Proactive Investors - Run By Investors For Investors

The USA may be about to embark on a cat and mouse struggle for control of Africa’s commodities

The USA may be about to embark on a cat and mouse struggle for control of Africa’s commodities
Chinese growth depends on securing adequate supplies of commodities

For two days running broker SP Angel has highlighted news in its morning briefing that the US government is set to boost funding for one of its major foreign aid vehicles, the Overseas Private Investment Corporation, to US$60bn.

This development was first flagged by Reuters a couple of months ago, and SP Angel doesn’t say whether it has a newer source, but it isn’t just the increase that’s of particular interest, but also the way in which the money is set to be deployed.

According to the Reuters and the SP Angel reading, part of the purpose of this planned expansion of OPIC is to allow it greater flexibility in the way it invests in projects, particularly in developing countries. The idea is that in addition to providing debt finance it will also henceforth be allowed to take equity stakes in companies and projects.

That will set it on a par with Chinese parastatals that have been investing heavily in commodities assets in Africa and elsewhere for years, taking equity stakes at the project and corporate levels, and then using these to apply leverage on policy nationally.

Countries in which the Chinese are heavily invested include the Democratic Republic of Congo, Zimbabwe, Zambia and, increasingly, South Africa. The Chinese have also historically shown interest in some of the big West African iron ore assets, and more recently in major lithium projects in South America and Australia.

None of this is new, but the presence of American interests in this rush for resources has been strangely muted. The world’s biggest mining companies, with the possible exception of Freeport McMoRan (NYSE:FCX), are not American, and although American regulators can sometimes reach their long arms into the affairs of the likes of Rio Tinto (LON:RIO) and BHP Group PLC (LON:BHP), particularly in regard to domestic copper production, on the whole the mining investment agenda is set by the fabled free market, and that alone.

Strategic policy doesn’t get a look in, at least not from the Western point of view.

But SP Angel reckons that the new developments at OPIC might be about to change all that. The new ability to take equity stakes will empower OPIC to compete on a level with Chinese companies when it comes to buying up assets, and according to SP Angel at least, could provide a major new source of funding for junior explorers in Africa.

OPIC of course is no stranger to resources per se. It has a deal with Canada’s Ascendant Resources Inc (TSE:ASND) to provide debt finance for a zinc asset in Honduras, and it’s also recently stumped up cash for an oil and gas development in Oman.

But SP Angel reckons the additional US$30bn in the budget could make it a major player in the African resources space, where to date European and Chinese money has held sway.

If true, it would represent a more forward-facing policy from Donald Trump’s administration, which in many respects hitherto has been inclined to stick to campaign slogans and “put America first.”

But one aspect of that vision has been to face up to China, and to engage China aggressively on the international arena with respect to trade. Going head to head as a competitor in a region that had previously looked rather like open country to the Chinese is an obvious way of piling on the leverage. And it also allows the US aid budget to be turned more directly towards specific American interests, which will play well with Mr Trump’s republican base.

The move comes as Mr Trump’s negotiations with his Chinese counterpart President Xi are apparently reaching an endgame. One deadline for escalation has now expired and been deferred, but there are unlikely to be many more in the event of a failure to come to terms.

Mr Trump’s message is clear enough: it was the Americans who chose to let the Chinese into the global trading system back in 1989, when the Chinese economy was half the size of Italy’s and, although much has changed since then, the US still has the physical as well as the economic muscle to control that trading system.

An exertion of influence in Africa will help underline that, whilst also being relatively cheap in terms of overall US government expenditure.

In the same week as SP Angel was bringing all this to the fore, it was also interesting to note that famed Israeli mining entrepreneur Beny Steinmetz, who’s often found himself tarnished with corruption allegations, gave up his rights to the massive US$23bn Simandou iron ore project in Guinea.

That news comes in the context of a recent spike in the iron ore price, but it may also be a reflection of the urgency with which the Chinalco, one of the most powerful of the Chinese parastatals, now wants to get its house in order. Rio Tinto is the other major partner in Simandou, and it’s a commonplace that most of the iron ore from the project will be shipped to China.

This kind of deal has been central to Chinese strategy for securing the commodities it needs for economic growth. If there is now a new challenger on the scene, then it would be a game changer.

 

 

Alastair_55b0a5ec88c28.jpg


Register here to be notified of future RIO Company articles
Copyright © Proactiveinvestors.com, 2019. All Rights Reserved - Proactive Investors North America Inc., Proactive Investors LLC

Market Indices, Commodities and Regulatory News Headlines copyright © Morningstar. Data delayed 15 minutes unless otherwise indicated. Terms of use