China Scrambles for African Resources

Chinese interest in acquiring "strategic assets" continues unabated, with recent acquisitions and investments in a number of companies in Australia and South America.

As we saw in last weeks eye bullish approach regarding Nigerian oil, China is looking a little further afield and it's all seeing eye has settled upon Africa. In what is quickly becoming a replay of the late Victorian era "Scramble for Africa", the latest country to be courted is the Republic of Guinea as China seeks to gain access to the West African nation's large mineral deposits. Instead of glass beads, whiskey and cowrie shells, Chinese negotiators are offering eye watering amounts of money to be invested in infrastructure projects.

The impoverished nation possesses more than 25 billion tonnes of bauxite ore, with more than 150 mineable deposits having been prospected to date. Additionally, Guinea's mineral wealth includes more than 4 billion tonnes of high-grade iron ore, significant diamond and gold deposits and as yet undetermined quantities of uranium. Bauxite exports account for more than 75% of GDP, according to Wiki sources.

Guinea's Minister for mines was quoted in the Financial Times as saying that the Guinean government is in talks with the China International Fund (CIF) regards a $7Bn investment into a number of projects including infrastructure, minerals and oil.

"Instead of just giving natural resources... in exchange for promises of developing our infrastructure, we decided to take the joint venture approach and co-own not only the infrastructure development companies and projects, but also whatever natural resource companies or projects are developed jointly." said Mohamed Thiam "All the government's stakes in various mining projects will be put in that mining company. Future mining permits or concessions that the government decided to develop on its own will be put in that company."

China still doesn't seem to be too picky regarding who it does business with, as the present Guinean government is a military dictatorship that has recently put down a bloody coup last month. 150 people were killed on September 28, when troops opened fire on a crowd gathered in the capital Conakry, in order to protest at ongoing corruption in Captain Moussa Dadis Camara's rule.

Sidya Toure, who leads the only effective opposition and is a former prime minister was quoted "I do not understand how you can believe that we can inject this kind of money into the economy of Guinea where the total gross domestic product is only three billion dollars."

CIF is also planning to form a consortium with the Guinean government and near neighbour Angola's state oil company Sonangol to look at prospecting for oil off Guinea's coast. As we reported previously, West Africa has become a hotbed of speculation and investment, as new oil fields are coming under development in Ghana, Angola, and Senegal. It is considered likely that offshore Guinea will also provide new hydrocarbon deposits that can be exploited.

What is interesting is that CIF on the face of things, does not seem to be an officially backed government company, whereas all the recent deals have been undertaken either by the Chinese Development Bank or via large state owned enterprises such as CNOOC (CEO) or Chalco. CIF is registered in Hong Kong and an inspection of the website gives very little information on the structure of the entity.

Last November, as it became clear that the global economy was heading into a recessionary period, central government in Beijing implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels, with energy receiving a special focus.

Adopting various measures such as tax reductions, rebates, fiscal subsidies, improved access to credit and direct government expenditure, central government has been encouraging state owned oil companies such as Petrochina and CNOOC to expand foreign investment in upstream opportunities, whilst increasing domestic refining capacity and oil product stockpiles.

We have seen a number of examples of this with Russia signing a 20 year $25Bn oil supply contract in February, which will see Rosneft supplying up to 300,000 bpd of oil via it's East Siberia-Pacific Ocean (ESPO) oil pipeline to China. This was closely followed by the China Development Bank extending a $10Bn loan to Brazil's state owned company Petrobras in return for securing strategic oil supply contracts and this month CNOOC has made a bid to acquire more than 16% of Nigeria's stated oil reserves.

It would appear that sentiment is currently running against Western based IOC's and countries in emerging markets that have currently untapped or underdeveloped hydrocarbon deposits are enjoying the ability to play interested parties off against one another. What is interesting to me is the fact that China seems to be playing Guinea at arms length via what is in effect a shell company, allowing them to hold up a clean pair of hands on an international basis.

This desire to secure resources at what would seem "any cost" should, in our opinion, receive close attention from both a geo-political and investment point of view. IOCs will not be able to compete in areas where there are no rules, particularly in Africa, whilst it looks like China will circumvent accepted norms using any available route to achieve their aims.

Disclosure: Author has no position in any company mentioned

Comments

[CautiousInv...:]

China is ably exploiting its rising stature and taking full advantage of its $2 trillion stockpile of reserves. China is not without its problems like misallocation of resources and corruption but with the West mired in the economic crisis of its own making, a prospering China has an unprecedented opportunity to build on its already powerful economy and project its influence with little competition.

China’s ongoing strategy is driven by multiple motives: to secure long-term access to strategic resources to sustain its impressive economic growth; to insulate its economy against sharp swings in the prices of commodities, petroleum being the most important; and to increase its economic and diplomatic strength by integrating the economies of the supplier countries with its own.

Beyond creating joint ventures to locate and extract strategic commodities, China will frequently invest in host countries and develop infrastructure without all of the strings typically imposed by the World Bank or IMF. China is repaid in commodities and quickly expands trade within the countries of its joint ventures.

Oct 13 12:41 PM

[Trinvester:]

China seems to be using the "by any means necessary" mantra in attempting to secure its future position as 'the' global superpower, taking full advantage of the vacuum that's been created by the US being unable to finance global investment. The US for many years has exploited global resources to ensure its own interests and prosperity, seems as if now the shoes' on the other foot.

Oct 14 10:57 AM

[a. palmer jr.:]

I'd think that Africa has enough problems without taking on another one...trading with China. Look what it's done for the United States. Our manufacturing of normal everyday goods is practically gone. I know, people will tell you we are still a manufacturing giant, but just look at the labels of stuff you buy. Even our flags and other patriotic items are now "Made in China". Why doesn't China just drill for oil in their own country? I'm sure that if they look around they'll find some oil somewhere in that vast acreage of theirs!

Oct 14 12:51 PM

[Plant the s...:]

Angola is in Southern Africa next to South Africa and is not a neighbor of Guinea which is in West Africa. Same continent but a long way apart.

Oct 14 03:48 PM

[Peter Medved:]

granted ... but near neighbour is a nice catch all ... nice to see that you have one fan following you all over SA my friend

Oct 16 10:14 AM

[addis:]

If you are interested in playing this theme take a close look at China Sonangol Enterprises International listed in Hong Kong (1229 HK). According to its website it "China Sonangol International Holding Limited mainly engages in oil, gas and minerals investment and exploration, crude oil trading and large-scale national reconstruction projects. With the headquarter office in Hong Kong, the company also has branch offices in China, Africa and Latin America." Shareholders include Chinese State Oil Interests, the Angolan State National Oil Company, Sonangol and Lev Leviev an israeli businesman who is well connected to Angolan President Dos Santos

Oct 31 07:34 PM