Min­ing: The gate­way to Africa

RISKAFRICA Magazine - - CONTENTS - Nick Krige

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.”

Po­ten­tial is­sues

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.”

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