China appears to be more interested than any other big economy in investing in the African mining sector. According to China Mining 2018, in 2011, China investors controlled only about 10 mining operations on the continent and this figure rose to at least 24 in 2018. China's interest in mineral resources in the African continent is motivated, on the one hand, by its continued strong growth in power, construction and industrial manufacturing sectors, and on the other, by its declining internal mining production capacity year-on-year, due to declining ore grades, increasing labour costs and a more stringent regulatory environment. In return, China has one of the strongest infrastructure construction abilities in the world and is best placed to help Africa to address its vast infrastructure gap.
It’s no surprise that Chinese mining investors are looking to Africa to invest. The African continent is home to an abundance of high-grade natural resources, from gold and oil to copper and cobalt, that can meet China’s growing industrial needs. As the largest producer of lithium cells, accounting for 70 percent of the global lithium cell manufacturing capacity, China is keen to find a stable source, such as the African continent, for low-cost cobalt, an element, along with lithium, that makes up the essential components of lithium batteries. High-grade copper is another mineral that China is lacking. Although massive quantities of ores have been mined and shipped worldwide, Chinese investors know that there is still a great deal of deposits to be explored and discovered in Africa.
South and central Africa appear be the jurisdictions attracting the lion’s share of interest from Chinese investors. OPC Policy Centre's statistics show that the top three countries that have benefited from China's African mining investments are Zambia, South Africa and DRC. By 2018, Zambia and South Africa had attracted the most mining investments from Chinese investors in Africa. This is because the region has one of the largest high-grade copper and cobalt deposits in the world and these countries are seen to be relatively stable, posing less political and social risks for Chinese investors. Chinese investors have also shown interest in the West Africa region, which is well-known for its rich gold and aluminium resources. But compared to south and central Africa, the social and political instability of this region has created uncertainty, which has resulted in perceived higher risks for Chinese mining investors.
Another key driver behind Chinese investors' ambition in Africa is the enhancing of inter-governmental collaboration between China and African countries. A declaration and action plan were adopted at the 2018 Beijing Summit of the Forum on China-Africa Cooperation, which called for the further elevation of China-Africa cooperation and increased implementation of the Belt and Road Initiative (BRI) in the region.
The BRI has played an important role in Chinese investment in Africa in the past decade. Baker McKenzie’s recent BRI & Beyond Forecast, produced with Silk Road Associates, details how the BRI has helped China to diversify its investment relationships, as well as acting as a stabiliser for China’s foreign reserves position and defending the renminbi against depreciation. One of the models for likely BRI investments, the aggregated 'Baseline Model', predicts an estimated USD 910 billion in BRI investments in the 2020s, with sub-Saharan Africa receiving the biggest share - 25%.
Further, Baker McKenzie research with IJGlobal, A Changing World: New trends in emerging market infrastructure, showed that China has targeted sub-Saharan Africa in recent years, both in the context of its need for natural resources and as part of the BRI. Chinese policy banks loaned USD 19 billion to energy and infrastructure projects in the region from 2014-2017, almost half of which was in 2017.
Although there is rising concern amongst African sovereigns about the long-term effects on their dependence on China, overall, African countries acknowledge that they need global capital to improve their infrastructure and economy and that a partnership with China has mutual benefits. To address the concerns, China has made it clear that it aims to work with African countries in a participative and inclusive way. In the meantime, African governments have begun building capacity to correct imbalances between borrowers and lenders in the negotiation phase.
There are many challenges facing Chinese investors in Africa, including political risks, social and economic instability and legal challenges. Many Chinese mining companies lack global investment experience and the knowledge of the many, vastly differing local legal systems in Africa. Countries in Africa have been focused on ensuring they can strike the right balance between encouraging much needed foreign investment and protecting the rights and resources of their countries and their people. Chinese investors looking to transact in this sector in Africa must therefore ensure that they form close working relationships with the best legal counsel, as well as due diligence experts and specialist local advisors on the ground in Africa, to ensure the full legal compliance and sustainability of the investment.
By Leo Zhang (Of Counsel), Bee Chun Boo (Partner, Beijing) and Wildu du Plessis (Partner, Johannesburg).