Exploiting Africa's wealth

Africa has huge reserves of untapped natural resources. Africa is increasingly becoming important a global producer of oil and has massive future potential in areas such as platinum, copper, cobalt and iron ore. Of course, as to precisely what there is, where it is and how much there is remains a matter of speculation.
There are currently constraints in terms of transport and energy, but there is no doubt that the continent will become increasingly important for industry in the coming years.
Encouragingly, the market identified as being of particular significance for Africa are iron ore (accounting for around half of the world's $45obn annual mining revenues; copper and cobalt (copper accounts for around 18% of revenues); and the share of gold (14%) and precious metals is not far behind.
In other words, the opportunities Africa possesses are precisely in those minerals the market values most highly. Iron ore prospects are particularly interesting because there are likely to be a lot of recoverable reserves available and China's ability to produce enough itself for its steel production targets is diminishing.
China is now importing more ore than before, despite falling steel production--presumably because of declining ore quality. The Tonkolili project in Sierra Leone, for instance, is an example of a vast iron ore deposit and then attracting the attention of steel-hungry China.
Part of the deal is that the Chinese company CRMCC is able to buy 40% of the iron ore produced--4m to 8m tonnes a year over the next 20 years. CRMCC provides much of the iron ore and steel required for China's railways and is considered a likely investor in Tonkolili's second phase, expected to start in 2013 and requiring $2.5bn of finance.
African Minerals has estimated reserves of 5bn tonnes of ore and may soon double, as more thorough analysis is undertaken.This move is indicative of a trend by China to source iron ore away from the big three producers, Vale, Rio Tinto and BHP Billiton, who together control 75% of the sector. Recent years have also seen an increase in spot-priced trade rather than through the more usual mechanism of the annual price benchmark negotiations.
Iron ore is a low margin, high volume commodity that requires very capital-intensive investment and a life cycle of many years. It requires the right kind of investment climate and a stable country politically and economically if it is to be successfully exploited.
Base metals, particularly copper and nickel, are to a large extent dependent on China and the country consumes half of the world's iron ore output. The massive gains seen over the last year are premised on the continued aggressive growth of China.
In the short term at least, the potential exploration and extraction of minerals in Africa is likely to largely depend on the ability of China to continue to grow rapidly and consistently. Because of the high costs of entry in the mining industry, the speculative costs of finding deposits and the capital-intensive nature of exploiting them, the industry has seen significant consolidation. The major 149 mining companies control 83% of all mining.
Increased investment from China, on a scale much in excess of that we have seen so far, is likely to be a major driver in the future of African minerals--the extraction of the copper-cobalt of Katanga and Zambia, the platinum of South Africa, the gold of Ghana, Mali and Tanzania and the vast arrays of iron ore from several African countries.

Doing Business in Africa

African governments continued to show commitment to promoting investment-friendly policy environments. However, this is from a very low base. The challenges remain daunting, often going beyond regulatory policy and extending to basic infrastructures, rule of law and human resource availability.

On the other hand, greater stability and the desire to capitalise on higher commodity prices have provided serious incentives to attract foreign capital to many African countries. Cross-border mergers and acquisitions (M&A) rose sharply in the first half of 2008, before the fall in commodity prices and the onset of the global financial crisis.

Nevertheless, cross-border M&A reached USD 21 billion in 2008, its highest level. Preliminary figures for 2009 indicate that cross-border M&A in Africa fell by a precipitous 73%, to USD 5.7 billion. This echoes a global fall in mergers and acquisitions of 66%. M&A activity in Egypt dropped by 90% and in South Africa by 37% in 2009.

There is a realisation that the rapid growth of China and India is rebalancing the economic power in the world, giving more clout to the South. South-South partnership can definitely build on this new development thrust, on the fact that Asia and Latin America are major drivers of global GDP growth and that Africa's economy also is expanding faster than world GDP.
Already China constitutes a significant source of foreign direct investment (FDI) to developing countries. Here in Mauritius we are seeing the impact of that South-South dynamic, particularly in FDI. China is investing some $700m in a special economic zone in Mauritius mainly to access the African market.
In recent years, Indian investments in Mauritius have soared, amounting to Rsl.3bn ($51.34m equivalent) during the past five years, in contrast to a mere Rs58m ($2.29m at today's exchange rate) for the preceding five years--a 22-fold increase.
These Indian investments also have an eye on the larger regional market of Africa, the more so that Mauritius is a member of SADC, Comesa and has access to a market of around half a billion people. But for developing countries to take full advantage of this unfolding South-South partnership it is important that they further open up, continue to eschew protectionism and embrace globalisation and free trade.
West Africa continue to benefit from the region’s oil industry, for example, with new finds boosting development in Ghana and Guinea and raising Nigeria’s FDI flows by 63%. Nearly 80% of total West African investment came through the oil industry, mostly reflecting industry expansion projects.
Central African inflows remained stable at USD 6 billion, with DRC the leading destination with USD 2.6 billion. East Africa also remained stable at USD 4 billion, and is still the lowest recipient of FDI on the continent.
 In southern Africa, Angola attracted USD 15.5 billion in 2008, an increase of over 50% from the previous year. South Africa, the continent’s most diversified economy, also registered strong growth in inflows.
South Africa’s stock of FDI at work in the country remains the highest on the continent by far at USD 119 billion, nearly a quarter of total FDI stock in Africa (standing at USD 510.5 billion at the end of 2008).
Attracting FDI into diversified and higher value-added sectors remains the ongoing challenge for Africa’s economies. The primary sector consistently remains the main focus of foreign investment.
Nevertheless, sectors such as banking, communications and infrastructure were dynamic up to the global crisis and will hopefully return to their prior dynamism once the effects of the crisis subside.
Service-sector investment rose in North Africa but remained negligible in sub-Saharan Africa, barring financial institution buy-ins. While still restricted to certain emitting countries (notably South Africa and Nigeria), African transnational companies (TNC) are growing to become major investors, even though intra-African FDI still only accounts for a small portion of total foreign investment.
The level of FDI from Africa to small African economies may well be understated in official FDI data, as a significant proportion of such investment goes to the informal sector, which is not included in government statistics. Overall, estimates measured the total stock of intra-African investment at USD 73 billion in 2007 (out of a total FDI stock of USD 424 billion; that is, 17% of total FDI stock in the region).
Other African investors include Libya’s Sovereign Wealth Fund, the Libyan Africa Portfolio Fund for Investment (LAP), which has over USD 5 billion in capital. LAP invests, both directly and through its subsidiaries, in a wide range of sectors in many African countries. Egypt’s Orascom also has a broad portfolio of investments throughout Africa, notably in telecommunications and construction.

Are trade finance issues affecting exports in sub-Saharan Africa?

Studies show that between February 2009 and January 2011, few medium and large scale firms in the export oriented sectors faced any problems with respect to the availability of trade finance.
The question is what accounted for this? The first reason accounting for this is the nature of trading relationships. Firms generally have well-established relationships with customers, and inter-company credit sustains trade.
In some cases, transactions are conducted on open account terms. Exporters are, in effect, providing trade credit to their customers, but they have built up their financial resources to cover the gap between shipment and payment and do not rely on banks for trade financing.
In other cases, customers provide advances to their suppliers. In the case of garment companies, there is greater reliance on financial instruments such as letters of credit, but most firms relied on the parent companies to provide trade finance and, with a small number of exceptions, its availability was unchanged.
The second reason is the resilience of the domestic banking system. Firms reported that credit in general is available from domestic banks as long as firms showed themselves to be creditworthy. Horticulture firms are considered good risks by local banks, so they did not have problems accessing finance.
The financial crisis has had visible impacts, such as notable declines in remittances, but the capacity of banks to finance companies and trade had not been affected.
These reasons do not show that the global financial crisis has had no impact on exporters in developing countries. Rather, the impact is very uneven.
First, sub-Saharan Africa appears to have been less affected, so far, by trade finance problems than other regions.
Second, there is evidence from Africa that restrictions on credit in the domestic market are hitting small traders and cooperatives that do not have the business linkages needed to access inter-company credit. To the extent that there is some credit rationing, the marginal firms are hit first.
Thirdly, the African exporters were clearly affected by other issues arising from the global financial crisis, particularly declining demand for garments and exchange-rate volatility for horticulture exporters targeting the UK market.
The conclusion to be drawn is that the impact of the global crisis on developing country exporters is highly differentiated by region, by sector, and by type of firm.
Responding to the new challenges requires carefully targeted support. Broadly targeted support to increase lending capacity in the banking system in both importing and exporting countries will not necessarily reach the firms that are in most need.
Firms with established exporting records that have repeat transactions with a range of established customers are more likely to obtain what bank finance is available and more likely to give and receive trade credit than other firms. Difficulties in obtaining trade finance are more likely to affect small firms and new entrants that do not have established relationships with their banks and with their customers.