Chinafrica

Although Africa is home to some of the largest mining deposits, China retains the title of the world's largest mining sector. It is a leading producer of minerals such gold, lead, zinc, coal, tin, iron and silver and the world's foremost producer of rare earths, accounting for over 90 percent of the global production. Ironically, China is also the world's top consumer of the same minerals and often has to rely on imports to deal with the internal deficit. There is no doubt that the future success of the Chinese economy is dependent on the ability to secure long-term access to mineral and metal resources.

Consolidating the mining sector

According to China's Ministry of Land and Resources, there are over 100,000 mining companies in China with more than half of these classified as small-sized enterprises. So many small companies have resulted in inefficient mining in many areas and high-risk operations as smaller mines tend to be the epicenters of mining accidents, particularly in the coal sector. To address these issues, the Chinese Government has been consolidating the mining sector. As consolidation takes place, the smaller companies face these options:

• Increasing output to government-directed levels - Companies with enough capital and reserve levels can simply increase output and comply. However, considering high output requirements and restrictive capital expenditure costs, this option is not always feasible;

• Partnering with bigger players or other companies to reach required output - This is the favored approach of most companies. However, competition between companies, difference in their cultures, divergence in cooperation terms, etc. mean this route is not always feasible;

• Exiting the market - If the above two options are not viable, smaller companies must exit the market either by shutting down or going overseas. This is an opportunity for African companies, especially those seeking partnerships.

Opportunity for African companies

In some provinces such as Hebei, smaller (and often private) companies are being pushed out of the iron and steel sector. Some of these companies' technology and processes are inherently not problematic; the key issues driving consolidation are low output value and a drive to reduce high energy consumption and high polluting industries. African companies' opportunities can be summarized as follows:

1. Opportunity for technology transfer - The opportunity for technology and expertise transfer is real. Given the vast scale of China's mining sector, what is considered small scale here may actually be large scale in parts of Africa. Smaller players that cannot meet the output are forced out of the industry. But where shall they go?

2. Opportunity for capital investments - As the small companies are pushed out of the domestic sector, they will either put their capital into other domestic sectors or go abroad in search of viable projects.

3. Opportunity for exports - As the smaller companies exit and the global mining slowdown continues, China's mineral deficit will continue to drive commodity imports, especially of high grade minerals.

4. The "going out" drive - It is not only the smaller players that are seeking to move out of China. With a steel sector that has been producing over capacity for years and facing decreasing government subsidies, even larger players have been moving out of China. Sinosteel, one of China's largest iron and steel companies, has signed a cooperation deal with the Kenyan Government to jointly develop a steel plant in the East African nation.

African companies need strategic partners

It would be naïve to think that all the companies that have been pushed out of China's domestic sector are viable partners. In fact, there are many that are indeed problematic in terms of excessive energy consumption, environmental damage, inadequate technology and poor safety records. This is why African companies must be strategic in selecting their Chinese mining partners. They should understand the implications of the offered technology/processes, particularly in terms of the environment. One needs to only visit the polluted areas in Inner Mongolia to understand that sometimes the best lessons coming out of China for African companies may be what not to do.

Walter Ruigu is managing director of China Africa Merchants Advisors Ltd. (CAMAL), a trade and investment advisory firm based in Beijing and Nairobi (camaltd.com). He can be reached at wruigu@ camaltd.com