20 December 2012

Zimbabwe: Essar Deal Will Unlock Opportunities for Locals

The long debate over how Zimbabwe will resume steel production is over: external investor Essar Group will, as originally agreed, take over 53 percent of New Zim Steel, the successor company of

Ziscosteel and will take 80 percent of New Zim Minerals, the former Buchwa Iron Mining Company.

This makes sense. The indigenisation policy is a goal, not a divine law cast in stone. The sort of investment that Essar has to make, which includes paying off external debts of the old Ziscosteel, does mean that it needs control of the new entity. In fact few have disagreed with the 53-47 split of ownership in the steel works between Essar and Government. At some stage in the future the Government can, after all, make an offer for another four percent.

While some disagree on principle with selling off a State asset, we must all recognise that Ziscosteel was a worthless asset. It was no longer producing and was not going to ever produce again unless someone put in a lot of money and managerial know-how.

The steel industry is not the world's greatest natural maker of profits and the only people who can make even a modest return on investment are those who have a great deal of knowledge of the business and how to create and manage modern steel plants.

No one in Zimbabwe has that precise knowledge and no one has the money to invest in a steel plant, especially as it is dead certain they will lose their money unless they find people with the precise knowledge. So while the Government retains a huge stake in the steelworks, it has allowed the external investor to have the final say in how the business is to be run. That seems sensible.

The argument over the ownership of the iron ore reserves is more subtle. Zimbabwe has a lot of iron ore, but the rich reserves needed for Redcliff are at Buchwa. But the sole market for this ore is New Zim Steel. Unlike most minerals the ore is not going to be exported, or at least not as ore.

It will first be processed and processed quite thoroughly to pig iron and then steel. Essar and the Government no doubt hope that there will be enough steel not just for local markets, but also for export. But those exports will be of a highly refined product, not raw ores.

So in this case transferring majority ownership of a single ore body to Essar is not stripping Zimbabwe of an asset. It is simply giving control of one source of one raw material to a critical local industry.

The other raw materials, coal for coking, oxygen for the blast furnaces, limestone and the like will all come from other Zimbabwean suppliers, all of which do have a majority local ownership.

The final result is that Zimbabweans already own and will continue to own, a majority of the total pool of suppliers of raw materials. We need to think of local ownership of sectors, rather than each little nut and bolt in that sector.

And while Zimbabwe has a lot of iron ore, it is highly unlikely to be able to take advantage of the recent boom in iron ore prices.

The big winners in this boom are suppliers in countries like Australia where vast sheets of iron ore are easily accessible in places very close to the sea and ports where huge bulk carriers can load up.

Beira, regrettably, will never be able to take the modern giant carriers. The Pungwe estuary is simply too shallow and even that port is far further from Zimbabwe's iron ore than ports taking ore shipments need to be. So we return to the position that unless there is a local market for iron ore it will simply stay in the ground.

Iron ore is an abundant mineral around much of the world, so the only really valuable deposits for export markets are those near sea shores and those near steel works. The Buchwa deposit has almost zero value without New Zim Steel.

But if anyone in Zimbabwe reckons that they can make money from iron ore, well there is plenty to go round. Ironstone formations are not rare as the prevalence of the red ironstone clays shows. We need to be careful in how we distinguish between common minerals and rare minerals, such as gold ores.

The original Essar deal was finely crafted after interminable negotiations and a transparent process of open bids. The best deal was finally closed. It made sense then and it makes sense now, especially when we consider that Government policy has not changed over the last couple of years.

Now that the debate is finally over, we hope that within a very few months Zimbabwe will once again join the world's makers of steel, this time with a proper modern plant that will provide employment for thousands of Zimbabweans and a market for other raw materials that will restore viability to a wide range of industries from the coal mines in Hwange to the gas producers in the Midlands.

All it is taking is a tiny adjustment to a policy and a willingness for us to keep our word.

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