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Chinese investments in ssa

Although much of Africa remains still un-surveyed, there is no denying that of the proven reserves, the continent is well endowed with mineral resources ranging from hydrocarbons to first rankings in world reserves of platinum groups metals, bauxite, cobalt, industrial diamonds, phosphate rock, gold, vanadium, and manganese in the world, (Metals Economics Group 2009). Yumkella (2011), places a “conservative estimate of the current value of the mineral reserve base of Sub-Saharan Africa (SSA) at US$1.2 trillion’.

With key discoveries such as Ghana’s Jubilee field in the Gulf of Guinea, Sub Saharan Africa (SSA) is set to continue experiencing unprecedented foreign investment attention targeting its natural resource sector. With the bulk of foreign direct investment (FDI) stocks still originating from traditional investors from the European Union and North America (Foster, et al 2008), SSA is nevertheless experiencing a drastic increase in FDI investments from emerging market’s multinational enterprises (MNEs). The mining industry in particular, has in the past decade seen the rise of emerging market giants. The rising emerging market mining giants unlike their developed countries counterparts, have increasingly seen participation from their public sector and sovereign wealth funds, that are said to primarily changing the mining industry dynamic, (Reddy, 2008).

According to Reddy (2008), the emerging market MNEs “are using their political, financial, and backing of their home states to win a competitive edge in securing mining assets in other developing countries”. The presence of these new emerging economies MNEs investors in SSA has been seen as offering an alternative to developed countries investments. Consequently emerging market MNEs investment in SSA, is seen as ‘complementary and providing ‘a win-win situation’, though instances of emerging market MNEs being competitive with win-lose outcomes, experienced in some sectors.

These emerging market MNEs investors are targeting mostly SSA’s natural resource sector, (Broadman, 2011) and predominantly include but are not limited to Brazil, India, South Africa and China. South African firms have been the largest investors in the rest of Africa from the early 1990s and have only recently been challenged by Chinese firms with their particular focus on resources, (Luiz, 2010). Of the four emerging market economies, China dominates in terms of sheer numbers, although trade and investment with other emerging markets, such as Brazil, India and has also been rising sharply in recent years, (Laishley, 2009).

Chinese firms’ preference of obtaining natural resources directly from the source has resulted in Chinese extractive firms now holding significant shares in the supply and demand markets of minerals in SSA. Emerging research shows Chinese firms as not only securing natural resources from oil producing countries, but have also ventured into the non-fuel mining products sector in South Africa, DRC, Guinea, Gabon, Zambia, and Zimbabwe. Chinese firms are securing the “mineral resource value chain” either by “obtaining mining and oil and gas concessions, or by taking stakes in producing companies” (Cattaneo, 2009), for minerals including copper, iron ore, and bauxite. Chinese companies active in SSA’s natural resource sector include a wide range of State-Owned Enterprises and private MNEs, with massive support from the Chinese government in some form (Gökgür, 2010).

At the core of competition from china, fueling this new dynamic is African states’ control over mining concessions. Case in point is China, with its deep pockets is able to place the highest bids in the world, reported at times to be over $2 billion, for exploration acreage, (Alden and Alves, 2009). It therefore becomes a struggle for other investors “to compete with China, which also offers huge incentives to African states” (Robertson, 2007). The incentives China offers are in the form of infrastructure packed deals, in return for mining rights to explore and exploit vast areas, which has proved crucial to securing deals in Africa (Alden and Alves, 2009).

The positive impact of on development of Chinese investments in SSA, show the complimentary aspect of Sino Africa engagement. China has identified the synergy, namely securing resources for its national businesses and while meeting Africa’s infrastructure deficit, (Foster et al, 2008). Accordingly Chinese investments in SSA are said to be complimentary to Africa’s infrastructure needs, which China is meeting through substantial contribution to the provision of ‘hard infrastructure’ such as roads, railways and hydropower projects”, (Alden and Alves, 2009). The elimination of bottlenecks by providing new transport and port facilities and more power generation capacity are all contributing to SSA’s economic growth.

In light of economic impact that FDI in flows into the natural resource sector carry, these new wave emerging market investors are finally enabling the “transformation of passive (dormant) assets of vast SSA mineral reserves into active assets” (Ajakaiye, et al, 2009), consequently creating an opportunity for economic growth in the region. Conversely, the drastic increase in FDI in SSA by Chinese firms is exposing other SSA investors to greater competition. An interesting side-effect of Chinese competition is that poses a threat to not only traditional investors such as European Union countries, North America and Australian firms who are being squeezed out of many markets. Emerging market economies are feeling the effects of China’s investment aggression. For instance Brazilian firms have not only lost their access in Angola, (Kaplinsky et al, 2009) but in Gabon too. In Gabon CVRD (now Vale) lost exclusive rights to Belinga, to China’s National Machinery and Equipment Corporation, “in exchange for a $3 billion investment underwritten by Exim Bank aimed at developing Gabon’s infrastructure'(Alden and Alves, 2009). Alden and Alves, (2009) is of the opinion that China deal deciding factor, was in fact an infrastructure project, “a brand new 560-kilometre railway line linking Belinga to the coast, (CVRD offered to build only a 200-kilometre stretch of the railway)”.

On the premise “China’s economic expansion into SSA has significant implications for SSA economic growth”, (Kaplinsky, 2006), therefore complimentary, offering the so called win win situation, touted by Beijing, China’s African Policy (issued in Jan 2006). To other emerging market economies however, like South African firms, China’s economic activity is proving to be more competitive. This as Chinese investments show signs of excluding inward-oriented SSA investors from developed markets, and squeezes emerging market economies investors as well.

South African firms have been engaged in substantial expansion in SSA’s service industry, since the early 1990s, (Kaplan, 2010). South Africa as an emerging market economy is one of the largest, most diversified and longest established mining sector in Africa. The total market capitalization of the South African mining companies comprising of 41 companies, increased from R667 billion in 2009 to R879 billion in 2010, PWC, 2010 SA Mine – Review of trends in the South African mining industry.

Kaplan, (2010) is of the opinion that South African firms have created significant opportunities for exports of mining related equipment and services in the SSA market. Case in point is mine construction. According to Hanlin (2011), mine construction a specialized field and worldwide, South African firms are relatively some of few construction companies capable of winning a tender to construct a new mine. The said scholar finds that despite advanced capacity of the South African mining service sector, South Africa does not appear to be benefitting proportionally from the activities taking place in the rest of SSA, (Hanlin, 2011).

One could argue that part of reason South African mining construction firms are failing to benefit is due the multi-national nature of the corporations currently engaged in exploration and mining activities in SSA and the endemic systems that exist within these corporations. In relation to Chinese firms, project contracts in SSA are the main driving force for the growth of Chinese exports to Africa particularly the electronic-mechanical products. Statements like “Africa is short of everything, we really want to bring every nail there if possible….to African construction sites from China, mostly equipment, trucks and machinery”, (Mr Jin of China Civil Engineering Co to Feng Xu, 2008, Interim Presentation to Super Group, unpublished) gives indication of the severity of the competition these South African companies face, particularly if the Chinese trend of sourcing supply from their country of origin is maintained. Reinforcing this “pre-determined procurement route” is the “strategic integration of Chinese aid with the competitive bids of Chinese construction firms, tied to the acquisition of Chinese-sourced inputs”, (Kaplinsky et al 2009). This results in effectively excluding the participation of not only South African mining companies but also South African mining service sector from engaging in a significant percentage of the procurement process.

The study seeks to identify whether Chinese firms entry into SSA’s extractive industries pose complimentary or competition to South African mining firms’ entry into the same market and the strategies South African mining firms employ to manage these opportunities or and challenges.

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