Exports To Stagnate Despite Iron Ore Boom
BMI View: Despite the country's rapidly growing iron ore sector, we predict that the Republic of the Congo will see its balance of payments situation steadily worsen between 2012 and 2016. Production of oil, which represents 70% of exports, is stagnating and will soon begin to decline. Considering the substantial economic headwinds BMI is forecasting for the iron industry over the coming years, we doubt that Congo will be able to expand its mining sector fast enough to offset falling oil exports.
The Republic of the Congo faces a serious challenge as oil production - which is the country's dominant industry - begins to decline. Like other mature oil producers (including neighbouring Gabon) the country must radically rebalance its economy if it is to retain its present standard of living. Fortunately for Congo, the country has rich iron ore deposits, which have caused non-oil exports to surge in recent years. Even so, BMI predicts that the country's balance of payments situation will rapidly deteriorate over the coming years as import demand remains robust while oil exports begin to decline.
|An Ailing Golden Goose|
|Rep. Congo - Oil Exports, US$bn (LHS) & Oil Share Of Exports (RHS)|
BMI's Oil & Gas team forecast that Congo will produce 112.9mn barrels of oil in 2012, an all-time high. We note, however, that the recent upsurge in oil production has been the result of the launch of new off-shore oil fields in 2008. The country's main fields are all maturing, and will soon begin to decline. Italian oil company Eni (which along with France's Total is the country's main producer) has launched an oil sands project, but we doubt that this will be sufficient to offset the decline of the country's larger oil fields. By 2016 our Oil & Gas team predicts that the country will be producing 4% less oil than today. Combined with our expectation of lower oil prices, the value of Congo's oil exports will fall by almost 20%.
|Many Eggs, One Basket|
|Rep. Congo - Composition of Economy By Sector, 2011|
As the Congolese economy is heavily dependent on the oil sector, this shift will have a dramatic impact on the country's balance of payments position. Congo has always run large service and income account deficits, offset largely by a hefty goods surplus. As oil exports decline, BMI predicts that the country's goods surplus will fall from 71% of GDP in 2011 to 40% in 2016. This will contribute to a large and growing current account deficit.
|The Long Way Down|
|Rep. Congo - Current Account Balance|
There is, however, still some reason for optimism in the face of declining oil revenues. One of the reasons Congo's trade surplus is narrowing is due to capital imports necessary for the development of the country's iron ore mining potential, an industry that should boost exports in the longer term. The country is richly endowed with high-grade iron ore, and is attracting the attention of investors such as Equatorial Resources and Core Mining. The country is also starting from a very low base of metals production. Core Mining estimates that their Avima mine will produce 20mn tonnes of iron ore per year by 2015; Congo's total national production was only 5mn tonnes in 2010.
Though most mines are yet to reach their full capacity, iron ore production caused Congo's non-oil exports to surge by 230% in 2011. Even so, however, the country's iron sector remains dwarfed by its massive oil exports.
|Go North, Young Man?|
|Rep. Congo - Major Iron Ore Deposits|
While BMI is predicting strong growth in Congo's non-oil exports, there are several reasons to doubt that the country's mineral production will end Congo's reliance on its dwindling oil reserves.
Firstly, the country's transport infrastructure - especially to key ore reserves in the northwest - remains very weak. As our Mining Team has argued, further development will be contingent on the willingness of mining firms to fund ambitious infrastructure projects (See June 7 'Exxaro Eyes Rail, Port, And Power' on our online service). Given Congo's weak business environment and small construction sector, some foreign miners may decide that the cost is too high.
Secondly, BMI holds a bearish view on iron ore prices over the medium term. Iron demand is heavily dependent on Chinese steel consumption, fuelled by the Asian giant's massive construction boom. As we are anticipating an economic hard landing in China, iron prices are likely to recede over the coming years. Even so, we do note that the ore grade found in Congo (60%) is well above the average of 40-50% found at most deposits. This makes the country's ore relatively cheap to process, raising margins. This may make Congolese ore a relatively efficient investment during a time of lower commodity prices.
BMI forecasts that Congo's non-oil exports will increase by an average of 17% per year between 2012 and 2017, but that exports as a whole will only expand by an average of 2.9% as oil production stagnates.
Risks To Outlook
Congo's balance of payments situation is heavily dependent on both exploration and commodity prices, both of which are inherently risky. It remains possible that new oil discoveries might increase oil exports over the long term, or that estimates of iron ore reserves are overly optimistic. This forecast assumes that the prices of both crude oil and iron ore will trend downwards, but a more dramatic shift would force us to re-evaluate our estimates. While Congo (unlike its namesake neighbour) is politically stable, 68-year old President Denis Sassou-Ngeusso lacks a clear successor; his death or incapacitation could cause large-scale political volatility.