China’s trade in African commodities is entering an interesting new phase as funding by state organisations is being tightened, allowing new players to enter the financing space. By Nicolas Clavel*
Of the $166.3bn of trade between China and Africa in 2011, around $93bn was African exports. In contrast to popular belief, China is importing more from Africa overall than it is exporting and this consists largely of mineral ores, hydrocarbons and agricultural products.
According to the African Development Bank, after oil the largest exports from Africa to China are non-edible raw materials which make up approximately 14% of all exports, including manganese, iron ore and chrome.
Whilst agriculture is a growing area, self-sufficiency regulations in China continue to stifle aggressive expansion in this segment of trade. This contrasts with more recent, sensationalist headlines about agricultural land purchase in Africa which, although real, are not all done by Chinese businesses. This being said, there have been marked increases in demand for cocoa, coffee, tobacco and tea which can be attributed to the growing diversification of the Chinese diet (another little-known fact is that Kenya is the world’s largest exporter of tea).
We also see a greater interest in financing processing operations for these commodities in Africa prior to their shipment to China. In addition, more of these projections are being conducted by private Chinese companies as opposed to State Owned Enterprises (SOEs), which led much of the initial Chinese investment in Africa.
The closing of the open ‘cheque book’
Prior to the 2008 global financial crisis, Chinese companies, especially the State-Owned Enterprises (SOEs) were able to buy commodities with few budget constraints as they could easily get letters of credit from major Chinese banks that ensured payment of goods. At this point China and Africa watchers alike began to notice the increase in Chinese activity in the continent.
The relatively easy access to finance facilities also allowed non-professional commodity dealers to take advantage and profit from the resulting arbitrage. This was assisted by a number of state-sponsored trading companies who profited by brokering trade finance from the state banks to private Chinese companies. This was particularly true in the steel and manufacturing industries which in turn contributed to the rapid rise in commodity prices, otherwise known as the ‘super cycle’ that finished not too long ago.
With the onset of the financial crisis and the slowdown of the public sector, the budget constraint has tightened significantly over the past five years. Along with a diminished risk appetite, state entities have had their borrowing curtailed by Beijing policy makers in response to fears of inflation. Many private sector Chinese companies have been affected by the change in financing.
Worse still, due to the long customs clearance procedures in China, firms need longer-term financing facilities of around 90 days as opposed to the more common 45 or 60 days. Firms also face limitations over the speed of fund movements due to fairly vigilant exchange control rules, which result in cash being tied up for longer and therefore leading to obvious cash-flow restrictions.
Consequently, Chinese firms have to conform to the market-set borrowing rates and without limitless state credit. At the same time, other firms, both Chinese and foreign, have stepped in to provide the trade finance solutions that these firms require. This has proven to be critical in paying for fuel which is required for the transportation of all goods. Financial innovations in the form of OTC Derivatives have also enabled this facilitation to continue despite tough market conditions. This has brought greater transparency to the commodities market, which has helped commodity-finance funds and professionalised a once-anarchic marketplace.
Significantly, now that the ‘super cycle’ has come to an end, still remaining are multiple, less volatile cycles, which occur much more in the average year than they used to. Furthermore, despite all the talk of a slowdown in Chinese demand, there has been little change in the need for minerals and soft commodities. As China’s economic structure evolves into a more consumer-orientated one, commodities are still required to formulate this change.
Non-SOE Chinese activity
There is also a human element to this commodity-based partnership, as a lot of projects in Africa use Chinese labour. The composition of workforces varies from skilled engineers and diplomats to low-skilled labourers. Yet this is a small proportion compared to the overall number of Chinese nationals in Africa. In 2007, only 114,000 of these nationals were working in Africa on a temporary basis, i.e. on secondment from an SOE. The vast majority of the estimated 1m Chinese on the continent are small private entrepreneurs. This influx has proven to be controversial, especially in countries such as Zambia where domestic businesses have vocally protested against the rising number of Chinese businesses. Chinese migrants see Africa as a continent of opportunity where they are unconstrained by the cultural limitations faced at home and also much less intense competition for jobs. This has made the Chinese very adept artisanal miners, farmers and traders, especially in more politically volatile countries like the DRC where forestry and copper mining are common.
The increase of Chinese workers in Africa is indicative of the growing business relationship between them, particularly in the areas of commodities and mining. The demand for workers in Africa, combined with the demand for easily accessible trade finance facilities from the Chinese, has meant that business between the two of them is progressing rapidly.
China’s current commodity imports, which consist of mineral ores, hydrocarbons and agricultural products, are only a small percentage of their trade at the moment: however with changing tastes in the country, this will soon broaden out. As this trade volume increases, this will be of particular importance to the already flourishing Asia/Africa trading relationship.
Furthermore, as these connections continue to develop, we can expect Chinese businesses operating out of Africa to expand also, particularly in areas such as processing and refinement. As well as the strong presence of the Chinese state in major engineering projects, Africa also holds a lot of potential for small entrepreneurs, especially in the commodities arena. This will result in the development of a multitude of different business types, which we would expect in turn to increase the amount of Chinese workers in Africa and build on existing bonds. Cumulatively, this should inject the necessary acceleration of pace and diversification in African economies to help them move to the next level. However, a great deal will depend on the personal relations between the Chinese and Africans on the ground. The Chinese cannot afford to alienate or marginalise the African worker or entrepreneur.
*Nicolas Clavel is CIO of Scipion Capital, a commodities hedge fund manager and Africa investment specialist. The Scipion Commodities Trade Finance Fund provides financing for a range of minerals in African markets from mining and also soft commodities assets such as cocoa, salt, tea and coffee.