Asia and born-again traders descend on Mother Africa

Mar 10, 2011 12:00 AM

Polarisation between the fast-growing economies of Africa, Asia and Latin America and the slow growth of financially troubled economies in North America and Western Europe will intensify in 2011 and 2012, according to the World Bank.
This means western companies will increasingly seek investment returns in developing economies, especially in the export of metals and minerals, as well as oil and gas. For Africa’s resource-rich economies, says Oxford economist Paul Collier, this could be a 20-year bull run.

The World Bank forecasts that the economies of sub-Saharan Africa will grow by 5.3 % this year and 5.5 % in 2012, while those of North Africa and the Middle East will grow by 4.3 % this year and 4.4 % in 2012.
The contracts that African states negotiate now could determine revenues for over a decade. Western companies are trying to adapt to the rising demand for energy and minerals from China, India, Japan, Indonesia and Korea. Trading companies such as Glencore and Trafigura want to operate as both exploration and production companies, controlling the entire value chain in commodity production, from extraction to processing, marketing, sale and delivery.

While western business models are generally based on political connections together with market and technical know-how -- all wrapped up in a cash offer to African states -- the strategy of Chinese and Indian companies mixes political influence and barter with promises of cut-price development projects and access to their growing global markets.
Competition from Asian companies is forcing both African trading and mining to think more long-term. Anglo-Australian mining giant Rio Tinto is teaming up with China’s Chinalco to launch a new generation of projects. For Rio Tinto, shareholder value is the goal; for China the aim is geo-strategic: long-term access to critical resources.


“Beijing’s equity is welcome and global companies have moved to invite Chinese companies into their operations as joint-venture partners, like in Guinea,” says Sanusha Naidu, research director of the China in Africa Project with the NGO, Fahamu.
“But the market share still lies with western global-resources companies like Rio Tinto and Anglo American when it comes to supply and determining the pricing index.”

According to Antony Goldman, head of London-based PM Consulting, China’s economic model doesn’t handle market volatility well. Instead, it has opted to engage in long-term deals in such countries as Nigeria, Sudan and Angola.
“That’s changed the game,” says Goldman. Trading companies are now trying to entrench themselves in particular markets through long-term contractual holds. “It’s a shift away from the pure idea of trading. But having a guaranteed stream of income through secured commodities is important, given the competitiveness of global markets -- in part because of increased competition from Asia.”

Commodity traders such as the Noble Group are restructuring to adapt. Glencore International, one of the biggest traders, began diversifying two decades ago by buying an aluminium smelter in the US. Now it is accelerating that strategy fast.
Its aim is to shed its skin as a shadowy Swiss-based private trading company to become a listed public company, quoted on the world’s leading stock exchanges. In the process it might decide to merge with another major company active in Africa, such as Xstrata.

Such companies may struggle to adapt to a more accountable system when their operations face increased scrutiny from shareholders and tax authorities.
“Opacity adds layers that allow for greater flexibility when it comes to political pariahs, or sanctions, or questionable sources,” says Goldman. Now the need to raise capital “outweighs the need for discretion.”

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