Why Chinese investment remains crucial to resource-rich Africa
China’s willingness to invest in mining in politically unstable, high-risk African countries could help the continent make the most of the slight rebound in commodity prices. Finbarr Toesland reports.
Before the collapse in a range of commodity prices over the past few years, bumper demand for resources that are plentiful in Africa boosted the economies of numerous countries on the continent. China accounted for much of this demand, and Beijing’s seemingly insatiable appetite for mineral resources hit its peak in 2013 when exploration and mining of minerals made up almost 25% of the country’s annual investment in Africa.
Although the commodities boom has ended and China is in a period of slower growth, Beijing still has countless mining interests across Africa and requires massive amounts of raw minerals to satisfy domestic demand. As nationalist agendas develop in the West, including Brexit in the UK and Donald Trump’s protectionist rhetoric in the US, China continues to move towards economic globalisation.
“China’s current policy stance appears to continue to expand its global economic footprint, including encouraging Chinese companies to acquire overseas assets in key strategic sectors. We have seen over the past years continued Chinese investment in resources projects across Africa,” says Lance Crist, global head of infrastructure and natural resources at the International Finance Corporation, a member of the World Bank Group.
Good news and bad
Accurately predicting the extent to which anti-globalisation policies will be implemented in the West is difficult, but some recent policy movements are a cause for concern in Africa’s mining industry.
“The first indicator of the trend is international governance of the extractive sector. The review by the new US administration of a set of regulations requiring companies in the extractive sector, in particular oil and gas, to disclose payments made to foreign governments and entities, will add to regulatory uncertainty in the sector,” says Kojo Busia, co-ordinator of the UN Economic Commission for Africa’s African Mineral Development Centre.
However, certain elements of Mr Trump’s ‘America First’ plan bode well for Africa. In late March, US transportation secretary Elaine Chao said the administration is on track to unveil a $1000bn infrastructure plan in 2017. This sort of investment would create huge demand for minerals from the continent, primarily iron and bauxite.
Taking a risk
Chinese firms continue to invest in countries with major social and political issues. Mining and metals company China Moly’s purchase of the Tenke copper mine in the Democratic Republic of Congo earlier in 2017 is a good example of China’s willingness to enter challenging jurisdictions, according to Mr Crist.
While Western companies have been involved with mining projects in Africa for far longer than China, Chinese firms are more likely to enter riskier and politically volatile regions. Thanks to generous financing terms from state-owned banks and the support of the government in Beijing, Chinese companies can focus on long-term objectives, unlike US and European enterprises, which are often more interested in shorter term opportunities.
Chinese state-owned mining companies have traditionally been the most active players in Africa’s mining sector, but after the country’s Ministry of Commerce relaxed rules around foreign investment in late 2014, private enterprises began to investigate opportunities in the industry. This push by Beijing to explore Africa’s mining sector has resulted in Chinese firms quickly learning how to do business in African countries, with initial missteps being resolved in subsequent projects.
Over the past year, China has supported a number of high-profile mining projects in Africa, including steel firm Shandong acquiring a 75% share in the Tonkolili iron ore mine in Sierra Leone from African Minerals, bringing its total ownership up to 100%. Shandong intends to invest $700m in the plant, making this venture the single largest industrial investment in Sierra Leone’s history.
These investments will undoubtedly create large numbers of jobs for Africans, but few of these projects see value added to mineral resources locally, limiting the positive impact on the local and national economy. In the case of Tonkolili, for example, all ore produced on site is exported to China without being processed.
A key factor in the major financial commitment from Shandong is the recent rebound in commodity prices, which has helped restore some confidence in the industry. “That confidence is likely to lead to an increase in M&A activity, and a small increase in new mine development,” says Jay Leary, co-head of the global mining team at law firm Herbert Smith Freehills.
Africa contains close to 30% of global mineral resources, but the many barriers to investment can dissuade even the most ambitious investors and companies from working with mineral-rich but troubled countries. “While each country in Africa has its own opportunities and challenges, some of the countries with the greatest geological potential also continue to be among Africa’s poorest,” says Mr Crist.
Besides the well-documented issues of corruption, poor governance, underdeveloped legal systems and political instability on the continent, improving the attractiveness of mining FDI will involve ensuring that there is as much regulatory certainty and predictability as possible for investors. “Mining is a high-risk, capital-intensive industry with long lead times between exploration and production, for which such certainty is an absolute prerequisite,” says Peter Leon, global co-chair of law firm Herbert Smith Freehills’ Africa practice.
According to the International Monetary Fund, 25 countries in sub-Saharan Africa are classified as resource-rich, with these countries having the potential to markedly increase their citizens' standard of living by effectively exploiting the abundant mineral resources. It is vital for both governments and private companies to have an accurate and comprehensive geological data map if the true mineral wealth on the continent is to be harnessed.
“African countries will need to invest in strengthening their geological information management systems. The quality of geology remains a crucial and decisive factor in attracting investment to the sector. Yet African countries invest very little in mapping their subsurface, which contrasts sharply with comparable mineral jurisdictions such as Canada and Australia,” says Mr Busia.
Commodity prices are still some way below their peak levels, but if the perennial challenges of weak infrastructure and complex mining codes can be mitigated, African countries may yet capitalise on global headwinds and unlock the value of minerals found within their borders.
The fDi Report 2016
Most popular content
- fDi American Cities of the Future 2017/18 – New York triumphs again
- fDi’s Global Cities of the Future 2016/17 – the winners
- fDi American Cities of the Future 2017/18 – FDI Strategy winners
- The first resort: how FDI can help the Maldives to preserve its paradise
- Maldives pushes sustainability at home and abroad
Crossborder investment monitor
fDi Markets is the only online database tracking crossborder greenfield investment covering all sectors and countries worldwide. It provides real-time monitoring of investment projects, capital investment and job creation with powerful tools to track and profile companies investing overseas.
Corporate location benchmarking tool
fDi Benchmark is the only online tool to benchmark the competitiveness of countries and cities in over 50 sectors. Its comprehensive location data series covers the main cost and quality competitiveness indicators for over 300 locations around the world.
fDi Intelligence provides customised reports and data research which deliver vital business intelligence to corporations, investment promotion agencies, economic development organisations, consulting firms and research institutions.Find out more.