Sub-Saharan Africa economy: Strategic rise
FROM THE ECONOMIST INTELLIGENCE UNIT
July 13th 2010

Rising global competition for commodities is giving a new strategic importance to resource-rich Sub-Saharan Africa. China and other emerging industrialised countries are vying with the subcontinent’s former colonial powers to acquire long-term stakes in mines, oilfields and other commodity assets. With unprecedented volumes of investment on offer, the stakes are high not only for resource companies seeking to expand in Africa but also for the region itself. The challenge for African governments will be to manage their commodities better to avoid a repeat of the boom-and-bust years of the 1970s-90s.

Natural resources are hardly a new story for Sub-Saharan Africa. For decades the region has depended on exports of commoditiesóoil, hard minerals and cash cropsóto fund economic growth, though often with disappointing results. The collapse in commodity prices in the late 1970s and the mismanagement of revenue inflows resulted in weak growth and rising poverty, cementing the belief that Africa’s dependence on commodities retarded its economic development. However, soaring emerging-market demand for commodities in recent years, coupled with the increasing scarcity of hydrocarbons and hard minerals, has changed the picture. Sub-Saharan Africa has become a prime target for adventurous foreign investorsówith Chinese companies playing a particularly prominent roleówith the result that the subcontinent once again has the opportunity to benefit from its natural wealth.

Sub-Saharan Africa is one of the most commodity-rich regions of the planet. The subcontinent contains the majority of known reserves of many key minerals, including 90% of the world’s platinum-group metals, 90% of the world’s chromium, two-thirds of the world’s manganese, and 60% of its diamonds. It contains 60% of the world’s phosphates, 50% of the world’s vanadium, and 40-50% of the world’s gold. Sub-Saharan Africa also boasts one-third of the planet’s uranium reserves, one-third of its bauxite, and 10% of all oil reserves (the bulk of which are concentrated in the Gulf of Guinea in West Africa).

Most of these resources are underexploited. Uneven development has resulted in a handful of countries dominating commodity exports. The most important by far, both in terms of the diversity of its commodity base and the volume of its exports, is South Africa. The subcontinent’s other commodity giant is the Democratic Republic of Congo, which sits on over half of the world’s cobalt reserves and 25% of its diamonds, as well as having large quantities of rare metals such as coltan (used in mobile phones). Nigeria and Angola dominate oil production. However, other countries are starting to develop their commodity resources, and several are set to become major producers in the near future. They include Guinea and Angola (iron ore), Ghana (hydrocarbons), and Guinea-Bissau (bauxite and phosphates).

Sub-Saharan Africa also boasts a large agricultural sector. Much of this focused on the production of cash crops for export to the West during the colonial period and in the first years after independence. Since the late 1970s Africa has lost global importance as an exporter of many cash crops. The main exceptions have been coffee, cocoa and tea, for which CÙte d’Ivoire, Ghana, Uganda and Kenya remain key global producers, and more specialised crops like cashew nuts (Guinea-Bissau) and vanilla (Madagascar). However, increased competition from Asian and Latin American producers, coupled with a decline in Africa’s terms of trade, has eroded profitability. Africa also continues to export large quantities of timber, particularly to China, but poor forestry management is threatening the sector’s sustainability.

A scramble for access

Major emerging markets are playing a key role in the development of the region’s commodities sector. Since the early 2000s China has invested heavily in African commodities, reflecting the two-pronged strategy of China’s state-owned oil and mining companies: first, acquiring access to reserves through long-term contracts; and second, purchasing stakes in local ventures whenever possible. According to the Chinese government, by end-2008 total Chinese investment in Sub-Saharan Africa amounted to US$26bn, including stakes in oil and gas concessions in Sudan and the Gulf of Guinea, copper mines in Zambia, iron concessions in Gabon, and ferrochrome and platinum mines in South Africa.

China is not the only player around. Chinese interest is increasingly being matched by investment from Indian or Indian-linked firms, notably the steel manufacturing giants Tata Steel and ArcelorMittal, which are acquiring stakes in large coal concessions in Mozambique. Brazil is also stepping up its investment. Given the expertise of Brazilian companies in construction, engineering and the oil sector, it is likely that these firms will provide stiff competition for contracts in the next phase of Africa’s infrastructure expansion.

Competition looks set to be particularly intense in the Gulf of Guinea, which continues to grow in strategic importance thanks to the steady increase in its proven oil reserves (a result of better deep-water drilling technology). The region is already the focus of military co-operation programmes between African governments and the US, EU and China. Tensions between these powers could increase as each seeks to establish a foothold in the region. Such a situation could prove advantageous to countries in the Gulf of Guinea if they are able to play off competing powers against each other. However, past experience indicates that such competition and strategic alliances can be used to prop up unsavoury regimes. This also poses potential difficulties for foreign investors. China is learning the hard way that its resource grabs can expose it to reputational risks over human-rights and environmental abuses.

Reaping the benefits?

There are plenty of other challenges. The region exports a lot of its commodities in unprocessed form, thus missing the chance to add value to them. For example, Guinea-Bissau exports its entire cashew crop (over 90% of the country’s exports) to India for processing. The creation of low-tech processing operations could capture more of the value of the crop, as well as creating significant numbers of jobs. However, efforts to develop processing industries in Africa have proved disappointing owing to the constraints of the business environment, poor management and competition from processors in India and China.

Broader challenges include managing capital inflows better and maximising the economic benefits of foreign investments. Progress is occurring, with improved local-content provisions in mining contracts, the imposition of tighter environmental standards and greater transparency over commodity revenues. However, greater efforts are needed. African governments must ensure that infrastructure development does not just support the exploitation and export of minerals but also facilitates trade and the movement of people and goods. Local workforces must be trained in new skills and not just used for manual labour. A large proportion of oil and mineral revenues need to be held outside the countries in question in order to prevent currency appreciation that could render other industries uncompetitive.

If African governments can realise these aims, there is a good chance that the subcontinent’s natural-resource endowment could provide major benefits to the population. Otherwise, the next wave of commodity development will merely entrench poor governance and corruption and further stifle economic development.

The Economist Intelligence Unit

Source: Global Forecasting Service

© 2010 The Economist Intelligence Unit Limited. An Economist Group business. All rights reserved.

Sub-Saharan Africa economy: Strategic rise Sub-Saharan Africa economy: Strategic rise ViewsWire
________________________

The MasterBlog

Advertisements



    Leave a Reply

    Fill in your details below or click an icon to log in:

    WordPress.com Logo

    You are commenting using your WordPress.com account. Log Out / Change )

    Twitter picture

    You are commenting using your Twitter account. Log Out / Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out / Change )

    Google+ photo

    You are commenting using your Google+ account. Log Out / Change )

    Connecting to %s



%d bloggers like this: