Digging deeper

Updated: 2013-03-08 07:09

By Andrew Moody (China Daily)

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Digging deeper

Clockwise from top: David Humphreys, principal at DaiEcon Advisors; Martyn Davies, chief executive of Frontier Advisory; Huang Haiwei, associate director of The Beijing Axis; Michael Power, investment strategist at Investec Asset Management. Mark Wessels / for China Daily

He said there was a natural synergy between resource-rich countries in Africa and countries such as China that had huge markets.

"China and Africa need to deepen practical cooperation in the mining sector. We need to strongly implement the agreements on mineral exploitation, investment and mineral commodities trade."

Chinese resources companies such as China Nonferrous Metal Mining (Group), CITIC Group Corporation, China National Petroleum Corporation, China Railway Resources Group and Beijing Haohua Energy Resources Company have been dominant players in Africa over the past decade or more.

Power at Investec says that in the first half of the last decade it was Chinese companies that were calling all the shots in Africa.

"The Chinese came in and pretty much did it 100 percent the way they wanted to do it. As a result, in this first generation of engagement they might have been a little brusque about local sensibilities," he says.

More recently, China has faced increasing competition in Africa from other emerging market players in the resources sector.

PPT Exploration and Production, the Thai state-owned group, acquired major oil fields in Mozambique with its acquisition of the Irish company Cove Energy last year.

This came not long after Pertamina, the Indonesian state-owned energy company, paid a record price for an Angolan oil block, beating off competition from its Chinese rival Sinopec.

"These investments show that China is no longer the only kid on the block. It might still be the main kid on the block, but it is certainly not the only one," Power adds.

"You not only have the Indonesians and the Thais but the Brazilians have also come in. Even the copper belt in Zambia is now more Indian than it is Chinese."

The Chinese attendance at Indaba proved that Chinese companies are still very much part of a major presence in the market.

Huang Haiwei, associate director of The Beijing Axis, a consultancy that provides strategic advice to Chinese companies in the resources sector, says Chinese companies are still very much active in the market.

"People who want commodities can't really go window shopping. They can't be like all those people you see in the streets walking past department stores with nothing to do. They have a responsibility to act. The market is very transactional. They need commodities to turn into cash," he says.

Huang says most of his clients - both state-owned enterprises and private companies - are looking to take complete ownership of existing facilities or enter into strategic equity partnerships rather than develop greenfield sites. A typical investment would be $100 million.

"It is a very capital-intensive business. The investors are not looking for short-term cash-generating projects but are looking to get cash flow over five, six or nine years," he says.

Duncan Clarke, an oil industry strategist and author of Africa: Crude Continent: the Struggle for Africa's Oil Prize, says China's role in the resources sector in Africa is often exaggerated.

"There are probably between 700 and 800 companies in the oil and gas sector in Africa, and among these are just four or five Chinese state-owned companies. I know that these companies are large, with an increasingly growing portfolio in exploration and development but they are still among many other players."

Clarke, also chairman and CEO of Johannesburg-based Global Pacific & Partners and who was speaking on the windy terrace of the Best Westin hotel in Cape Town, says Chinese activity is surrounded by too much mystique.

"Many people think the Chinese have some megaplan, but I think independent observers don't see it that way because they do often stumble and run into brick walls. Companies like Sinopec, for example, have had bad luck both in Angola and in North America," he says.

Clarke says the Chinese attract attention because their deals are seen as opaque.

"Probably the big difference is that a large chunk of China's business is done state to state, whereas the Western footprint is more articulated through companies."

Dr Martyn Davies, chief executive of Johannesburg-based strategy and research Frontier Advisory who advised on the recent Wesizwe platinum deal, says the rhetoric about China is often "overblown".

"Chinese mining companies certainly have a very strong home game (in China) but they have had a less successful away game."

Davies, who is an authority on the China-Africa relationship, says China is not the colonial resources power in Africa some assume.

"We are not in the 19th century anymore. There will be no more Cecil John Rhodes in Africa. The market mechanisms are so much more entrenched," he says.

Humphreys at DaiEcon Advisors says that while some believe China is the neocolonial power in Africa, that does not fit the facts.

"When Western countries did this in the latter part of the 19th century they ended up running the countries, and I think this is the supposition that surrounds all of this," he says.

"There is an assumption that China is taking one step in the process of getting involved in the politics of Africa. There is, however, very little evidence of this. I just think it reflects on the West's own sense of vulnerability."

Humphreys believes that what really is happening is that China is moving away from going it alone and cutting its own deals in Africa.

"International mining is not a matter of putting a plate on the door and hiring a few people. Rio Tinto, which I used to work for, have always been an international company, and it is companies like these that have the expertise that China needs," he says.

He says Shandong Iron & Steel Group's recent $1.5 billion acquisition of a 25 percent stake in London-listed African Minerals' Tonkolili iron ore mine in Sierre Leone is a case in point.

"By harnessing on to these guys and taking a strategic shareholding, China gets the resources it wants but doesn't have to get strategically or politically involved," he adds.

Whether having resources is a bonus for Africa or, in fact, a curse is often debated.

Because of the commodities boom over the past decade, many African countries have experienced double-digit growth.

However, in a recent study by the United Nations Conference on Trade and Development, the share of manufacturing value added in Africa's GDP fell from 12.8 percent to 10.5 percent, indicating that its economy was actually going backwards.

During the same period MVA in Asia increased from 22 to 35 percent.

"What this means is that African economies are moving down the value chain and becoming more resource dependent. I find this deeply concerning," says Davies at Frontier Advisory.

China, however, is likely to need Africa's resources for a long time. It remains easier for it to import iron ore from many parts of Africa than mine it in western China and transport the resource to its coastal steel plants.

Humphreys at DaiEcon believes China will eventually reduce its own iron ore production from 300 million to 100 million tons and seek to bridge the gap by importing from Africa and elsewhere.

"When China was growing fast it couldn't get these raw materials, but now with all the concerns about environmental problems and pollution, it makes sense to do this. If it can buy raw materials cheaper than it can produce itself that is what it will do."

andrewmoody@chinadaily.com.cn

(China Daily 03/08/2013 page1)

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