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Signs of a Construction Boom in Southern Africa

Jan. 07, 2011 3:59 PM ET
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A construction boom, far larger and more sustained than the work done during the build up to the World Cup, could be coming to Southern Africa. A major indicator of this boom will be if South Africa makes a significant investment in the oil refinery in Lobito Angola. The reason we should be paying attention to this deal is because the bulk of the refined oil is supposedly going to be reserved for developing Southern Africa, rather than for foreign markets. China was initially planning to fund the project, but pulled out when Angola refused to guarantee that 80% of the refined oil would be reserved exclusively for foreign markets. If it is true that the bulk of the oil is reserved for the region, this deal could be viewed as a first step in a process of shifting from an economy relying solely on primary commodities to one which has a manufacturing base as well. After all, a reliable supply of oil is essential for economic development in Southern Africa. If South Africa partners with Angola on this project it will be more than a business deal. It will be a concrete effort to fundamentally change the regional economy.

Angola needs South Africa, not just as an investor, but also as a distributor. Despite the fact that Lobito is an excellent port, much of Angola’s infrastructure is in poor condition, thus the ability to ship oil to South Africa, which has much better infrastructure both internally and linking it to other countries in Southern Africa, is important. As Southern Africa has a temperate to arid climate there is less strain on infrastructure than one would encounter in tropical environments. The region also lacks barriers, such as the Sahara Desert and the Congo Rainforest, which facilitates construction (admittedly the Kalahari is there but it is far more manageable than its Northern cousin). Expanding roads and railways in the region will create numerous opportunities for engineering and construction firms in the region.

Though the estimated 9 billion dollar price tag is significant the 200,000 barrels per day (BPD) of refined oil that Lobito is projected to produce dwarfs the 40,000 BPD (rough estimate) that Angola’s only mainland refinery currently produces. That oil would be instrumental in stimulating development in the region, however South Africa will not fund such a project unless it is sure that it will get a significant return on investment. Politically and economically speaking, there are factors which indicate that this is indeed the case. Building infrastructure will employ the estimated 54,000 construction workers who lost their jobs after the World Cup and create new manufacturing and transport jobs. As unemployment is one of the major problems in South Africa, President Zuma will likely be inclined to boost his political capital by creating jobs. If South Africa is going to make a significant investment in the refinery, Pretoria will want to see South African companies awarded a significant portion of the contracts. A likely winner is the engineering contractor Murray & Roberts. Internationally, they are best known for helping build the Burj Al Arab Dubai and the Gautrain around Johannesburg. Though the company has taken a hit recently due to the drop in work after the World Cup’s successful conclusion, problems procuring land for Gautrain and from difficulties obtaining payment from clients in Dubai, the company is still well placed to take advantage of the growing interest of investment in Southern Africa. Suffice it to say, the Lobito refinery could be a major indicator of things to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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