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The Scramble for Africa: Profiting From World's Largest Cache of Commodities

In the quarter century stretching from the late-1880s to the First World War, there was a mad rush by the world's leading powers to occupy and annex African territory.  Now, 100 years later, the world's elite again are scrambling to make their respective marks on the continent.

The methods of extraction have changed, but the end goal remains the same – to gain access to Africa's coveted bounty of commodities.

Most notably, Chinese interests have swarmed Africa, constructing roads, rail lines, municipal buildings, schools, ports, and pipelines in exchange for access to natural resources.

China's success on the continent has attracted the likes of India, Brazil, and Japan. But if these relatively new arrivals want access to Africa's gold, silver, cotton, cocoa, copper, aluminum ore, and oil, they'll have to negotiate around China, which by far has the strongest ties to the continent. 

Engineering an Empire

China's African investments in 2009 rose an astonishing 80%. In fact, Africa now represents 10% of China's total outward foreign direct investment (FDI).

Trade between Africa and China has grown 40% a year since 2001, reaching a record-high $107 billion in 2008. That was enough for China to top the United States and European Union as the continent's largest trading partner.

China is most interested in Africa's oil resources, such as those found in Nigeria, Sudan, and Uganda. About 13% of Africa's total oil exports go to China.

The state-run China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO) is the main agent in such oil deals. CNOOC recently purchased oil assets in Uganda from Britain's Tullow Oil for $10.5 billion (7 billion pounds), and is in talks with Nigeria to buy 6 billion barrels of oil – equivalent to one-sixth of the country's total reserves – for as much as $50 billion.

CNOOC also paired with Sinopec Corp. (NYSE ADR: SHI) to take a 20% stake in an oil field off the shore of Angola for $1.3 billion, and with Ghana National Petroleum Corp. (GNPC) to bid for a stake in the Jubilee oil field in West Africa.

Of course, China isn't just pursuing industrial resources. With incomes growing among its more than 1 billion citizens, China is growing into one of the world's largest markets for luxury goods.

China last year surpassed the United States and Germany as South Africa's largest trading partner, in part because of its ravenous appetite for diamonds.  Diamond sales in China rose 16.9% to $1.5 billion in 2009.  South Africa-based De Beers' diamond sales in China quintupled to 2.3 million stones.

Total trade value between China and South Africa was $14.29 billion in 2009 – down 1.19% from 2008, according to statistics recently released by South Africa Customs. Those statistics also showed that trade value between South Africa and Germany fell 27.88% year-over-year, and trade with the United States fell 34.8% from 2008.

Bilateral trade between Egypt and China grew to $6.24 billion in 2009 from $610 million in 1999, according to Egyptian government statistics. The annual rate of growth in the past five years has been more than 30%.

"The Chinese people cherish sincere friendship toward the African people, and China's support to Africa's development is concrete and real," China's Premier Wen Jiabao said at the fourth ministerial Forum on China-Africa Cooperation (FOCAC) in November. "We will help Africa build financing capabilities. We will provide $10-billion for Africa in concessional loans."

Premier Wen and Chinese President Hu Jintao unveiled eight measures on bilateral cooperation at that meeting, as well as $10 billion of low-interest loans to African nations.

Can You Hear Me Now? Africa Gets Wired

With the long-term outlook for commodities decidedly bullish – and given China's apparent success on the turbulent continent – many other emerging countries are coming to view Africa as an important part of their economic growth models.

India – China's continental rival – is one such country. 

Indian officials next week will meet with representatives from 34 African countries for a three-day conclave to discuss $9 billion worth of business projects. The conclave will also lay out a roadmap for the second edition of the India-Africa Forum Summit to be held next year. India hosted the first summit in New Delhi in 2008.

India's trade with Africa soared to more than $30 billion in 2008 from just $967 million in 1991. And it could reach $70 billion in the next five years. Sudan and Mauritius are among the top five investment destinations for India, with both accounting for about 18% of India's FDI flow.

It's not just Africa's commodities that India is interested in, either.

Indian telecoms tycoon Sunil Bharti Mittal, chairman of Bharti Airtel Ltd., last month shocked investors when he revealed that his company had offered to buy the loss-making African assets of Kuwait's Zain Telecom.

Africa represents "the most under-penetrated market in the world", offering huge potential growth, Mittal told the AFP in a conference call with analysts. The deal could negatively impact earnings in the short term, "but in the long run, we are looking for a growth story in this. And therefore it's not a cause of worry."

Just 36 out of every 100 people own a mobile phone in Africa, compared to India where subscribers total 45 out of every 100, and advanced economies where mobiles outnumber people, AFP said. According to estimates, the total population of the 15 African countries Zain operates in is just under 500 million.

Bharti is offering $10.7 billion for the unit, which lost $111 million dollars for the first nine months of 2009. Bharti twice failed to merge with Johannesburg-based MTN Group Ltd. (PINK: MTNOY), which is the continent's largest operator.

"The Future of the World's Natural Resources"

Brazil – which boasts one of the largest and fastest-growing economies in the world, and with its own cache of valued commodities – is looking to partner with Africa as well.

Brazilian companies have invested just $10 billion in Africa since 2003, but with a booming economy and growing demand for resources that number is likely to rise sharply.

Brazilian imports from Africa rose to $18.5 billion in 2008 from $3 billion in 2000. Exports to the continent have grown eightfold in that time, surging from $1 billion to $8 billion.

Luiz Inácio Lula da Silva, the Brazilian president who took office in 2003, visited Africa six times in his first five years in power. Some Brazilian officials have even suggested that African countries prefer to do business with Brazil, which has had similar struggles with poverty.

"They identify with us because we experienced similar problems to them in the past and have successfully adapted technology to local circumstances," one Brazilian diplomat in Mozambique's capital, Maputo, told the Financial Times. "They see Brazil as a model to be imitated".

Indeed, Brazil is proving to be quite the model for success. Brazil was one of the last countries to actually fall into recession and one of the first to dig its way out. Its gross domestic product (GDP) declined by just 0.3% last year. This year the economy will expand by 5.8%, according to central bank estimates. And with the nation's demand for raw materials expected to rise accordingly, Africa will be a big part of Brazil's growth plans.

"Brazil is positioning itself to be Africa's prime partner in its vital quest for greater energy and food security," says Jeremy Stevens, joint author of a recent research report.

For instance, Vale SA (NYSE ADR: VALE) is working alongside Odebrecht, a Brazilian construction company, in the remote town of Tete, Mozambique to develop some of the world's largest coal reserves.

"The thing about Africa is that sooner or later it will become a reality," said Roger Agnelli, president and chief executive of Vale. "Africa is the future of the world's natural resources, along with South America."

Investing in Africa

Africa's potential is so great that investors should actually prefer it to China because its stocks are significantly undervalued, Jens Schleuniger, manager of the Deutsche Bank DWS Invest Africa LC fund, told Reuters in an interview.

"Few know that Africa is the second-most dynamic growth region behind Asia," he said. "However, there is a lack of trust as many investors attach too much importance to political risks. I believe this is partly exaggerated."

Schleuniger pointed to Bharti Airtel's recent activity in the region as evidence that "the appetite for investments in the region is picking up."

"Above all, you will find investment opportunities in the three Cs – commodities, construction and consumption," says Schleuniger.

Bharti's deal with Zain Telecom is an example of the latter, whereas CNOOC's forays into the continent are an example of a commodities play. Investing in either of these two companies could be preferable to buying into an Africa-listed company because they are profiting from the continent's resources but are less risky than a domestic company.

Another option would be mining companies Anglo American PLC (OTC: AAUKY), which is one of the largest diversified mining companies, and AngloGold Ashanti Ltd. (NYSE ADR: AU), the world's largest gold miner.

The majority of Anglo American's operations are in South Africa, where it was founded in 1917. There it mines thermal coal, iron ore, and platinum. The company has a corporate office in Johannesburg, and its secondary listing is on the Johannesburg exchange. Anglo American also has projects or operations in Namibia, Botswana and Zimbabwe.

There's also African Bank Investments Ltd. (OTC: AFRVY), which underwrites unsecured credit risk through the provision of personal loans to South African residents, and sells furniture and appliances.

For a more general sampling, the Market Vectors Africa ETF (NYSE: AFK), which seeks to replicate as closely as possible the price and yield performance of the Dow Jones Africa Titans 50 Index, might be worth a look.

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  1. Gerry Theodorakis | March 12, 2010

    It wasn't that long ago that the super racist Chinese used to refer to the indiginous African people as:
    "Black Devils", now this great nation of Africa & it's great indiginous people have sold out their souls to the greed stricken Chinese like many other countries such as our own Australia, who is suffering from Chinese takeover of real estate (pushing up prices to record highs, record unaffordability for mainstrean Australians) & taking over industry & natural resources.
    China has had centuries to allow it's disgusting human population to become out of control & largely destroy it's environment through pollution / over developement & likewise has had centuries to repair the massive damage it created.
    Why should the rest of the world sell out their countries & souls to these insanly greedy / materialistic Chinese who only want to dominate the world. Wake up everyone, regain your countries & souls.

  2. Wei Ling Chua | March 12, 2010

    China is so far the only country offer real benefit to Africa.

    The construction of roads, rail lines, municipal buildings, schools, ports, and pipelines are essential steps for Africa to built their economy and a civic society.

    In fact, China also offer thousands of scholarship to African students and canceling the debt of 32 countries in Africa: (Hong Kong Media, 14 Jan 2009 in Chinese language: )

    The World Bank has a detail report with regards to China infrastructure financing in Africa:

    The world should stop exploiting Africa, and follow China model in trading with African countries.

    • MUSA | August 15, 2010

      how many return to africa with that amount of knowledge? or do they get away and become foreign?

  3. George Amadi | May 16, 2010

    China trading with Africa can only get better. Both need each other badly in a world that the UK and the US have grown used to dominating irresponsibly. The concern being touted by the West over growing China-Africa trade is at best, suspect! Europe and America have sufficiently proved they ain't no friends of ours. Trying to dissuade us from being friends with China is a non-starter… Period!

  4. MUSA | August 15, 2010

    It looks ok to trade with anyone as longs as their is maximum gain for the locals. The only worry is trading in commodities that are perishable against imperishable goods! Is Africa giving away gold and metals for tarmac? Is africa giving away its rights on property by allowing someone to take over major developments and own them by internation law? It will be another scrumble for Africa where the local chiefs were cheated into giving away Gold and other valuable non perishable goods in exchange for gun powder and sweets and cloths and shoes only later to realize ( after the bllody leberty wars) that the things given away were to be sold back as a matter or necessity at a much higher price. To be dorminated is a choice. Let us keep OUR GOLD AS A TRADING CURRENCY OR STORE of value and develop slowly. Too fast growth is not happiness as someone wants to paint it here; it leads to recessions and unaffordablity. The WAY FORWARD IS TO BUILD CAPACITY IN SUSTASTAINABLE DEVELOPMENT. More water dam for energy, more railways, for food processing and storage, more medical development, more local engineering

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