Tuesday, August 11, 2020

GOLD: UGANDA’S PERFECT TIMING

Last week gold crossed the $2000 an ounce level for the first time ever.  The precious metal has been on a run since March when the scale of the Covid-19 crisis begun to register.

In times of crisis gold prices tend to soar as people liquidate other assets to invest in the metal, traditionally considered a safe haven for value.

In the last few weeks with western countries going back into lock down after lifting previous restrictions, uncertainty has grown in the world economy hence the flight towards gold.

"On Friday it touched $2,075 an ounce, the highest it has ever been since September 2011 when it peaked at $1,921.35....

This until recently would mean nothing in our neck of the woods.

But in 2018 gold overtook coffee as the major export earner when we exported $514m worth of the metal.  Last year was even better with our gold receipts more than doubling to $1.25b. 

Observers put local production, from mostly artisanal miners at around $50m a year, with the remainder coming from the region. In a few short years Uganda has become the gold refining hub of the region.

In 2016 Africa Gold Refinery Opened for business in Entebbe and the rest is history.

A confluence of factors has conspired to bring about this happy result.

To begin with the gold bearing regions of eastern Congo are largely pacified as compared to a decade ago. And with regular flights to Entebbe Airport it makes more sense for traders to come to Uganda. Previously they would fly on to Dubai.

Secondly, Uganda not only has a refinery – there are three others are in the works or already up and running, but also has surplus energy. Refining metals from their ores is energy intensive. It helps too that the refinery is only a stone’s throw away from the airport, which before the lockdown, serviced about 20 airlines.

And thirdly apart from a few incidents of gold related robbery and con jobs, Uganda is a relatively safe place to do business.

The aforementioned three new refineries and the anticipated 600 MW expected when the Karuma power dam is completed within the next 12 months, means that within next five years the country will probably be exporting multiples of its current volumes.

The improved gold prices also means we will be getting more money.

It is an interesting story of how value addition can be a possibility for Uganda sooner than later.

For a viable value addition project to take root there has to be adequate supply of raw material and ready market, especially abroad where more value can be captured for the finished product.

There is probably nothing we produce in adequate proportions to sustain an industry. For coffee in the year to June we broke the record in exporting five million bags of both Robusta and Arabica. Whereas we are the biggest exporter on the continent, Ethiopia produces more but consumes most of its own produce.

The plan to get to 20 million bags is good if we are to have a go at adding value to our coffee sustainably. 

"But supply is only one part of the equation, the access to markets is the other and many will argue the major challenge....

A handful of companies control world trade in processed coffee and have in effect cornered the market. To break into that cartel would cost time and money, which would be better spent elsewhere.

The same can be said for cocoa, tea or any other commodity you can think of.

The smart thing may be to grow our own internal markets to sustain these industries. Milk is a case in point. Of all the milk consumed in Uganda barely a fifth of it is processed.

If more processed milk was consumed locally then we would have more industries around the product, which would mean more demand and more incentive for farmers to produce more through use of improved breeds and employing better farming methods....

And what would it take to increase consumption of processed milk? Government action. One, to enforce standards on milk sold in the market and secondly, to actively create local markets.

We can take a cue from neighbours Kenya, where consumption of processed milk is nearly total. In the 1980s the government started school milk program, which not only increased the capacity of the then monopoly Kenya Co-Operative Creameries (KCC) but down the road created a demand for processed milk from the adults who had grown up on school milk.

Bad management of the program means it is no more but the effects continue to ripple through the society 40 years later.

Strong domestic base serves as launch pad for exporters but also serves as fallback position in the event of wild fluctuations in external market demand.

Gold has shown us the way. There is minimal local demand, out refinery is not even one of the biggest on the continent and demand for gold internationally is time tested, but as proof of concept it has worked very well for us.

"Can we do it for our coffee, milk, fish and cocoa? Maybe but it will need more strategic thinking and execution of that strategy than we are currently displaying....


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