|
A lot of resource investors stop listening to corporate presentations when
they learn the company’s project is in Africa.
More often than not the country risk of exploring for minerals in the
“dark continent” (as Africa was known to 19th century European explorers) is
just too big a gamble for retail investors’ hard-earned capital.
Development projects are hi-jacked by rebels, or over-run by artisanal
miners. Operating mines get expropriated by governments that can’t resist the
temptation to raid a foreign company’s coffers. And African miners frequently
see their profits reduced by corrupt officials intent on
re-negotiating royalty contracts.
All of these things are true, yet in the long run, Africa cannot be
ignored. The hammer-shaped continent is expected to drive global growth over
the next several decades, as populations there climb, but dwindle elsewhere.
“About half of the world’s fastest-growing economies will be located on
the continent, with 20 economies expanding at an average rate of 5% or higher
over the next five years, faster than the 3.6% rate for the global
economy,” Brahima Coulibaly, director of Brookings’ Africa Growth
Initiative, wrote in its 2019 Foresight Africa report.
The growth as always will be driven by population expansion.
According to the Center for International Policy, in 2035 the number of
working-age people in Africa will exceed the rest of the world combined, and
by 2050 one in four humans will be African. At 2100, 40% of the world’s
population will hold a passport from an African country.
In this article we’re tackling Africa - its importance to future trade
flows, for commodities its middle class will be demanding, and most
importantly, the role of China in helping to develop, and purchase influence,
in fast-growing African economies.
The good
The Center
for International Policy points out that Africa’s impending
“demographic dividend” will no doubt increase its economic clout:
Since 2000, at
least half of the countries in the world with the highest
annual growth rate have been in Africa. By 2030, 43 percent of all
Africans are
projected to join the ranks of the global middle and upper
classes. By that same year, household consumption in Africa is expected to
reach $2.5 trillion, more than double the $1.1 trillion of 2015, and combined
consumer and business spending will total $6.7
trillion.
Sub-Saharan Africa has done exceptionally well, buoyed by higher commodity
prices, an improved global economy and better access to capital
markets, reports
Quartz.
The region is expected to grow by 3.8% this year, edging out the global
growth forecast of 3.7%. Among the top 10 economies are Ethiopia, Rwanda,
Ghana, Côte d’Ivoire, Senegal, Benin, Kenya, Uganda and Burkina Faso. Between
2003 and 2013, Nigeria, population 170 million, averaged about 7% annual
growth.
The IMF expects Ghana, which 30 years ago was a dead loss, to be
2019’s fastest-growing
economy, at 8.8%. The country well known for its coffee exports is
seeing its GDP given a major kick from oil sales, as crude prices rise and
production expands.
Africa is also something of an economic incubator.
For example Kenya has pioneered a system of “mobile money” the
Financial Times reports, which allows users to send and receive cash via
their mobile phones.
The bad
But it’s not all puppies and rainbows. Africa’s dark side frequently pops
up in the headlines, giving most North Americans an image of the continent as
dangerous, disease-ridden, lawless, and dirt poor.
A quick check of the headlines Monday yielded a video, circulating on
social media, of two women and two young children who were blindfolded and
shot last summer by Cameroon soldiers; kids in Nigeria used as suicide
bombers in an attack on UNICEF; and white South African farmers who say they
are living in fear of being attacked by blacks and losing their farms. The
farmers patrol their farms at night wearing bullet-proof vests.
As noted at the top, mines are frequently targeted for treasure, and
sometimes blood. In January of this year, Kirk Woodman, a geologist at
Progress Minerals, was kidnapped and killed while working at a gold mine in
Burkina Faso.
Africa’s economic success has been uneven, and comes with a
price - debt. Despite being the fastest growing continent, Africa is home to
three-quarters of the world’s poorest nations. One in three living in sub-Saharan
Africa are under-nourished. 589 million live without electricity and rely on
biomass for cooking. The World Bank says more Africans are poor today than in
1990, proving that economic growth is not finding its way down to the lowest
rungs of society.
We can appreciate their desperation in the thousands of north African
migrants who pay snake heads their family fortune to get them across the
Mediterranean Sea to Europe.
A fifth of African countries are basket cases, dragged down by political
instability and conflicts, which as we know, can get downright ugly. Among
the countries
that have seen brutal, and sometimes painfully prolonged civil wars, are
Rwanda, Liberia, Mozambique, Nigeria, Uganda and South Sudan.
Growth for these countries is difficult when they don’t have a lot of
money. As their populations continue to soar, the demand for infrastructure
and social services rises as well. African governments need to figure out a
way to address poverty, education and diseases, and to manage social
divisions.
Take this stat for example: By 2050 over half of Africa’s 2.2 billion
people will be living in cities - the same as the anticipated population of
China. Imagine the need for new roads & bridges, electricity, schools,
health clinics, etc. According to the UN, three-quarters of 71 African cities
over 750,000 lack the infrastructure to support large populations. Usually
the answer is to borrow.
Countries that piled on debt in the last half of the past decade are now
seeing interest rates rise, putting their ability to manage debt payments
into question - especially if commodity prices drop.
According to Brookings, a Washington, DC-based think tank, at least 14
African countries are at high risk of being unable to pay their debts,
compared to five years ago. These heavily-leveraged nations have a
total debt burden of $160 billion, $90 billion of which is owed to foreign
countries.
Africa is the prize
In the 1990s, Africa was languishing in debt, disease, droughts and civil
wars. Who can forget the failure of the United Nations to stop the massacre
in Rwanda?
One country that didn’t turn its back, that saw opportunity in Africa, was
China. The
Huffington Post argues it was the help of China that led several
African countries, where the Chinese invested, down a better economic
road:
It also helps that Africa has a patient new friend with deep pockets
and a long view. When the rest of the world was dismissing Africa as a
troubled backwater, China was busily embracing it, maybe recalling its own
rise from famine and chaos. As
Moyo puts it, China has been striking deals with struggling
developing countries — the “axis of the unloved,” in her words — in return
for investment, employment and infrastructure.
Why did China choose Africa? The answer is simple. China needed to secure
raw materials for the country’s economic boom that started around 2000, and
Africa had those materials.
The sheer size of the African continent - the world’s second largest -
implies a bounty of natural resources. South Africa and Botswana are rich in
diamonds, the DRC supplies 60% of the world’s cobalt,
a mineral that is critical for the manufacture of electric vehicle batteries.
Africa ranks highly as a source of aluminum, chromite, copper, gold, iron
ore, manganese, zinc, graphite, coal, oil, uranium, platinum group elements,
and phosphate rock.
Armed with hundreds of billions of US dollars from the country’s foreign
reserves, in the early 00’s China’s
state-owned enterprises (SOE) and sovereign wealth funds (SWF) were sent out
to scour the globe for resources - to fuel China’s exploding
economy.
China wanted to diversify out of the massive US-dollar component of its
foreign exchange reserves, so the SOE/SWFs had no problem dealing in straight
cash and operating in what some might consider high-risk areas. Chinese
investors shifted their focus from Australia and Canada to higher-risk
destinations which included Brazil, Ecuador and Africa.
According to a Pricewaterhouse Cooper (PwC) report on M&A
activity in the mining sector for the decade ending in 2010, PwC counted a
total of 400 Chinese deals worth US$48 billion. At the start of that decade,
China was a negligible player in M&A.
The Chinese are making massive loans, building huge infrastructure
projects such as high
speed rail, dams, bridges, roads, schools and hospitals. While SOEs and
SWFs are making deals for the country’s resources, other Chinese companies
are building the necessary infrastructure that every country needs to build a
future for its citizens. This is the key to China’s overseas
investments - adding infrastructure capacity makes their massive, most often
early-stage resource investments viable and creates a long-lasting economic
legacy for the host country.
Thanks to the trillions of foreign exchange reserves it holds,
China offers loans at highly competitive interest rates. For example, the
Export-Import Bank of China (Exim Bank) gave the Angolan government three
loans at interest rates ranging from LIBOR (London Interbank Offered Rate -
the rate banks charge each other on loans) +1.25 %, up to LIBOR +1.75%.
The Chinese have a longer-term horizon for repayment, because they are
mostly after off-take mineral supply agreements from early-stage development
projects.
Reconstruction in war-battered Angola was helped by three oil-backed
loans, then Chinese companies came in and built roads, railways, hospitals,
schools, and water systems. Nigeria took two loans from China to finance
electricity-generating projects. The Chinese built a hydropower project in
the Republic of the Congo that was repaid in oil and built another hydropower
project in Ghana that was repaid in cocoa beans.
“While the West supports microfinance for the poor in Africa, China is
setting up a $5 billion equity fund to foster investment there. The West
advocates trade liberalization to open African markets; China constructs
special economic zones to draw Chinese firms to the continent. Westerners
support government and democracy; the Chinese build roads and dams.” Isaac Twumasi Quantus
The overall Chinese package is very attractive and there are a lot of
resource-rich countries taking the Chinese up on their offers.
MINING.com
reported in under 10 years, the number of China-headquartered mining
companies with assets in Africa went from just a handful in 2006, to 120 in
2015. Two high-profile examples are the acquisition, by China General Nuclear
Power Corporation, of the Husab uranium project in Namibia, and
Zijin Mining’s involvement (39.6%) in the
massive Kamoa-Kakula copper deposit in the DRC.
While iron ore and copper have been the hot targets of overseas
acquisitions by Chinese firms, the Chinese have also gone after gold, nickel,
tin and coking coal.
More recently the most desired metals are those that feed into the
tectonic global shift from fossil fuels to the electrification of vehicles.
China Molybdenum bought the Tenke copper and cobalt mine in the
Democratic Republic of Congo for $2.65 billion in an effort
to secure a supply of cobalt for EV batteries.
Africa and the New Silk Road
The “New Silk Road” is the term for an ambitious trade corridor first
proposed by China’s current president, Xi Jinping, in 2013. The grand design
also known, confusingly, as the Belt and Road Initiative (BRI), is a “belt”
of overland corridors and a “road” of shipping lanes.
It consists of a vast network of railways, pipelines, highways and
ports that would extend west through the mountainous former Soviet republics
and south to Pakistan, India and southeast Asia.
So far over 60 countries, containing two-thirds of the world’s population,
have either signed onto BRI or say they intend to do so. According to
the Center
for Foreign Relations, the Chinese government has already spent about
$200 billion on the growing list of mega-projects projects including the $68
billion China-Pakistan Economic Corridor. Morgan Stanley predicts China’s
expenditures on BRI could climb as high as $1.3 trillion by 2027.
The Belt and Road Initiative is seen by proponents as an economic driver
of proportions never seen before in human history. It would not only allow
Asia to relieve its “infrastructure bottleneck” ie. an $800 billion
annual shortfall on infrastructure spending, but bring
less-developed neighboring nations into the modern world by providing a
growing market of 1.38 billion Chinese consumers.
Opponents argue that is naive and the real intent of BRI is to carve new
Chinese spheres of influence in Asia that will replace the United States,
in-debt poor nations to China for decades, and restore China to its former
imperial glory.
Whatever the motivations for it, the power of the New Silk Road was shown
earlier this year during a summit in Beijing. China reportedly
used the conference - which included the participation of Kenya,
Ethiopia, Tunisia and Egypt, among 50 countries - to increase the Silk Fund
for BRI projects, from $40 billion to $100 billion. The presidents of Russia,
Argentina, Chile, Indonesia, Switzerland, Turkey, Vietnam and Uzbekistan were
there, along with representatives from the UN, IMF and the World Bank.
As for who stands to benefit most from Belt and Road, Africans or Chinese,
it’s probably too early to say, but the Africa
Center for Strategic Studies reels off a number of benefits. They
include:
- Addressing Africa’s inadequate infrastructure, which is
a bottleneck to Africa’s development. The World Bank
estimates that Africa will need up to $170 billion in investment a year
for 10 years to meet its infrastructure requirements.
- East Africa’s projects, where most of the funds are
being directed, could increase by up to $192 billion, if the projects
are used profitably. Examples are the railway connecting Mombasa to
Nairobi, and the electric railway from Addis Ababa to Djibouti, China’s
first overseas naval base.
However there are a number of negatives and potential red flags that
China’s Belt and Road partners need to watch out for.
The first is the Blue Economic Passage that connects Africa to new
maritime corridors in Asia. The expanding commercial presence matches Xi
Jinping’s goal of making China’s military stronger - which may lead to
regional conflicts. In the words of the Africa
Center for Strategic Studies:
This is particularly evident in the Indian Ocean, where China’s
planned sea lanes are heavily concentrated and its rivalry
with India is growing. Africa’s importance to China in this
regard stems from its location in a maritime area in which Beijing hopes to
expand its presence and power projection. Indeed, a decade ago China’s reach
in Africa’s adjacent waters was nonexistent. Today, it is estimated that the
PLA Navy maintains five battleships and several submarines on continuous
rotation in the Indian Ocean. This is set to increase in the coming
decades as
India ramps up its own presence in the area.
Another is local markets getting swamped Chinese products. That happened
to Kenya’s cement exports in 2017, which dropped by 40% due to a flood of
Chinese cement. This can easily happen because China is using Africa as an
end user of sectors that are seeing industrial overcapacity ie.
producing too many goods.
Or when local workers are displaced by Chinese employees. According to the
Africa Center for Strategic Studies, there are over 200,000 Chinese nationals
working on Belt and Road projects across Africa. This has resulted in the
need for a globally focused strategy to protect China’s overseas
interests. Similarly the Communist Party of China has adopted the
concept of “protecting overseas nationals” as a core Chinese interest,”
states the center. Seems to me this is an open-ended dictum that
could easily justify a military intervention in one of China’s BRI partner
countries.
There is also the risk of widening trade deficits in African countries
that are being shipped China’s excess production. In 2016 Kenya’s imports of
Chinese cement, used to build the Nairobi-Mombasa railway, increased 10-fold.
Chinese steel exports to Nigeria popped 15% in 2018, and Algeria imported three
times as much steel. In 2019, China’s aluminum exports have risen 20%, with
$46 billion worth of aluminum bought by Egypt, Ghana, Kenya, Nigeria and
South Africa.
If these countries aren’t careful, they will end up with a whopping-great
balance of trade deficit with China, (just like the US) that when added to
large loans for infrastructure, could be economically limiting or even
crippling.
Conclusion
The rise of Africa is interesting on its own, but when paired with the
rise of China, the prospect for the West is actually quite scary.
On the one hand we have a continent that is teeming with humanity and getting
more and populated every year. Its citizens want what we as North Americans
have. We have written about the scarcity
of resources and the potential for conflict. Combine that with
existing tribal tensions in Africa that have at times exploded into civil
wars, and you have a powder keg just waiting for someone to light the
match.
Then factor in China, which is playing Africa’s new economic dragons with
the skill of a Chinese violinist. It’s a beautiful plan, really. Make loans
to poor developing nations that want to become part of BRI, using US dollars,
while the USD is still the reserve currency. The loans are paid back using
offtake agreements for raw materials from these countries, which become part
of the largest trading block in the world, thereby further distancing China
from the West.
Remember, Russia is part of BRI. The Kremlin and Beijing have already
signed billions worth of energy deals, and are talking about a new
payments system that allows for trade in rubles and yuan, excluding the
US dollar.
Devalue the yuan, so that China’s new south Asian trading partners can buy
competitively priced Chinese goods, further enslaving them with crippling
trade deficits.
China was already building the New Silk Road when Trump got elected and
started poking the Chinese dragon with the stick of escalating tariffs. The
trade war just hastened what China was planning on doing anyway: cut the US
out of its trading loop.
It has the resources, the technology and the population to lay siege to
the United States for a long time. China’s in no rush to settle the
dispute.
Meanwhile, hit
back at US companies as retribution against the United States which
dared to stand in the way of companies like Huawei and ZTE. Build the biggest
manufacturing base the world has ever seen, embargo their critical metals,
effectively starving their supply chains, and watch them slowly wither and
die, as the US continues down its path to self-destruction.
That’s the topic of our next article.
subscribe
to my free newsletter
Legal Notice / Disclaimer
This article is copyright protected and may not be reproduced in whole or
in part or retransmitted or reposted without the authors written permission.
This document is not and should not be construed as an offer to sell or
the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently verified.
Richard Mills makes no guarantee, representation or warranty and accepts no
responsibility or liability as
to its accuracy or completeness. Expressions
of opinion are those of Richard Mills only and are subject to change without
notice. Richard Mills assumes no warranty, liability or guarantee for the
current relevance, correctness or completeness of any information provided
within this Report and will not be held liable for the consequence of
reliance upon any opinion or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any direct or indirect
loss or damage or, in particular, for lost profit, which you may incur
as a result of the use and existence of the information provided within this
Report.
|
