More Related Content
Viewers also liked (11)
Similar to MW_Q2-2010_AG-Article (20)
MW_Q2-2010_AG-Article
- 1. July 2010 2 Introduction 3 Equities 14 Private Equity 18 Alternative Investments 22 Property 29 Fixed Income J & E Davy, trading as Davy, is regulated by the Financial Regulator. Davy is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. Davy is authorised by the Financial Regulator in Ireland and regulated by the Financial Services Authority for the conduct of business in the UK. MarketWatch Feeding the Dragon - African commodities and China Page 18 Davy Private Clients
- 2. Feeding the Dragon African commodities and China Alan Guy Alternative Investments Chinas support for Africas development is real and solid and, in the future, no matter what turbulence the world undergoes, our friendship with the people of Africa will not change Wen Jiabao, Chinese Premier, at the opening of a two-day China- Africa Summit, 10th November 2009. While Chinese growth is well documented what is less well known is how Africa is feeding Chinas insatiable appetite for commodities. China the worlds workshop is increasingly relying on imported raw materials from the worlds poorest continent. It is not only oil and industrial metals that China is consuming but gemstones and precious metals. For example diamond sales in China rose by 16.9% in 2009 to $1.5 billion, a level second only to the US. In a country with an estimated 11.82 million weddings per year the increasing wealth and the adoption of Western customs may see demand go higher still. How does Africa benefit? Booming trade with China and the export of commodities can help African economies to grow and allows their Governments to begin to lift their populations out of poverty. African Governments like Chinas cheap loans which have fewer strings attached related to good governance and corruption than those of the IMF or World Bank. Perhaps most importantly Chinese involvement in Africa is reigniting other nations interest in the continent, bringing back investors who had long neglected it. A Booming Trade While the pattern of trade, which sees raw materials going to China and Chinese finished goods flooding Africa, has concerned some Africans, trade between China and Africa continues to boom. In March 2010 Angola overtook Saudi Arabia as Chinas largest crude oil supplier, a month in which Chinese imports rose to their second highest level on record.1 In return for the oil Angola received loans to finance the construction of roads, railways, hospitals and schools. In 2009, Chinas investment in Africa increased by 80% with Africa now representing 10% of Chinas total outward foreign direct investment.2 China invested $7.8 billion in Africa in 2009.3 Trade between Africa and China has grown by 40% a year since 2001, reaching a record high of $107 billion in 2008. Unsurprisingly China is Africas largest trading partner and by comparison trade with the world largest economy, the U.S., was $86.73 billion.4 African Infrastructure a Win-Win for油China Perhaps unsurprisingly Africa lacks much of the basic infrastructure developed countries take for granted. What infrastructure is there is often outdated and massively overstretched. Nigeria for example is one of Africas biggest oil producers but has to import some 85% of its petrol and diesel due to chronic lack of refining capacity. China is becoming increasingly involved in both the funding and reconstruction of African roads, railways and ports. The Forum on China Africa Cooperation (FOCAC) was created in 2000 as a means to foster bilateral trade between 49 countries from Africa and the worlds fastest growing nation. The FOCAC has often been the forum for China to announce its largest investments into the continent. To date $15 billion of preferential loans have been announced at FOCAC, the most recent was $10 billion announced in November 2009.5 In 2006 President Olusegun Obasanjo of Nigeria signed a contract with China Civil Engineering Construction Corporation to rebuild Nigerias antiquated colonial era narrow gauge railway. Under the terms of the agreement China was to supply nearly all the equipment and technical personnel at a price they themselves determined. While preferential loans are on the face of it generous, they do come with strings attached, e.g. countries with diplomatic relations with Taiwan for example are not eligible for the loans. It is often the case that the loans and buyer credits are made on the condition that the funds are used to finance infrastructure built by Chinese companies on favourable terms to the Chinese or spent on the purchase of Chinese goods. For example in the case of the 2006 Nigerian Railway deal the terms of the contract had no protection against 2 Source: dailymarkets.com 3 Source: Bloomberg 4 Source: U.S. Census Bureau 5 Source: Bloomberg 1 Source: Ft.com/energysource, April 2009 18 marketwatch 19 july2010 a lt e rn a t i v e i n v e s t m e n t s
- 3. overcharging or cost overruns. As with other projects in Africa, China will supply most of the workers. Such favourable terms for China and its companies are not uncommon. For those loans backed by commodities such as oil China has in the past negotiated favourable terms. Under resource backed loans a fixed quantity of the commodity is delivered as payment irrespective of any increase in the value of the underlying commodity. In a period of rising prices the African nation will lose out. While the infrastructure provided by Chinese loans and muscle clearly benefits the African nations involved it has additional benefits for the Chinese. While miles of road railway and new port facilities all make it easier to ship the commodities that China wants out, the provision of new transport links to regions once cut off and the improvement of existing links provide China with access to new markets for its exports. For China it is clearly a win- win油situation. When feeding a dragon you can burn your hands. Chinese involvement in Africa has been an economic lifeline however it has not been without its costs. Africans are seeing their market places saturated with cheap Chinese imports which have in most cases been shipped into a Chinese built port, via Chinese constructed highways in Chinese built油lorries. Particularly badly hit has been the textile industry with cheap Chinese imports largely replacing local cloth. A study of the period 2000-2006 by the Nigeria Textile Manufacturing Association, suggests that those employed in the industry have fallen from 250,000 to less than 30,000. An equally epic fall in production has also been evident with production falling from 1.5 billion to less than 400 million metres of fabric per year. Given the increased provision of infrastructure one might expect the trend to continue. Chinese companies have been criticised for their environmental policies and work practises. Chinese mining companies in Zambia have been heavily criticised for using obsolete, unsafe and polluting machinery which is banned in China. Perhaps unsurprisingly during Zambias presidential election campaign in 2006 workplace accidents, poor working conditions and below-minimum wage pay at Chinese-run copper mines became major campaign issues. NeoColonialism or a new油partnership? The rise of China in Africa has been compared by some to the rush for African resources at the turn of the 19th century with a large power on the ascent securing commodities to fuel its growth. As outlined previously environmental concerns and the poor treatment of African workers added to this perception of neo-colonialism. However increasingly African nations are aware of their importance to the continued growth of China. Unsurprisingly they are demanding better terms on the contracts when negotiating. Angola for example has demanded that at least 30% of work on its infrastructure projects must be subcontracted. The Democratic Republic of Congo when negotiating a $3 billion copper backed loan demanded, amongst other conditions that a maximum of 20% of the labour could be Chinese. China also has been stung by criticism over its imperial ambitions and is now engaged in a Hearts and Minds charm offensive. At the FOCAC conference, in November 2009 Wen Jiabao announced that China would cancel the debt of Africas poorest nations. The China leadership was also at pains to stress that China would not cut its investment or aid to Africa, this at a time when the rest of the world, including Ireland was cutting its aid as a result of the global financial crisis. In the 19th century the British built the UgandaKenya Railway in what was British East Africa, (modern Kenya and Uganda). The original purpose of the project was to provide a transportation link to carry raw materials out of the colony and to carry manufactured British goods back in. In the 21st century China has taken up the mantle. In January 2010, China announced that it would upgrade the railroad linking Kenyas Mombasa port and the Ugandan capital. Can one draw parallels, only time will tell? What one can be certain of is that in a world of finite commodities the relationship between China and Africa will become increasingly important to those of us in Europe and the rest of the developed world The rise of China in Africa has been compared by some to the rush for African resources at the turn of the 19th century 20 marketwatch 21 july2010 a lt e rn a t i v e i n v e s t m e n t s
- 4. capital markets | corporate finance | private clients | research The information contained in MarketWatch is not investment research or a research recommendation for the purposes of regulations. It is for informational and discussion purposes only. References to past performance are for illustration purposes only. Past performance is not a reliable guide to future performance. Estimates used are for illustration purposes only. MarketWatch is not intended to constitute an offer or solicitation for the purchase or sale of any financial instruments, trading strategy, product or service and does not take into account the investment objectives or financial situation of any particular person. Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal and other advisors before making an investment decision, and only make such decisions on the basis of the investors own objectives, experience and resources. Davy shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data, calculations nor for any special, indirect, incidental or consequential damages which may be experienced because of the use of the data made available herein. This document and its contents are proprietary information and products of Davy and may not be reproduced or otherwise disseminated in whole or in part without Davys written consent. 2010 息J&E Davy. Dublin Office Davy House, 49 Dawson Street Dublin 2, Ireland T +353 1 679 7788 F +353 1 671 2704 csu@davy.ie Southern Office 89/90 South Mall Cork, Ireland T +353 21 425 1420 F +353 21 425 1410 cork@davy.ie Western Office 1 Dockgate, Dock Road Galway, Ireland T +353 91 530 520 F +353 91 530 710 galway@davy.ie Northern Ireland Office Donegall House, 7 Donegall Square North Belfast BT1 5GB, Northern Ireland T +44 28 9031 0655 F +44 28 9031 0656 davynorthern@davyuk.com www.davy.ie