Of all sectors of the Cuban economy with investment projects announced in the Foreign Investment Portfolio for 2016-2017 issued by the Ministry of Foreign Trade and Foreign Investment, the Energy and Mining Sector has the largest number of projects, with 123, representing 31.14% of the total. It is followed by Tourism (114 projects), Food (76), Biotechnology and Health (18), and Industry (16) sectors, and Construction and Transportation (10 projects each). See Figure 1.
Figure 1. Number of projects by sector in the foreign investment portfolio
Source: Ministry of foreign trade and foreign investment.
The Ministry of Energy and Mining, the Cuban state entity with greatest number of projects in the investment plan that has been drawn by the government for the next 15 years, consists of three strategic entities: the Electrical Union, the company CUBANIQUEL and the company CUPET. All three have high hopes of attracting the right partners to develop the 123 investment projects identified by the Cuban government in the areas of electricity generation, nickel production and oil and gas extraction and processing.
Figure 2. Number of investment projects in the Energy and Mines Sector
Source: Portfolio of foreign investment opportunities of the Ministry of Foreign Trade and Foreign Investment. 2016-2017.
However, being able to implement such an ambitious plan is a real challenge, given that the current ver adverse scenario: accelerated loss of Venezuelan oil supply, falling oil prices in the world market, declining Cuban production of nickel and abrupt fall of nickel's world market price.
Faced with such an adverse scenario, the Cuban mining industry has been given a new impetus by launching a modern mineral crushing plant (zinc and lead) in the mining zone of Minas de Matahambre in the western region of the country. The new plant is a joint venture formed by the Cuban company GEOMINERA (51% of the shares) and the European multinational TRAFIGURA based in Amsterdam. This 270 million dollar investment seeks to develop other sources of income for the Cuban mining industry in the face of the accelerated decline of nickel production and prices in recent years.
The fall of nickel
The nickel industry is going through a difficult period. The drop in nickel world market prices has greatly influenced the decline of investment in Moa Nickel S.A., a 50-50 joint venture between Sherritt International and CUBANIQUEL created in 1994, which has been financially successful for both parties since its inception. Moa Nickel S.A. currently owns the Moa extraction, processing and smelting operation, a refinery located in Alberta, Canada, and an international marketing company.
Statistics on production and exports of nickel reflect the challenging nickel business scenario. Between 2000 and 2010, high production levels were achieved, reaching over 75,000 tons in 2005. See Figure 3.
Figure 3. Cuban nickel production, 1975-2015 (thousand tons)
Source: Oficina Nacional de Estadística e Información (ONEI).
However, by 2010, not only had production been declining but world prices had also fallen, sharply cutting revenues from nickel exports.
In 2007, revenues from the export of nickel exceeded two billion dollars. The price of a ton of nickel on the international market was $50,000. As a result, the nickel industry was the main generator of export revenues, overtaking the sugar industry and tourism as generators of revenue.
This led to plans for major investment projects to build two new nickel producing plants, one in partnership with Venezuela with a value estimated at US $700 million and another with China for US $500 million. However, in the following years the price of nickel began to decline and neither of the two investments materialized. In 2015 the value of Cuban exports of nickel barely reached 521 million dollars, a drop of 75% when compared with the value of exports in 2007. See Figure 4.
Figure 4. Value of Cuban exports of nickel (millions usd), 2004-2015
Source: Oficina Nacional de Estadística e Información (ONEI).
Cuba is one of the world's largest nickel producers and exporters and supplies 10 percent of cobalt worldwide. Nickel is essential to the production of stainless steel and other corrosion-resistant alloys, such as those used in the manufacture of batteries for mobile phones, automobiles, engines and aircraft turbines. Currently, Cuba has two production plants that require a technological upgrade to lower production costs to compensate for the decline in the price of the mineral in the world market. Recently, Sherritt International invested in a facility to produce sulfuric acid -- a key input into nickel processing -- with the aim of reducing production costs by 12 to 15%.
The fall in nickel world market prices is mainly due to lower demand from China, who is the main consumer of the metal, and the replacement of nickel in making steel allows by other cheaper materials.
Given this scenario, no major investments are expected in this area until the world market nickel prices reach a level that would justify a large-scale investment to increase production. Therefore, if prices continue at low levels, it is not advisable to increase production, but rather to work to reduce costs.
Thus, the current strategy is aimed at investing in other segments of the Cuban mining industry, for example in the production of zinc and lead, in order to increase export earnings. The production of gold, silver and copper is also under study.
The new niche of Cuban mining and its opportunities
The investment thrust to diversify the Cuban mining industry opens up new perspectives and opportunities for the country's economic future. The site that will be put into operation at the beginning of 2018 in the Mines of Matahambre, plans to crush about 220 tons of lead and zinc concentrate annually.
At present, reserves have been estimated at this site to permit 11 years of exploitation in this site; the time of exploitation could be extended another 10 years if another mining area with similar characteristics located a few kilometers away from Minas de Matahambre, in an area known as Santa Lucia, was brought under operation.
In the areas where the extraction of these minerals will be carried out, the presence of gold, silver and copper has also been detected. Extraction lines for these minerals are being considered that could potentially further diversify the Cuban mining industry in the coming years.
The current project at Minas de Matahambre includes the renovation and rehabilitation of the port of Santa Lucia to develop a logistics infrastructure that will allow the shipment of the zinc and lead concentrates to be transported to the port of Mariel, where the export activity of the country is centered. The investment also includes repairs to the Nombre de Dios dam, which will supply water to the project, and the construction of a tail dam to collect wastes from the process[i]. The new company plans to generate about 1,000 jobs directly and indirectly.[ii]
The interest in the production of zinc responds to the increase of the world price of this mineral in the last years mainly due to the supply deficit. Scotiabank estimates that the price of zinc will increase by 32% in 2017, while for the current year it predicts a demand deficit of more than 600,000 tonnes.[iii]
The strong rise in the price of zinc during 2016 (from US $ 1,682/tonne in January 2016 to US $ 2,514/t in December) will continue in 2017. The average price in 2017, according to FocusEconomics estimates, will be US $ 2,710 per ton, 29.0% higher than the previous year. In contrast, the price fell on average 0.9% per annum in the last five years. [iv] See Figure 5.
Figure 5. Evolution and projection of the price per ton of zinc in the international market, 2014-2018E (dollars per ton)
Source: Havana Consulting Group based on data published by Bloomberg Intelligence and FocusEconomics.
The main factor that will drive up the price of this mineral in 2017 will be the decrease in production in some of the world's major zinc mines. In 2015, major producer Glencore cut its production by 500,000 metric tons, suspended operations in Australia and Peru, and limited production of some of its mines in Australia and Kazakhstan. In 2016, production was especially hit by closure of zinc refineries in China, as a result of the Chinese government establishing tougher environmental regulations.
These production cuts will be maintained in 2017, so there will be a lower supply of zinc in the market, compared to the increase in demand due to the increase of its consumption by the industrial sector. FocusEconomics estimates a market deficit of 611,000 tons by 2017, 66% higher than the 2016 deficit (367,000 tons). A deficit of 478,000 tons is projected for 2018. See Figure 6.
Figure 6. Balance of world zinc production, 2012-2018E
Source: Havana Consulting Group based on data published by FocusEconomics.
Zinc is the fourth most-used mineral by industry, after iron, aluminum and copper. It is mainly used for galvanization, which accounts for around 50% of the refined use of zinc, a process highly demanded by the construction and automotive sectors. Currently, 15 kg of zinc is used on average for each vehicle built.
In 2016 global demand for zinc increased by 2.2%, driven by China, which consumes 50% of this metal worldwide. In 2016, demand in China grew 3.3%, according to estimates by Bloomberg Intelligence and JP Morgan.
Production of galvanized products grew by 10% in China in 2016, mainly due to the increase in infrastructure works, and private investment in housing and construction. It was also stimulated by the growth in the production and export of cars and by the increase of the Chinese domestic market of autos by 14%, mainly due to the tax cuts implemented by the Chinese government for the purchase of light vehicles.
If we analyze the behavior of vehicle sales in the two largest markets in the world (US and China) we will note that sales have been increasing in the last five years. Considering this behavior along with the productive capacity cuts of some zinc producing countries, a market with high uncovered demand is projected, with a stable price and some price growth in the coming years. See Figure 7.
Figure 7. Car sales in the US and China, 2012-2016 (million units)
Source: Havana Consulting Group based in various sources.
If we make a comparative analysis of the behavior of prices in the world market for zinc, lead and nickel, we will note that the prices of the first two have remained stable in the last six years with a slight upward trend, while the price of nickel has shown a strong decline (48.81%) in the same period. See Figure 8.
Figure 8. Evolution of the international price of zinc, lead and nickel, 2012-2016
Source: Havana Consulting Group based on data published by the World Bank.
Projections of the new niche of the Cuban mining industry
The new mixed company Minera del Caribe S.A. (EMICAR), formed by the Cuban company GEOMINERA and the European multinational TRAFIGURA to operate the mining project in the Mines of Matahambre, is projected to produce some 12,000 tons of zinc and 5,000 tons of lead for the last half of 2017. Considering the current prices of both minerals as reference, the possible revenues from projected sales would be in the order of 30.8 million dollars for zinc and 11.5 million for lead, for a total of 42.4 million. See Figure 9.
Figure 9. Projected sales of zinc and lead by EMICAR for the last quarter of 2017
Source: Havana Consulting Group
The company aims to export annually 220,000 tons of lead and zinc concentrate, with the following split: zinc (70.6%) and lead (29.4%).
Considering the current prices of both minerals, the annual sales of the new company would be projected at 549.2 million dollars, from which would have to subtract the costs of production and commercialization of the final product. According to company executives, it is expected to recover the initial investment in five years.
Conclusions
Considering the behavior of lead and zinc prices in recent years and the current international market conditions, where there is a high demand for these products, the production cuts made by several companies and the growth of industrial consumption (where the automotive industry stands out among others), prices in the world market for lead and zinc are projected to be stable and experience an upward trend in the coming years. So the newly announced plant in Cuba to obtain lead and zinc concentrates seems to have been a good strategic decision and for the moment will have a start with great opportunities.
At a time when Cuban exports have fallen, leading the country to a recession, coupled with the Venezuelan crisis that has resulted in the reduction of oil supplies to the island - which has forced the country to buy the oil in the international market at higher prices with less satisfactory financing terms - the opportunity to be able to export lead and zinc concentrates is undoubtedly provides some relief that in the medium term that may offset somewhat the capital shortage that the Cuban economy currently has. The gradual recovery of the mining industry could become a new wild card that in the medium term allows Cuba to increase exports and develop other industries.
References
[i] EFE. “Millonario proyecto despierta a coloso minero en occidente de Cuba”. https://www.martinoticias.com/a/cuba-pinar-del-rio-planta-de-mineral-exportacion/149668.html
[ii] Meersohn, Susana. “Cuba comenzará a explotar en julio millonario proyecto minero en occidente”. AREAMINERA, mayo 2017. http://www.aminera.com/2017/05/08/cuba-comenzara-explotar-julio-millonario-proyecto-minero-occidente/
[iii] SCOTIABANK. “Scotiabank: precio de cobre subirá 15% y precio del zinc 32% este año”. Julio 2017. http://semanaeconomica.com/article/sectores-y-empresas/mineria/234904-scotiabank-precio-de-cobre-subira-15-y-precio-del-zinc-32-este-ano/?ref=f-rt
[iv] Roncal, Alvaro; Pecho, Daniela. “Precio del zinc: ¿cómo le irá en el 2017?”. Mayo 2017. http://semanaeconomica.com/article/sectores-y-empresas/mineria/224342-precio-del-zinc-como-le-ira-en-el-2017/?ref=especial
