud Technology in Africa (Part 3 of 3)
- Improving Urban Mobility Networks in Africa
- Supply Chain Disruptions in South Africa Amidst Global Geopolitical Pressure
The 5 Pillars of the Modern Energy Landscape
The demand for power in Africa is growing at an exponential rate, but the continent is facing larger challenges than any other region in the world. Fast population growth, outdated technology and infrastructure, limited available funds as well as hugely dispersed population across the vast continent pose significant risks. The African energy sector, just like the global sector, has long been driven by the three growth drivers that are aimed at ensuring equitable distribution of energy supply, decoupling of carbon emissions from economic growth and foster the implementation of new sustainable, modern and digital infrastructure. These drivers are decarbonization of the energy generation space through the reduction of fossil fuel use, digitalization of the infrastructure to maximize profits and minimize loses and decentralization of the network systems away from expensive centralized grids towards modern mini-grids. However, there are two new drivers on the block, deregulation and democratisation. Democratisation of energy supply facilitates access to power as well as flexibility to choose the source of power. Consumers, especially in more developed countries such as the US and Europe, are prepared to pay a premium tariff for renewable power. Small-scale or distributed generation is an efficient mechanism to democratise supply across markets. Utility scale wind and solar power projects are now viable due to the sharp decline in the price of solar panels and wind turbines. Additionally, development in battery technology and small-scale storage will further revolutionise this field. Energy deregulation is the restructuring of the existing energy market and seeks to prevent energy monopolies by increasing competition. Each power company offers to sell its electricity at the lowest possible rate, which is then purchased by independent agencies to meet the demand. Energy is therefore delivered through the existing utility infrastructure owned by the utility companies which is responsible for transmitting the energy, but not setting the rate consumers pay. Users therefore receive the same service as in a regulated sector but at a more competitive rate.
Huawei launches secure digital payment solution with Ozow
Over the past few years, the world has evolved and accelerated into an interconnected digital ecosystem, where everything - from our phones to our computers - are linked. Companies worldwide have begun to understand the intrinsic need to develop solutions that elevate the experiences of consumers by creating platforms that provide an interconnected digital ecosystem. While continuing in their quest to bring convenience to its device users, Huawei, has recognised the importance of providing their customers with improved product experiences. In doing so, Huawei has partnered with one of South Africa’s largest fintech’s, Ozow, to provide a more convenient, easy and secure way to make instant payments on the Ozow platform and the Huawei AppGallery. To make a payment, Huawei users select Ozow as their payment method on the AppGallery. Users then enter their banking details and select an account to pay from. The device user then approves the transaction on their banking app through a secure second-factor authentication. Given the simplicity and convenience of Ozow’s payments platforms, device users can make real-time payments directly from their bank accounts without the need for cards and can start paying directly for their in-app purchases.
Cloud Technology in Africa
Part 3 of 3
Cloud computing is the on-demand use of a network of remote servers hosted on the internet and housed in a data centre. The system manages, stores, and processes data, rather than the user actively managing the computing on a local server or personal computer. The benefits of cloud computing for businesses include large cost reductions, improved customer service, improved operational productivity with access to international technology and markets. There are currently 83 colocation data centres across 15 African countries and the next step is to improve broadband by using fibre-optic networks to bring internet connections inland from underwater submarine cables. However, the implementation of cloud computing is limited due to broadband connectivity and cost. The continent has insufficient or low-quality broadband, whilst the cost of laying just one kilometre of fibre-optic cable ranges between USD 15,000 and USD 30,000 (ZAR 217,000 and ZAR 434,000). Improving the fibre-optic network will improve data centre capacity and with forecasts predicting that the growth of data centre capacity will enable the growth of African cloud revenues by 80 per cent by 2025.
Improving Urban Mobility Networks in Africa
With Africa’s rapid overall population growth and rising urbanisation rates, cities on the continent need to raise their efforts to ensure they can accommodate the growing needs but also take advantage of the economic activity this growth provides. Key areas of focus in some countries are around improving the mobility networks in the growing hubs to support economic activity. Several countries such as Senegal and Kenya are incorporating the use of electric buses for improving public transportation, reducing road congestion and carbon emissions in the key cities Dakar and Nairobi. In recent market activity, Senegal’s Bus Rapid Transit (BRT) project in Dakar is expected to receive more than €135 million in investment for the program which is part of the government's strategy of modernising its urban mobility and transport network by 2025. The program will be implemented through Meridiam and its partners Keolis Group and Fonsis which will provide the electric buses for the city. With estimates of the population growing to 40% in the next decade the project is a timely one and is a step forward in attaining the sustainable development goals (SDG8, SDG9, and SDG11). Similarly steps forward are also seen in Kenya’s booming e-mobility space from operators like the BasiGo which introduced two 25-seater electric buses for Nairobi. The success of such projects will attract more investment into this booming industry.
Supply Chain Disruptions in South Africa Amidst Global Geopolitical Pressure
Implications of the Russian-Ukraine war for households, businesses, and governments in South Africa
In the globalised economy we find ourselves in today, local economic growth in one country is hampered or driven by activities in the global market and South Africa is no exception to this. Globally, the economy took a sharp plunge induced by the Covid-19 pandemic in 2020, which resulted in soaring inflation levels, reduced employment levels, amplified semiconductor shortages, and acute supply chain disruptions. Global and local lockdowns had several knock-on effects on the distribution of raw materials and finished products from suppliers to the market as the land, sea, and air freight shipping routes were halted. The impact was highly felt in industries like the food and manufacturing sectors, with the South African manufacturing sector mimicking the global sector’s growth reduction trend. Locally the manufacturing sector’s growth was further hampered by the July riots in 2021 that saw the destruction of properties (warehouses, factories) and products. Now, two years into the pandemic, global and local forecasts still predict the persistence of supply chain disruptions through 2022 and early 2023, with optimistic views set for the second half of 2023. The early 2022 signs of slow recovery in manufacturing, which were in part being driven by improvements in production in Europe and Asia (excluding Japan), according to a survey done by IHS Markit may now be threatened by the rising geopolitical tension in Europe, with the Russia-Ukraine conflict and a resurgence of the Covid-19 virus in China. However, pockets of opportunity exist for markets that can fill the gaps in exports from Russia.
Prior to the invasion, global GDP growth forecasts for 2022 were above 5% (based on September 2021 Frost & Sullivan analysis), while the global manufacturing Purchasing Manager’s Index (PMI) also showed some signs of resilience and recovery in the global economy in the face the Omicron variant and looming new Covid-19 waves. The PMI data registered a 0.4 high (53.6) in February of 2022, from the 53.2 recorded in January but still shows below pre-pandemic averages, with an overall modest annual growth rate of just under 2% for global production. Following the recent Russian military presence in Ukraine from the 24th of February, several western markets imposed sanctions on exported Russian commodities and key input materials, actions which are expected to have ripple effects on the global economy. Some effects will include a continued shortage of semiconductors and raw materials (grains, oilseed), staff decline in Ukraine’s employment sector, and rising input prices (i.e., fuel). With predictions of global GDP growth expected to drop (down to 4.3% by Frost & Sullivan), it is worthwhile tracking the possible implications on the supply chain and growth opportunities this presents for South African industries like the food and automotive sectors.
Automotive/Electrical Manufacturing Sector: Dependence on Russia and Possible Growth Opportunities
Russia and South Africa are two important players for platinum group metals (platinum, palladium, rhodium) global production and exports, with the demand being mainly driven by three sectors automotive, industrial (electrical and chemicals) and jewellery. Russia leads in palladium production recording 98 and 91 metric tons in 2019 and 2020, respectively (Figure 1a) while South Africa is a key player for platinum (71% in 2019) and rhodium (~83% in 2021). These two markets are closely followed by North America and Zimbabwe. Thus, any negative activity in one of these countries has potential impacts on the global commodity prices and the overall supply of these metals. With the rise in platinum prices over the past decade, the demand for palladium has experienced growth as it is being used a substitution metal in light-duty diesel vehicles in Europe which accounts for 20% of global demand. The demand for palladium was further driven by the growing Chinese motor vehicle market. The current war in Ukraine has caused logistics bottlenecks in Russia and Ukraine and drew US sanctions on Russia which drove fuel prices. Together these developments stand to impact manufacturing value chains for both automotive and electrical products but has opportunities for alternative exporting markets like South Africa. In 2020, South Africa accounted for 33% of the global palladium mine production (Figure 1a) and was the fourth-largest exporter thus it can benefit from the present crisis by filling this demand-supply gap, through increased exports from the country. As the overall prices for palladium prices currently have not been drastically impacted, dipping to just under 1,100 U.S. dollars per troy ounce on the 10th of March, (down by some 6.5 U.S. dollars day-over-day), revenue generated from filling this gap will be large. South Africa and Zimbabwe would benefit even greatly if increased focus is placed on more value-add downstream beneficiation opportunities prior to export. Currently, both the United Kingdom and the United States benefit in export revenue from re-exports of palladium powder from Africa.
Food Sector: Dependence on Russia-Ukraine and Possible Growth Opportunities
The food sector in South Africa will only see impacts from the war through possible price increases rather than shortages. These increases which may be gradually felt 3 to 6 months from now, according to Grain SA can be cushioned with collective efforts by the government and private sector as they will have severe implications on the low-income groups. Russia and Ukraine collectively account for more than a quarter of the world’s wheat exports and are the leading markets for sunflower oil exports, which are key raw materials for the production of staple food, worldwide. Thus, the current state of things at the two countries is predicted to result in a reduction in global production which will impact global wheat prices. In 2020, Russian exports to Africa were worth USD 3.63bn, followed by France at USD 2.16bn and Ukraine at USD 1.45bn, but little of this was destined for South Africa, whose trade partners are mainly Argentina and Brazil. However, as wheat prices are controlled by changes in the international market, South Africa’s high import status for wheat is the main concern. The present crisis echoes once again the need for raising local production by supporting local producers in the coming months. In the past decade, local production suffered at least 5 significant dips (Figure 2a) which were mainly caused by increases in global wheat prices, a weaker rand, increased domestic consumption along with climatic factors such as below-average rainfall, more to soften the dips. One support stream highlighted by several economists is around cushioning fuel prices (input costs) and protecting the exchange rate.
Conclusion
In conclusion, the Russia-Ukraine turbulence will have a gradual impact on South Africa’s food and manufacturing sector, which will be gradually felt by businesses and households in the upcoming months. However, it is not all gloom as the situation presents pockets of short-term growth opportunities for South Africa, for metal exports (i.e., palladium) particularly if value-add downstream beneficiation opportunities are explored, but also highlights the need to promote the local agricultural production sector to cushion the economy from such changes in future. Currently, uncertainty lies on the extent of the impact, but several adjustments have been made on global GDP growth predictions, but the upcoming months call for collaborative efforts from the government (particularly for fuel prices) and businesses to protect South Africa’s economy and its inhabitants.
Sources: IHS Markit, JP Morgan, Frost & Sullivan, Statista, Grain SA, World’s Top Exports, Press Releases (Reuters, Fin24, Business Insider)
To find out more about opportunities in Africa, please contact Lynne Martin.
