[miningmx.com] — CHINA’S hunger for Africa’s resources is no secret.
But if Africans are going to take full advantage of it they need to focus less on the instant cash that China can offer and more on securing more substantial deals that have better long-term prospects for the continent.
“Africa has what China wants,’ says Alex Pestana, an investment strategist at Sanlam Investment Management (SIM).
China has no choice but to look outside her borders to support her economic growth and satisfy her increasingly wealthy consumers. Her demand for Africa’s resources, for example, has increased by 600% in less than a decade.
Aside from mineral wealth, this is especially true when it comes to food.
The Chinese are urbanising at a rate of 24m people a year. This not only means that between 350m and 400m Chinese will be urbanised in the next two decades, but their per capita income, which reached and average of $4,300 last year, is also increasing steadily. From a food consumption point of view this means increasing demand for protein. For example, a rural consumer, according to the Bank Credit Analyst, consumes 21kg of meat, three litres of milk and 200kg of grain a year.
But the urbanised consumer demands 35kg of meat, 15 litres of milk and 50kg of grain annually.
China’s food insecurity problem is exacerbated by over-farming, which is fuelling desertification. Desert areas in China, like the Gobi, for example, are expanding by between 2 460km2 and 10 400km2 a year.
“This will have a tremendous impact on world food prices and supply.
Food and land prices are already up as a result,’ says Pestana pointing out that China is paying specific attention to the fact that sub-Saharan Africa only uses 15% of the available arable land for agriculture (see farming land price graphic).
China has not only invested in arable land in countries like Kenya, Uganda and Mozambique, the Chinese Development Bank has offered agricultural loans to countries like Angola ($1bn) as well as to agroprocessing businesses in East Africa.
There’s no doubt that Africa has been benefitting from China’s insatiable appetite for raw materials.
It’s the main reason why Africa has been enjoying such positive economic growth prospects since 2000.
Trade between China and Africa has risen from insignificance in 1999 to $120bn last year and this is expected to grow by about 5% to 6% a year.
But the benefits have been skewed. Africa sells her mineral wealth in return for cheap imports that have, at best, not helped diversify Africa’s economy and, at worst, have annihilated certain sectors in Africa like manufacturing.
South Africa’s Minister of Trade and Industry Rob Davies argues that the so-called “China moment’ offers a new window of opportunity that Africa is at risk of missing.
MODUS OPERANDI
“We (Africans) can’t live forever on the basis of a mineral boom. We have to consolidate that into valueadded production. The building of the domestic market and consumer industries is fundamental if we’re going to move further forward. We cannot live on just a mineral boom and a growing market that is serviced by imports. We have to occupy that productive space as African countries,’ he told delegates at the World Economic Forum on Africa.
While critics of China are vociferous, there needs, says SIM’s research, to be more focus on what China’s modus operandi is and what opportunities this opens up for business and development.
According to a Standard Bank report “China and the US in Africa:Measuring Washington’s response to Beijing’s Commercial Advance’, the US is increasingly uneasy about China’s potential to monopolise Africa’s finite resources. While it is clearly not only China which is interested in Africa’s resources, the advantage the Chinese have in securing them is simple. First, China is liquid, very hungry, able to make decisions quickly and offers very easy and cheap trade terms.
“A return on equity of about 12% is typically required, compared to the 30% to 50% sought by Western investors.
This is a little risky as it leaves little room for error but these deals are usually backed by a state bank,’ says Pestana.
China is also able to offer cheap finance that doesn’t have the demands and financial austerity programmes like those offered by the International Monetary Fund (IMF).
China does attach conditions to loans but these tend to be less onerous.
The $3bn (15-year) loan that Ghana has just accepted from the Chinese Development Bank for infrastructure projects is a good example. The condition is that 60% of the work done on projects will be given to Chinese contractors.
This, of course, doesn’t help Africa in her quest to create jobs or improve her skills quotient, but the reality is that this kind of condition is made even sweeter by the fact that the repayment interest rate is only 3.43% compared to 6% on the Eurobond market.
China is now the number one contractor in Africa. In 2009 the Chinese were responsible for 37% of all African infrastructure projects compared to the Italians (15%), France (10%) and the US (7%).
“Cheaper finance crowds out other investors,’ says Pestana who argues that China is here to stay, so acquiring an intimate understanding of how it operates is the only way a business can understand the investment complexities and opportunities involved in Africa.
He adds: “As a bond investor in Africa, for example, Chinese concessionary loans to various countries are crowding bond investors out of the market. My understanding of this makes me understand the shelving of the Eurobond issuance programmes of many African countries, which thanks to China, get lower loans at lower cost of capital to them but with a set of conditions attached.’
Nigeria is one country that’s waking up to the challenge of using the country’s resources to secure deals that have long-term benefits for the Nigerian economy. For example, it’s working on a policy that insists on a very high content of local Nigerian labour in foreign financed projects, including Asian projects.
While Chinese firms are also learning fast and adapting to increasing demand in Africa for more mutually beneficial deals, the onus is solely on Africa to understand what drives China so that its demand for resources pays properly.
– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.
