China’s Africa Investments Produce Modest Returns
ICBC is slow to turn its stake in South Africa’s Standard Bank into a platform for deal making.
Even though China’s presence in Africa had been growing rapidly, the October 2007 announcement that Industrial and Commercial Bank of China was buying a 20 percent stake in South Africa’s Standard Bank Group for $5.5 billion caused heads to turn. The deal marked the first major overseas venture by China’s largest bank and seemed to signal the start of an all-out Chinese assault on the African market and the continent’s rich mineral resources. ICBC chairman Jiang Jianqing raised expectations for a flurry of deals with Standard, saying, “We share the same vision on the globalization of the financial industry, and we have common interest in emerging markets.” Standard’s CEO, Jacko Maree, hailed the tie-up as “an enormous vote of confidence in South Africa and in Africa.”
More than two years into this vaunted partnership, however, the two banks’ collaboration has produced very modest fruit. In their only big deal to date, ICBC and Standard last year arranged half the financing for a $1.6 billion power plant expansion in Botswana. The banks are considering financing or investing in an additional 60 or so other African mining, energy, agriculture and infrastructure projects potentially worth tens of billions of dollars, but so far the Chinese side has put off any decisions. The joint review process, says Craig Bond, the Beijing-based chief executive of Standard Bank China, is “much slower than we expected.”
With its $2.45 trillion hoard of foreign exchange reserves and its voracious appetite for natural resources to feed its factories, China is both courted and feared around the world for its potential clout as a deal maker. Poor countries are eager to take China’s cash or promises of infrastructure development in return for oil and other commodities, while many developed countries worry about the possible loss of strategic companies or resources to Chinese entities. But as Standard Bank’s experience shows, the reality on the ground in Africa is more prosaic. China can be more bureaucrat than juggernaut, with its big, hierarchical enterprises often slow to make decisions. Beijing’s money, moreover, doesn’t always guarantee entrée to the best deals.
In the past two years, state-owned Chinese companies have announced a string of deals or proposed projects in Africa, including investing $1.25 billion in Uganda for a third of the petroleum assets owned by the U.K.’s Tullow Oil, agreeing to finance and build a proposed $4 billion port in Kenya, undertaking $6 billion in infrastructure projects in the Democratic Republic of the Congo in exchange for rights to copper and cobalt deposits, and a tentative agreement to build up to $23 billion in oil refineries in Nigeria. Not all of these deals are sure to pan out, though. And in many cases, Chinese firms have had to settle for stakes in natural-resource deposits that long-established Western rivals have overlooked or sold off in favor of more accessible and secure sites. There is not a single instance in Africa in which the Chinese have outbid or outmaneuvered a leading Western mining or oil company for possession of world-class reserves. “In some cases, the Chinese are going after oil reserves that are considered too politically risky by other companies,” says Peter Jackson, London-based senior director of global consulting firm IHS Cambridge Energy Research Associates.
A prime example is China’s most important African oil operation, in Sudan, a country that has been a pariah for Western governments and investors because of the massacres in its western region of Darfur and a separatist movement in its oil-producing south. Last year Sudan supplied China with 10 percent of its oil imports, or 785,000 barrels a day, according to the Journal of Energy Security. State-owned China National Petroleum Corp. (CNPC) owns 40 percent of Sudan’s Greater Nile Petroleum Operating Co., a consortium whose other partners include Malaysia’s Petroliam Nasional Berhad (30 percent), India’s Oil and Natural Gas Corp. (25 percent) and Sudan’s state-owned Sudapet Co. (5 percent). CNPC has invested more than $8 billion in Sudan.
China has so far gained access to a mere 3 percent of Africa’s known oil and gas reserves; roughly 30 percent are controlled by international oil companies, while the remaining 67 percent are held by African governments, according to IHS Cambridge.
Nevertheless, China’s trade with Africa has grown rapidly, a reflection of its strong demand for commodities and its willingness to pay rising market prices. The country’s trade with Africa has jumped fivefold over the past decade, to $107 billion last year from $21 billion in 2000. By comparison, the European Union’s trade with Africa only doubled during the same period, though at $210 billion last year, it is still almost twice as large as China’s.
Nowhere have the Chinese raised higher expectations for future trade and investment deals than in South Africa, the continent’s largest economy. In 2009, China surpassed the U.S. and Germany as the top destination for exports from South Africa, worth 48.7 billion rand ($6.2 billion). The pact between ICBC and Standard has raised hopes of even bigger things to come. With a market capitalization of $239 billion and 2009 net income of $18.95 billion, ICBC is the world’s largest bank by some distance. Although Standard Bank is much smaller, with a market cap of $21.4 billion and a net profit of $1 billion, the bank is the leading lender in sub-Saharan Africa. Only the U.K.’s Standard Chartered and Absa Group, the Johannesburg-based arm of Britain’s Barclays, have a comparable presence across the region.
“The Chinese strategy to use Standard Bank to help find and finance investments across Africa is very sound,” says Jeff Gable, the Johannesburg-based head of research for Absa Capital, Absa’s investment bank. “They can’t do it by themselves.”
Standard had discussed possible cooperation with ICBC for several years. Then, during a June 2007 visit to Cape Town for an international financial conference, ICBC’s Jiang Jianqing slipped away for a day with Maree to negotiate the outline terms of an ICBC stake in Standard. The deal was completed in March 2008. ICBC bought half of its 20 percent stake from Standard shareholders at R136 a share and the rest by paying R104.58 a share for new stock issued by Standard, effectively boosting the South African bank’s capital by $2 billion and raising its tier-1 capital ratio to 11.2 percent of assets from 10.4 percent.
The timing was fortuitous. “It gave us a very strong capital and liquidity position going into the global crisis,” says Maree.
The ICBC-Standard alliance got off to a quick start with the announcement of a May 2009 deal for an $825 million, 20-year loan to finance the $1.6 billion expansion of a state-owned coal-powered plant, known as Morupule B, in eastern Botswana. ICBC provided the financing, while Standard took charge of the structuring of the loan, as well as the currency and risk hedging. The interest rate of the loan was not disclosed.
It was a classic example of Chinese brawn and South African expertise. Faced with energy shortages at home, South Africa had announced in 2008 that it would stop exporting electricity to neighboring Botswana by 2012. To cover the shortfall, state-owned Botswana Power Corp. called for proposals by foreign companies to finance the Morupule project, which involved the installation of four 150-megawatt coal-fired units. Standard Bank had operated in Botswana for years and was well aware of the country’s impending energy shortages. The combined ICBC-Standard bid won out over proposals from France, India and Malaysia. As part of the deal, the two banks will also provide a $140 million bridge loan while state-owned China National Electric Equipment Corp., one of ICBC’s top corporate clients, will build most of the power station under a $970 million contract.
According to Maree, Standard had not sought to participate in the Botswana project before its alliance with ICBC. Without the Chinese bank as a partner, “we would not have been able to undertake the funding of a project of this scale,” he says. ICBC officials sound just as pleased. “The value that Standard Bank brings to ICBC in the financing of the Morupule project is its regional and sector knowledge,” George Liu Jianchang, ICBC’s Beijing-based deputy manager for project and trade finance, wrote in an e-mail to Institutional Investor. The Chinese banker went on to point out that ICBC’s deep pockets allowed the deal to go forward “at a time when banks around the world are cutting back on international lending and concentrating on domestic lending in the wake of the global financial crisis and government bail-outs in 2009.”
But since winning the Botswana contract, the two banks have made no deals of comparable significance in Africa, and Standard executives concede their frustration. “China has the capital and patience and is in a very strong negotiating position,” says Bond, the head of Standard’s operations in China. “It means getting things done can take time.”
Standard has 40 bankers in Beijing, almost all of them Chinese-born and foreign-educated, with experience at global investment banks. They meet weekly with their ICBC counterparts to discuss specific projects in what is called a “work stream.” The idea is for ICBC officials to become thoroughly familiar with a potential project and with their Standard counterparts. There are work streams for resource banking, corporate banking, investment banking and information technology, among other activities. Resource banking, for example, includes long sessions on potential commodity trade deals involving both precious and base metals. The work streams can go on for months, culminating in a formal meeting between Standard’s Maree and ICBC president Yang Kaisheng, who has a seat on Standard’s board. That meeting may — or may not — green-light a project. “We see 2010 as a very good year in terms of deals and other transactions,” says Maree hopefully.
So far this year, however, Standard executives can cite only three deals stemming from their bank’s link with ICBC. In March the two banks extended $400 million in loans to refinance the debt of the Lumwana copper mine in Zambia owned by Equinox Minerals, a Canadian-Australian company. A second deal, also in March, involved an undisclosed amount of trade financing to enable the Ghana Cocoa Board to finance its annual crop.
Separately, ICBC facilitated a deal between Standard and China UnionPay, China’s bank-card association, to allow Chinese tourists in South Africa — many are expected to visit for the World Cup competition, from June 11 to July 11 — to use Standard’s ATMs for cash withdrawals and payments.
Although Standard remains optimistic that it can strike more and bigger deals with ICBC this year, there is little pressure that the South African bank can bring to bear on a partner with 11 times its market capitalization. “ICBC’s current business with us is tiny — a rounding error in accounting terms,” says China chief Bond. For Standard, the hope is that ICBC quickly completes its learning curve on Africa and decides to bid on some of the 60-odd deals under discussion. These include about $17 billion in potential infrastructure projects identified by Standard. If ICBC gives its assent, the two banks could bid on a majority of them. “Not all will choose our consortium, and some large projects will just never happen,” says Bond. “But Africa’s need for infrastructure renewal is now clearly on the agenda.” According to Bond, the three or four deals most likely to materialize are coal-powered electricity plants in several African countries, each costing in excess of $1 billion.
Infrastructure deals linked to natural-resource projects are a key part of Chinese investment strategy in Africa. They have also raised the specter of China Inc. — Western rivals and multinational agencies allege that Chinese firms and the Beijing government are cooperating closely, sometimes unethically, to snatch African contracts from competitors. The most recent controversial case involved the $9 billion minerals-for-infrastructure deal signed in 2008 between a consortium of Chinese companies and the Democratic Republic of the Congo. Decades of war, corruption and economic mismanagement have reduced the mineral-rich nation to the unenviable status of sub-Saharan Africa’s poorest country.
The agreement calls for the Chinese to build roads, railways and hospitals in exchange for copper and cobalt ore from a mine they will develop. But the deal raised objections from the International Monetary Fund and the Paris Club of creditors, which contended that the project violated the terms of an aid package from these Western donors to enable Congo to service its $11 billion foreign debt. So last August the Chinese consortium agreed to reduce its Congo deal to $6 billion, with the Beijing government cutting $3 billion in infrastructure spending.
But some form of China Inc. remains the modus operandi across the continent. “Unlike the West, the Chinese economic development model in Africa is one with a lot of state involvement,” says Deborah Brautigam, author of The Dragon’s Gift, a book published in 2009 that traces China’s growing role in Africa. “They try to protect and promote their companies.”
This is especially apparent in Angola, which last year overtook Nigeria as the largest oil producer in sub-Saharan Africa. In 2004, just two years after the end of Angola’s 27-year civil war, the Export-Import Bank of China extended a $2 billion low-interest loan to that virtually bankrupt African nation to finance infrastructure projects to be built mainly by Chinese companies. At the time, Royal Dutch Shell, which operates in the Atlantic waters off Angola, put up for sale its 50 percent stake in an offshore drilling area. India’s ONGC was expected to buy the stake. But the national Angolan oil company, Sonangol Group, exercised its preemptive rights to the area and refused to allow the deal. Instead, Shell sold to China Petroleum and Chemical Corp., or Sinopec, for $1.68 billion. “There is a widespread consensus that Sinopec would not have gotten that stake if China Eximbank hadn’t lent that money to Angola,” says Erica Downs, a specialist in Chinese energy at the Brookings Institution, a Washington think tank. According to Downs, additional Chinese state loan commitments to Angola undermined efforts by the IMF to ensure that the country spent its oil wealth transparently in return for IMF aid.
Such mounting criticism led Chinese Prime Minister Wen Jiabao to defend his nation’s economic policies at a China-Africa summit in Egypt last November, where he also announced $10 billion in new low-interest loans to the continent over the next three years. “There have been allegations for a long time that China has come to Africa to plunder its resources and practice neocolonialism,” Wen said at a news conference. “In my view, this is completely untenable.”
While a combination of self-restraint and outside criticism has created headwinds to greater Chinese investment in Africa, nothing has slowed China’s swelling trade with the continent. Both Chinese trade and investment were very much the center of attention in February at the Mining Indaba, the international mining conference held annually in Cape Town. A number of experts attending the Indaba pointed out that Chinese mining operations in Africa are still at an early stage, with no significant production yet under way. “If the Chinese want to have more influence on ore supplies and prices, they will have to buy into major existing operations,” says Magnus Ericsson, co-founder of Swedish mining consulting firm Raw Materials Group or RMG. “And so far that hasn’t happened in Africa.”
But nobody at the Indaba belittled China’s enormous impact on the ore trade. A case in point is Kumba Iron Ore, which is 64 percent owned by Anglo American, the British–South African mining giant. One of the top five iron ore suppliers in the world, Kumba produces an expensive high-grade ore at its Sishen mine, about 600 miles southwest of Johannesburg. Kumba is just the sort of African mining property the Chinese would want to own — if only it were up for sale. “South African mining companies are world-class and trade at world-class multiples,” says Absa’s Gable. “There are no easy wins here like Chinese investors can find in Congo or Ghana.”
China has emerged not as a predatory investor but as Kumba’s white knight of trade. The global recession walloped Kumba’s traditional markets in Europe, Japan and South Korea, whose combined share of the company’s exports dropped from 57 percent in 2008 to only 25 percent last year. China more than made up for this swoon by accounting for 75 percent of Kumba’s ore exports in 2009, compared with 43 percent the year before. “The iron ore market for 2009 was really a tale of two regions: China and the rest of the steel-producing world,” said Chris Griffith, Kumba’s CEO, in announcing the company’s results in February. Thanks to Chinese demand, instead of plunging into loss, Kumba had 2009 net income of R6.96 billion, down only 4 percent from R7.28 billion in 2008.
China’s rising appetite for African ore has also excited local portfolio investors. Alex Pestana, an investment strategist at Sanlam Investment Management, one of South Africa’s largest financial services firms, began traveling to China in 2004 to gauge the country’s soaring demand for iron, copper, cobalt and other ore. But Pestana, based in Bellville, an eastern suburb of Cape Town, decided to forgo direct investments in Chinese state-controlled entities for now in favor of an indirect China play through such Western mining companies as BHP Billiton and Anglo American. “These companies’ fortunes are largely determined by commodity prices, and the margins are dependent on Chinese demand,” says Pestana. “But certainly, as Chinese companies become more important players in Africa, I can see we will be taking a bigger exposure in them.”
That is Standard’s bet as well. But the South African bank isn’t just waiting for its partnership with ICBC to pay off in Africa. Last year Standard estimated that most of the $78 million in new revenues generated by its alliance with ICBC actually came from advisory fees and trade financing for large companies headquartered in China. Through introductions from ICBC, says Bond, Standard “has developed good relations with our targeted top 50 companies in China.”
Aided by ICBC, Standard last year signed a $1 billion loan deal for five years at an undisclosed interest rate with four major Chinese banks: Bank of China, China Citic Bank Corp., China Development Bank and ICBC (Macau). Standard will use the money for daily management of its liquidity and balance sheet.
The capital boost Standard got from ICBC’s purchase of its 20 percent stake has allowed the Johannesburg bank to look beyond South Africa and China for new investments without its Chinese partner. In March 2009, Standard used a $200 million convertible loan to purchase a 33 percent stake in Troika Dialog, Russia’s second-largest investment bank. And back in Africa, Standard is hoping to expand its footprint. “We are looking at a number of troubled Nigerian banks to see if they offer us an opportunity to further increase our operations there,” says Maree. “Of course, you can never rule out the possibility of coming across something really big.”
But that kind of opportunity will require the financial clout of a partner like ICBC.