Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaJuly 31 2007

China cuts out the middleman

By negotiating directly with Africa, China is changing the rules on commodity trading, writes Martyn Davies.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

When Europeans first arrived in Africa, the indigenous peoples must have wondered: “Why are they showing interest in us? And where will this take us?” Today the same questions are being asked of China’s rapid move into the continent. What, then, is the endgame of China’s commercial engagement of Africa?

The net result of Europeans’ move into Africa was political and economic dependency for the continent. Take the London Metals Exchange. Despite Africa possessing the greatest quantity of the globe’s metals and minerals, the value of their extraction is not where they are mined but the trading thereof on the LME.

LME middleman

The Chinese leadership views the LME for what it is – an expensive middleman – and often calculates its trade figures with African countries to include minerals traded on the LME as originating from Africa, thus boosting its trade statistics with the relevant country. China’s state-directed foray into Africa will have a strategic impact on the LME and the commodities market structure as we know it. So what drives this foray into Africa?

China needs commodity and energy assets. Without a reliable international supply chain of oil and key metals, its economic growth will be undermined. With the possible exception of Iran, China is geo-strategically excluded from the Middle East. The US invasion of Iraq resulted in Beijing increasing the pace of its acquisition of African energy reserves. This is evident in Angola, Sudan and Nigeria, where Chinese national oil corporations have spent big to get a foothold in the energy sector.

US political opposition to the state-owned CNOOC’s attempted purchase of US energy firm Unocal dazed the Chinese leadership. US political interference in a transaction that offered the best value to shareholders was unfortunate. China cannot buy strategic commodity assets on the market when US political interests dictate that it should not. Stung by such political obstruction, China’s state council has shifted its focus to Africa to secure its energy and metals assets. No such political opposition to Chinese firms taking over African assets has been forthcoming.

The main strategic driver of China’s venture into Africa is Beijing’s long-term strategy to remove its economy from international commodity markets. By acquiring commodity assets at source, negotiating prices with the recipient (African) government and securing long-term supply contracts, China seeks to establish parallel markets that are removed from international commodity markets, where prices are set in either London or New York. The mining majors – Anglo American, BHP Billiton, Rio Tinto and CVRD – will ultimately be selling to the traditional markets but will find new competition from state-owned Chinese trading firms.

The LME market as we know it will be disrupted by China. The global economy trusts the market mechanism of the LME. But the leadership in Beijing suspects the market is open to manipulation by US political forces. Beyond disruption to the market, China’s attempt to subvert the LME may lead to a long-term erosion of the market in its current state.

Building close ties

Unlike Japan, which became the world’s second largest economy through playing by the rules of the global commodities markets, China seeks to change those rules. Its state-owned banking sector allows the Chinese state to direct capital and purchase international resource assets, employing a risk model that is quite different from that of private listed companies. China is leveraging its state resources to implement its commercial policy towards Africa. The long-term success of this strategy is dependent upon China building and maintaining close ties with African countries. I doubt if most African states realise the strategic value with which they are regarded in Beijing.

Dr Martyn Davies is executive director of the Centre for Chinese Studies at Stellenbosch University, South Africa and CEO of China Investment Consulting

Was this article helpful?

Thank you for your feedback!