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To: blenderHEAD who wrote (744)3/2/2012 2:03:59 AM
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Come on China bring that off/take deal...



Benefits for China in New East African Resource Rush




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European Pressphoto Agency
By Gabe Collins and Andrew Erickson

A new great game is afoot as recently uncovered stores of mineral resources in East Africa create competition between Brazilian, Japanese, Indian, Irish, Anglo-Australian and Chinese investors.

Already a strategic region for China due to its 54 United Nations votes and location astride key trade routes, East Africa is about to become even more important to the world’s second-largest economy. The rapid economic growth that natural resource development stands to produce will likely fuel heightened commercial and diplomatic competition in coming years as more Chinese companies and businessmen enter the region and jockey for position. The prize: oil, gas and coal money that by 2020 could equal roughly 50% of the current GDP in Mozambique and more than 10% of GDP in other producer countries.

Mozambique and Tanzania are now believed to host at least 70 trillion cubic feet of offshore gas reserves. Mozambique also holds some of the world’s largest coking coal deposits, while Uganda enjoys at least 1.1 billion barrels of oil reserves. Ethiopia’s Danakil Basin is home to a world-class potash deposit.

The mineral-producing countries (plus neighbor Kenya) also boast a combined consumer market of more than 225 million people – an potentially lucrative opportunity for Chinese entrepreneurs already schooled in the navigation of emerging economies.

As Chinese investment and citizens crisscross the vital but volatile area, Beijing will have to decide how to promote and protect its people and interests without stepping too deeply into complex local politics. But the rewards could be substantial: Based on the projections for production from the companies developing East African resources and the likely baseline prices for the commodities in question, new commodity production in Mozambique, Tanzania, Ethiopia and Uganda could be worth more than $24 billion per year by 2020 (Exhibit 1), when extraction projects are likely to be in full swing. Even under bearish conditions, that figure is likely to hit $17 billion.



Here are some of the ways Chinese companies stand to benefit:

* Enter projects by partnering with lead developers who desire a cash rich Chinese partner

Chinese companies have two key advantages as they seek assets in East African resources. First, many of them—both those that are state-backed and those that are privately held—tend to be cash-rich, making them desirable partners. In March 2011, Tullow Oil Plc., which is leading exploration activities in Uganda, sold one-third stakes in three exploration areas to China National Offshore Oil Corporation (CNOOC) and Total for US$2.9 billion. Similarly, in December 2011, Kenya’s government awarded China’s Fenxi Mining Group development rights for coal reserves in its Eastern Province, which can help fuel the Kenyan cement and steel industries and generate electricity.

Second, they offer a pipeline into the large and growing Chinese market for oil, coking coal, liquefied natural gas (LNG) and potash. In many cases, they are even willing to pay for development costs in order to obtain longer-term assured resource supplies. In November 2009, for instance, Allana Potash ( pdf) reported that China Minerals provided 35% of the company’s initial mine construction cost for its Danakil Basin project in Ethiopia in exchange for the right to purchase 20% of production at a discount to market potash prices. Furthermore, contrary to perceptions that prevailed during the Unocal fiasco in 2005, many major Chinese natural resources companies like CNOOC have proven themselves to be sophisticated global operators who are willing to invest in mutually beneficial ways with a wide range of partners and market commodities to end users worldwide when the economics make sense.

* Sell digging equipment to the miners and infrastructure builders

Chinese companies are also well-positioned to supply mining and construction equipment even if Chinese miners are not directly involved in a project. Shantui, China’s largest bulldozer manufacturer by market share, recently opened a sales office staffed by 160 people in Kenya because East Africa has become one of its top export markets, where the company sold more than 300 construction machines during 2011. To put this number in perspective, the company only sold 110 bulldozers to Angola in 2005 when that country was one of the top destinations for Chinese construction investment outside of China itself.

In Mozambique, where Chinese companies missed out on gaining a stake in several coking coal deposits, Chinese equipment makers have still been able to secure some supply contracts. Among them is China CNR Corporation, which signed a deal in April 2011 to provide 330 coal rail wagons to help Vale transport coal from its expanding Mozambican mines.

* Help build the necessary roads, rails and ports needed to get resources to market

In East Africa, a lack of high-volume transport infrastructure presently limits miners’ ability to bring natural resources to market and monetize them. Now Chinese firms are poised to write a new chapter in the history of their cooperation with developing countries.

Between 1970 and 1975, in what was then Beijing’s largest single foreign aid project, China built the Tazara Railway to link Zambia to the Tanzanian port of Dar es Salaam, freeing the landlocked country from exporting copper through white-supremacist Rhodesia. Today similar assistance from Chinese firms appears welcome. Booming Mozambique, for instance, needs to refurbish at least 340km of existing rail lines and probably double-track them so that large volumes of coal from the country’s interior can be moved by rail and river barge to the coast for export ( pdf). As Mozambican rail lines and ports are augmented to handle rising coal traffic, Chinese construction firms and construction workers from China may well secure work. Similarly, the country’s offshore natural gas development presents opportunities to sell pipe and construction materials, as well as a chance to purchase stakes in LNG projects by dangling the prospect of guaranteed sales into the Chinese market.

As Allana Potash builds the transport infrastructure to support its planned Danakil Basin potash mines, Chinese firms will almost certainly play a role since the project requires road and rail construction and a new port in Djibouti, all of which are areas of expertise for companies like China Railway Construction Corp (CRCC), which is already working in Ethiopia. In December 2011, CRCC reported that China Ex-Im Bank had agreed to provide Ethiopia with a $3 billion credit line over the next three years to support infrastructure development. Similarly, oil infrastructure projects in Uganda will likely attract Chinese suppliers, as will the need for additional regional transport linkages, like the superhighways Chinese companies are currently building in Kenya.

* Serve growing consumer economies

Chinese companies—particularly small and medium enterprises—are well positioned to capitalize as East African natural resource development drives demand for appliances and consumer goods, construction of homes and hotels, and other items. Indeed, a 2011 article in Asia & Africa Review by a scholar from Hunan University notes that at least 1,500 small- and medium-sized enterprises from China already operate in Africa (as opposed to 100 large companies).

An influx of resource revenue that drives consumer activity further increases the opportunity for Chinese entrepreneurs who have the advantage of having learned how to serve their own internal emerging market. Kazakhstan’s economy grew more than five-fold between 1990-2010 (from $26 billion to $149 billion) and we believe similar growth rates could be possible in Mozambique, Tanzania and Uganda if the countries’ resource bounties turn out to be as large as developers believe and can be successfully brought to market.

Bottom line: East Africa’s emerging natural resource boom has not received the same attention as that of other frontier commodity plays such as Mongolia. Yet rising mineral production and consumer economy booms are likely to lure heightened Chinese investment and migration into the region, with security implications as China’s footprint grows amidst complex local politics that are likely to be unsettled further by large revenue inflows.


Erickson
Collins
Andrew Erickson is a professor at the U.S. Naval War College and a research associate at Harvard’s Fairbank Center. Co-founder of China SignPost ( ? ???), he blogs at www.andrewerickson.com.Gabe Collins is a co-founder of China SignPost and is a J.D. candidate at the University of Michigan Law School.



Africa, Andrew Erickson, China-Africa, Expert Contributor, Gabe C


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