The development of mines in sub-Saharan Africa by Chinese firms will slow in the coming quarters, before picking up again in 2021, says industry research company Fitch Solutions.
In addition to logistical challenges being faced by miners as a result of the global Covid-19 pandemic, the company says Chinese firms will suffer from reduced access to State-subsidised capital.
Over the past two decades, Chinese investment into African mining assets has been supported by concessional finance from State-owned Chinese banks helping to fund both mines and supporting infrastructure.
A sharp slowdown in Chinese economic growth this year will place downward pressure on State finance for foreign projects, Fitch Solutions notes.
The company expects China’s real gross domestic product (GDP) growth to reduce to 1.1% this year, following a 6.8% year-on-year contraction in the first quarter of the year, making it the slowest yearly pace of growth in over 30 years.
This will lead to authorities prioritising financing of domestic economic stimulus measures, such as front-loading infrastructure construction, Fitch Solution says.
Additionally, reduced access to capital will also slow development of major logistical infrastructure intended to facilitate the delivery of African minerals to world markets. Considering the capital-intensive nature of rail and port project, Fitch Solutions notes there will be more susceptible delays than road projects.
The development of mines could also be negatively impacted by delays to the development of China’s Belt and Road Initiative (BRI) in sub-Saharan Africa. Slower development of BRI assets would have negative implications for logistical capacity in these markets, and a combination of domestic funding constraints and a reduced ability for BRI participants to take on debt “will see Beijing scale back the scope” of BRI investments in the next 12 to 24 months, says Fitch Solutions.
“We expect progress will largely be restricted to Asia in the near term, which implies potential delays in numerous sub-Saharan African markets with a heavy reliance on Chinese workforce and materials,” the company comments.
However, looking beyond the potential disruptions in the coming quarters, Fitch Solutions says the long-term trend of rising Chinese mineral investment in sub-Saharan Africa will remain intact.
It says China’s structural deficit in key minerals – iron-ore, copper and uranium – will sustain the long-held strategy of securing direct access to mines in the developing world.
“The investment appeal of sub-Saharan Africa to Chinese firms will actually increase as diplomatic relations between China and developed markets deteriorate.”
Screening of Chinese investment into sensitive sectors, including resource extraction in developed markets such as the US, the European Union and Australia, has been rising since 2016, and mounting criticism by western governments of China’s role in the global Covid-19 pandemic will exacerbate these tensions, the company notes.
As an example, Fitch Solutions notes that Australia has been “particularly critical” of China’s handling of the Covid-19 pandemic and is pursuing an international enquiry into the outbreak.
In response, China suspended meat imports from several Australian abattoirs and imposed elevated antidumping and anti-subsidy duties on Australian barley in May.
With this in mind, Fitch Solutions says Beijing will have increased incentive to diversify import sources for key industrial minerals, and that diversifying away from Australia will be particularly appealing given that the country accounted for around 40% of China’s total mining imports in 2019.
Investment into sub-Saharan Africa markets such as the Democratic Republic of Congo (copper), Zambia (copper), Guinea (iron-ore), South Africa (coal) and Ghana (bauxite) will be one avenue through which China could reduce this reliance, Fitch Solutions suggests.
Moreover, “closer economic ties with sub-Saharan Africa will help buttress diplomatic support for China”.
Developing greater economic dependence on China in emerging markets is already an implicit goal of the BRI, and Fitch Solutions says this objective will be even more vigorously pursued as relations between Beijing and the West deteriorate.