2024 Elections Report: Risks & Opportunities for Commodities Sector
In the ever-evolving landscape of global commodities, the year 2024 stands as a pivotal juncture marked by transformative elections across diverse regions. As nations prepare to cast their ballots, the outcomes hold the power to shape policies and strategies that will significantly influence energy, trade relations, and resource management worldwide.
This report encapsulates the intricate intersections between political shifts and their repercussions on the commodities sector. London Politica’s Global Commodities Watch has made a selection of the most significant countries, and analysed the potential impact of elections based on election programmes, past policies, and scenario planning.
Ghanaian electricity: the triumph of competitive politics over good governance
On 26th May, Ghana’s government tried to propose a restructuring of the US$1.58 billion of debt owed to various private power producers. The producers have rejected this proposal and threatened to cut off the power supply, which could cause a third power crisis within the last decade. These power crises are part of a larger consistent failure to provide basic electricity to the citizens of Ghana; It exemplifies the failure of the International Monetary Fund’s (IMF) Structural Adjustment Programmes (SAP) and the Good Governance Agenda of the 1980s. This article will explore how commercialisation can fail in a culture of competitive politics.
Electricity has been a front-running issue in Ghanaian politics since its founding President Kwame Nkrumah’s belief that building the Akosombo Dam, the third biggest dam in the world in terms of water capacity, would bring developmental leaps. The succeeding presidents including President Jerry Rawlings, the first democratically elected President, used the extension of the electric grid to draw votes, making electricity a critical measure of political success and developing a norm that electricity provision is a core responsibility of the government. This has led leaders to intervene frequently in the privatised energy sector to increase electric grid sizes (making it one of the biggest in West Africa). The political structure also allows the president to have a say in the decisions of the supposedly ‘independent’ Public Utilities Regulatory Commission (PURC) since he has the power to appoint board members. Ghana adopted the IMF’s SAP in 1995 when its inflation rates were over 100%. Under the Standard Reform Model, Ghana allowed private management of their electrical facilities.
Fast forward to August 2012, the anchor of a pirate ship ruptured on the West African Pipeline, inflicting a GDP loss of US$320-924 million. This external element is only the tip of the iceberg. The underlying issue for such a large GDP loss (an estimated 4%) was that the remaining power generation capacity required crude oil, which was more expensive than pipeline gas. This led to high debts within the producing companies; the Volta River Authority (VRA) and the Electricity Company of Ghana (ECG). Furthermore, Government subsidies and financial support were insufficient for these companies to continue ordering fuel, despite multiple requests. For example, The VRA requested amelioration for six cargoes of light crude but was only provided with finance for three. As such, the government played a significant role in the elongation of the crisis. A central problem can be traced back to the inefficiency of Ghana’s large electricity grid. Incumbents often expanded the grid in hopes of demonstrating their continued dedication to providing electricity, but large parts of these grids are unmonitored and suffer from severe reliability issues. This can be traced back to show how competitive politics has compounded the severity of the crisis.. With the 2012 General Elections scheduled for December of the same year,, there was a further electorally motivated intervention to prevent tariff rises, increasing profit and allowing the companies to order more fuel. This resulted in the inability of the VRA to pay the fuel suppliers, thus further elongating the crisis.
Without sufficient investigation into the underlying issues of the price of fuel and the lack of capital to invest in them, the government signed 43 new contracts for primarily thermal power plants taking the total electricity capacity (assuming sufficient fuel is provided) from 1GW to 5GW.. The then President John Mahama did little due diligence and circumvented officials in the Energy Commission who had predicted energy demand of 3,000 to 4,000MW by 2020. The simplest way to mitigate this oversupply would be for Ghana to become an electricity exporter in the region; however, this did not materialise due to high tariffs, poor infrastructure, and neighbouring countries wanting to be self-reliant after previous experiences of shortage. This overabundance has driven government debt to US$1.4 billion, which is approximately 4% of GDP. Furthermore, these contracts were used to create thermal power plants instead of implementing the planned hydropower plants including Micro-Hydro Western Rivers Scheme and the Juale Dam. Focusing on increasing electricity capacity instead of the fundamental cash flow and reliability issues can be best explained as an electorally driven solution which demonstrates the incumbent’s continued dedication to providing electricity by investing in tangible infrastructure instead of actually solving the electricity crisis in the long run.
These two crises show the failure of the Standard Reform Model in a highly competitive political situation. The market mechanism, commercialisation and separation had no effect in a country where governments continue to intervene to meet short-term political objectives. Since tariff increases meant a loss of power, it was impossible for leaders to divert resources to achieve long-term stability and instead focus on unsustainable practices like low tariffs.
Today, Ghana is set to default on loans by the IMF and has been in talks with the G20 to restructure its external debts. While the IMF is imposing more stringent conditions on loans, its leaders have also been cosying up to the Chinese to help solve their debt crisis, leading to increasing tensions with the United States. If this gridlock continues, the Ghanaian people would either be buried in further debt or have to face another electricity shortage crisis.
Cover image: “Ghana Akosombo Dam” by Mark Morgan Trinidad A
Export Bans – A Means to Shore-up Ghana in the Bauxite and Iron Ore Industry
Aluminium and Steel remain some of the most widely used materials across industry. Produced from bauxite and iron ore respectively, their demand has led the Ghanian government to establish laws to prohibit the export of bauxite and iron ore in their raw form. The ban is expected to take effect soon and aims to legislate the exploitation, utilisation and management of these resources.
Defending its decision, the government claims that the legislation is “to safeguard the country's limited natural resources and learn from the past mistake of gold exportation”. The origin of the government’s export ban can be traced back to the creation of two statutory corporations, namely:
1. Ghana Integrated Aluminium Development Corporation (GIADEC):
2. Ghana Integrated Iron and Steel Development Corporation (GIISDEC):
A reading of section 28 from GIADEC Act, 2018 and section 30 from GIISDEC Act, 2019 confirms the state’s actions in following procedures for an export ban of bauxite and iron ore respectively. Interestingly, section 4 from both the laws talks about the need to adhere to local content requirements and measures aimed at boosting the country’s upstream and downstream operations. As a result, the Minerals and Mining Local Content and Local Participation Regulations were passed in December 2020 to promote job creation, use of local goods and services, and to improve the attractiveness of domestic businesses in Ghana’s mining sector. These regulations apply to:
holders of mineral rights (holders of reconnaissance and prospecting licences and mining leases);
holders of licences to export or deal in minerals; and
registered mine support service providers
Ghana’s iron ore reserves are estimated at about six billion tonnes and there is potential to start mining operations by 2025. On the other hand, Ghana, the eleventh-largest global producer of bauxite, is also estimated to produce 10 to 20 million tons of bauxite a year from its 900 million tonne reserves. Between 2016 to 2021, production from Ghana decreased by a CAGR of 13.18%. The Ghana Export Promotion Council attributes the decline in production to underutilisation of its reserves and poor infrastructure. Given the absence of bauxite refineries in the country, the mineral is exported to Canada and Scotland for refining and imported from USA and Jamaica to obtain alumina (refined bauxite). It is then processed by the only local smelter in the country, the Volta Aluminium Company Limited (VALCO). Aluworks Ghana, one of VALCO’s major customers further leads the process in aluminium continuous casting and cold rolling mill to produce the raw materials that are used in products ranging from household appliances to aircrafts. As a result, the government has been attempting to fill the vacuum by shoring up VALCO’s production capacity alongside GIADEC’s projects that aim at expanding the country’s exploration and refining capacities. The $1.2 billion deal (2021) to build a bauxite mine and refinery between GIADEC and the Ghanaian-owned Rocksure International showcases the government’s zeal in producing local aluminium products to substitute its annual imports of up to 45,000 tonnes. In addition, Ghana has partnered with China for obtaining the requisite infrastructure and funding to create value-addition to its existing supply chain despite the plausible environmental concerns.
Ghana’s push to limit market access in the bauxite and iron ore industry is similar to Indonesia’s ban on the export of nickel ore for which it is currently facing legal action at the WTO. The rise in such trade restrictive measures also potentially exposes the weaknesses in upholding WTO’s trading principles. Consequently, by promising more jobs, the Ghanaian government must also be wary of the impact of layoffs that such trade-restrictive measures can have on the existing labour engaged in the mining industry. Here, the case study of PT Freeport Indonesia can act as a definite reminder about the ill effects of hasty mining regulations. As far as Ghana’s mining industry is concerned, the export of gold brings maximum revenue to the country. Hence, when introducing new laws to legislate and build its bauxite industry, which amounts to just 0.29% of the global bauxite production, the country’s competitiveness remains to be seen especially when compared to top bauxite producers such as Australia, China or India.