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China's Investments in the African Resources Sector -- Strategies and Result (Issue: 13)

China is now Africa’s third largest trade partner behind the US and France. So how did China establish itself in Africa? What are the implications to the resources sector?

China has been making considerable in-roads into the African resources space. In addition to oil projects ranging from Sudan to Angola, China is also making investments in the mining sector. China is now Africa’s third largest trade partner behind the US and France. So how did China establish itself in Africa? What are the implications to the resources sector?

Champions of human rights and good governance in Africa are in for a rude shock. Non Governmental Organisations (NGOs) that promote such causes are likely to receive less funding, and even less moral support, from their usual backers in Europe. During the EU-Africa Summit in December, Mr. João Cravinho, the Portuguese minister responsible for the summit, claimed that the Europeans had been “excessively simplistic” in their recommended preferred governance in Africa. The cynic in me interprets this as a resignation of some EU leaders in order to allow Africa to have its own version of democracy.

If human rights organisations and NGOs were listed companies, they would be on the sell list of analysts. Since such distasteful recommendations are not needed on unlisted entities, maybe it is appropriate to explore what brings about such negative sentiments. So what prompted the EU’s change of heart towards Africa’s apparently dubious practices of governance and corruption?

Among many possibilities, attempts to catch up with China in gaining a share of Africa’s vast mineral and hydrocarbon wealth is gaining considerable credence. It was six long years after the first summit that the EU arranged the party in Lisbon with politicians from 53 African countries and 27 European countries. Interestingly, invitees included Robert Mugabe, which prompted Britain to boycott the party. Maybe European countries feel benevolent towards former colonies, but more likely, they realise that they are left out of African riches as the Chinese have made serious inroads across the continent.

Trade between China and Africa started shifting gears in 2000 with the establishment of the China-Africa Co-operation Forum. By 2006, China-Africa trade had reached approximately $56 billion compared with just $2 billion in 1999. During the same period, Africa’s imports from China quadrupled to $26.7 billion while exports to China reached $25 billion. By the end of 2006, China marked its position in Africa as the third largest trade partner behind the US and France.

China’s expansion to Africa, however, became a matter of considerable concern amongst western policy makers upon the realisation of its growing influence in the African resources sector. Oil and gas was, indeed, the largest export item from Africa to China, accounting for 61% of exports in 2006. Metal & minerals accounted for 14% of African exports in the same year. Clearly, China is competing with established resources players from the west including Africa’s former colonial masters.

A closer look at China’s main trade partners in Africa would provide a better understanding of its real focus. In 2005, China’s main African trade partners were South Africa and Angola accounting for 18.3% and 17.6% of total Sino-African trade respectively. Other top trade partners included Sudan (10%), Nigeria (7%) and Congo (6%). The top 10 trade partners who accounted for 80% of Sino-African trade are all resource rich countries. Nothing much has changed in that equation, even today!

Interestingly, the list also includes countries with dubious records of governance. For instance, Sudan is widely criticised by the West over its human rights violations, Nigeria over corruption and the Congo over blood diamonds. Except for South Africa, all the other countries above remain plagued by human rights violations, poor governance, press gagging, associations with extremists (e.g. Algeria, Egypt and Libya) and in some cases, remnants of past civil conflicts (Congo and Nigeria in the Niger Delta). In an attempt to improve these matters, the West has been preaching from the democratic doctrine to these countries. Clauses of good governance were attached to trade and aid, presumably with all good intentions.

Against this backdrop, the Chinese approach to Africa rings a marked difference. Unlike the West and former colonial masters, China is willing to do business with no questions asked. China is also willing to give aid, develop infrastructure and make investments with no conditions attached. Corruption and good governance, according to the Chinese officials, are matters to be left with respective African leaders.

China’s hands-off approach has instantly won them many a good friend in Africa. The Chinese President, Mr. Hu Jintao, started 2007 with state visits to eight countries from January 30 to February 10. This was followed by a series of similar visits by several high profile leaders and business magnates. Not surprisingly, Sino-African business has taken off with oil and metals at the forefront.

Much to the delight of African leaders, China shares their view that sovereignty precedes over human rights. This is further complemented by generous aid packages including infrastructure investments in the region. China also maintains a cordial relationship with Mr. Mugabe and turns a blind eye to atrocities in Darfur. It is not just a coincidence that many of the Chinese investments happen to be in resource rich countries. Commercial potential appears to be China’s main criterion for selecting investment destinations in Africa.

So far, it is the energy sector that has been the focus of Chinese investments in Africa - largely through Chinese state oil companies such as China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC) and China Petrochemical Corporation (Sinopec). Significant investments include a $2 billion loan to Angola in exchange for oil contracts, several exploration contracts and refinery acquisitions in Algeria by CNPC, $2.3 billion investment in Nigeria by CNOOC and several similar deals of varying sizes in Kenya, Uganda, Congo and Sudan. China purchases nearly 60% of Sudan’s production and 25% of Angola’s production. Clearly, Africa is a major energy supplier to China.

Chinese interests, however, are not limited to oil and gas but also to base metals, precious metals and minerals. China has considerable investments in copper and cobalt projects in the Congo and Zambia; Platinum, coal and chrome in Zimbabwe; iron ore, coal, nickel, and aluminium in several other countries. Interestingly, China has given generous aid to most of these countries and package loans, including those for infrastructure development.

Aid combined with trade deals is a time tested business model which was originally introduced by Europeans. The practice was followed by the US and Japan with tremendous success. For instance, Japan made generous contributions to South Korea, Taiwan, and China after World War II, in the form of export credits and soft loans, with the proviso that such facilities should be used to procure Japanese goods and services, including Japanese construction equipment and services. One could argue that Africa is merely following the same model.

That theory, however, does not hold water as there were no blatant violations of human rights or disregard to democracy by the regimes of recipient nations at that time. No leader in any developing nation would be able to challenge Mugabe in his ability to lead nations to chaos and destitution. One would also be hard pressed to find examples of atrocities comparable to those in Darfur, performed by regimes that were recipients of western or Japanese aid. That is where China’s hands-off approach becomes less than inspiring.

It is admirable that China is, indeed, engaged in several social projects across Africa. They include telecommunication projects in Ethiopia, road projects in Kenya and the first space satellite in Nigeria. However, these investments have not helped burning issues such as employment as the Chinese bring their own labour. It is also alleged that the Chinese bring prisoners to work in African mines. China is also involved in arms trade to African nations such as Sudan in exchange for oil purchases. Its dealings with corrupt regimes have even led to the divergence of development funds from intended social projects to fatten the purses of politicians. China’s no accountability policy, in other words, is not exactly in Africa’s interest.

However, matters are unlikely to change anytime soon and the West appears to be gradually coming to terms with it. The EU is fast changing its attitude towards the African style of governance and even relaxed its own travel ban to accommodate Mugabe for the conference. In an attempt to recover its losing grip on the African natural resources pie, Europe is currently promoting trade deals named European Partnership Agreements (EPA) with Africa. EPAs, however, have instilled little enthusiasm amongst African leaders. Competition between China’s “no conditions” approach and Europe’s “relaxed conditions” approach can result in only one winner!

Attempts by Europe to win Africa back appear to be too little and too late. Africa prefers China’s hands-off approach. Unlike the EU, China does not preach, attaches no conditions related to human rights and asks no questions on good governance. If Europe is to compete with that it will have to follow a similar model. Europe always had the desire to look clean but continued to maintain trade relations with less than democratic regimes. That even worked in the past. One example is doing business with the South African apartheid regime but banning sporting ties. Back then, of course, there was little competition from China. Changing winds appear to have prompted Europe to change its model as well.

So what are the implications from the resource investing perspective? Watch for smaller companies with assets in Africa as China would be looking to acquire those that have advanced stage projects. Cuddling up with governments does not always lead to good licences and projects and China is aware of that. That may prompt China to look for acquisitions, and such acquisitions are expected to be at hefty premiums.

Amongst metals, copper, cobalt and iron ore appear to be the most sought after by the Chinese and, therefore, companies with exposure to those metals in Africa would prove to be attractive investments. China’s African safari is far from over and it is up to astute investors to make use of ensuing developments in the resources sector.

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