Mining: The gateway to Africa
China’s interest in Africa’s boundless mineral wealth has been well documented, and now it seems the country’s investors are targeting South Africa as the gateway to the continent’s riches.
China boasts a population in excess of 1.3 billion people, or almost one- fifth of the people alive on the planet today. The country has experienced unreserved growth over the past few years and the government’s economic policies have guided 300 million people out of poverty. All those people and all that growth require resources, which Africa has in abundance.
Unfortunately, the perception of Africa as an investment opportunity to outsiders is not a good one. The 2012 Ernst & Young Africa Attractiveness survey found that, despite foreign direct investment projects in Africa growing at a compound rate of close to 20 per cent a year since 2007, there remains lingering negative perceptions of the continent. The idea that corruption, piracy and civil unrest are rife throughout the continent serves to cement that negative image of Africa, despite continued growth. Even though South Africa has many of its own issues, as the country with the largest GDP on the continent and its frequent involvement on the international stage, the country is often seen as the shining light of Africa.
The diversity of the South African mining industry, as well as its world-class banking and finance systems, makes the country an ideal base from which Chinese firms can expand their investment into Africa, according to Otsile Matlou, head of mining at ENS. “South Africa is increasingly becoming an attractive destination for Chinese investment. The country has over 150 years of experience in mining and is among the top five best banking systems in the world. Furthermore, it arguably has more mineral diversity than any other country in the world – mining over 50 economic minerals within its borders. These factors are very important for Chinese investors,” says Matlou.
Opening the door
South Africa seems amenable to Chinese investment, having recently amended regional headquarter company tax legislation to provide a favourable tax position for foreign companies to set up their regional headquarters in South Africa. It has made it even easier for Chinese firms to use the country as a launch pad for the rest of their African projects. “We expect that there is going to be an influx of Chinese investment into Africa, through South Africa, as a result of this,” Matlou says.
Ernie Lai King, head of ENS China and executive in ENS’s tax department, believes that the headquarter company concessions will assist a great deal in competing with jurisdictions like Mauritius. “I am fortified by the announcement in the national Budget Speech that plans are in place to simplify the current rules. The further announcement that plans to implement special economic zones is also very welcome,” says King.
Matlou, whose firm has advised on mergers and acquisitions throughout Africa, says ENS has already seen an increasing interest from China, specifically in African mining ventures. “The indication is that the Chinese are going to invest in a diverse mining sector. They are not going to focus on one commodity and are looking to diversify in iron ore, manganese and gold, among others.”
Something African countries should be aware of is that the Chinese mineral strategy in the past has been largely extractive, with little investment outside of the extraction operation. “While most companies are choosing to invest in the countries where they are extracting minerals, Chinese mining companies in the past were doing the opposite. They tended to mine the raw materials, ship it to China, produce the products and ship those products back into the international market.” However, King reports that the Chinese are now giving greater support to South Africa’s beneficiation programme, but a major obstacle is South Africa’s sustainable electricity supply. “A chrome smelter, for example, consumes immense amounts of electricity and until we have a sustainable, reliable power supply, it is a problem,” he says.
Other problems also exist in the South African mining sector due to labour unrest and the threat of nationalisation. Despite this, Jane March, mining practice leader for Africa at Marsh, believes that the future of South Africa’s mining industry lies with investors, which would explain the countries new policy to encourage companies to set up regional headquarters in South Africa. “Production is down due to the strikes, and commodity prices are also lower. While we have the resource base within our country, whether the industry grows or shrinks is dependent on investors’ views of our country and whether we are able to maintain stability and extract the resources cost-effectively,” she says.
South Africa is increasingly becoming an attractive destination for Chinese investment.
Chinese companies have a history of importing their own human capital for projects. This has the potential to affect local job creation and provide additional discontent among local workers and needs to be handled delicately. Chinese firms do seem to have noticed the effect imported labour has on the local populace and recent projects have seen an increase in the utilisation of local labour. “The one thing about the Chinese is that they learn quickly from their mistakes and are appreciating the political sensitivities in the region. Notwithstanding the fact that imported Chinese labour is highly productive and low cost, recent major Chinese investments that I am seeing are focused on local job creation, skills development and training,” observes King, who widely advises Chinese business and Chinese state-owned enterprises.
In addition, investment in South Africa has been focused on making resource extraction and transportation more efficient and cost-effective. “South Africa possesses world-class port and rail link capacity. In this, China has found opportunity, announcing deals to ease bottlenecks that are currently holding up coal exports as well as providing much-needed job creation. A source has revealed that the China Development Bank has agreed to lend South African State Rail Freight Group, Transnet, up to $5 billion to revamp ageing track used to carry commodities such as coal and iron ore. The infrastructure aid is a help, but South Africa still desperately needs to boost the capacity of its electric grid to power its energy-intensive mining sector,” says Brian Africa, marketing and business development executive, Performance and Custom Bonds Services (PCBS).
Unlike other active investors on the African continent, such as India, Chinese investors prefer not to enter into supply agreements if they can personally handle the operations, according to Matlou. “Therefore, Chinese companies will invest in operations that are already up and running and seek full control, so that they can determine the destination of the ore or mined commodity.”
Matlou attributes this approach to the fact that most of the money available for investment is coming from public funds. “There is no shortage of money. The Chinese firms want to invest in existing operating mines where they are guaranteed returns.”