Jackson Sikamo, a 34-year veteran of the mining industry and country manager of the Chinese-owned Chibuluma Mines in Zambia, recalls the buzz that Copperbelt Province generated at the peak of the commodity boom.
“Planes landed at Ndola Airport with lots of businessmen. You could feel the money in the air.”
Copper industry executives began getting second cars. The office secretary became two secretaries, then three. Five years later, the secretaries have moved on.
The price of copper dropped from $10,000 a metric ton in 2011 to $4,300 this year. Long prized for its electrical and thermal conductivity and resistance to corrosion, copper is used in refrigerators, air conditioners, cars and smartphones. It was in high demand during China’s construction boom, fuelled by the government stimulus of some Rmb4tn (around $586bn at the time) that followed the global financial crisis of 2008-09.
Now, sated demand in China, which alone consumes 46 per cent of the world’s copper, has knocked commodity-dependent African countries like Zambia back on their heels. In Nigeria, the continent’s largest economy, GDP growth has slipped to -1.8 per cent, from 10 per cent in 2010. Angola, which regularly grew at double digits in the 2000s, is forecast to expand just 2.5 per cent in 2016. Zambia grew at 5 to 10 per cent annually from 2010 to 2014, but is expected to grow 3.4 per cent this year.
For Chinese companies that expanded aggressively in Africa in the late 2000s, the situation is equally dire. Bembele Manganese Mine in northern Gabon suspended production at the end of 2015. Its Chinese owner, CITIC Dameng Holding, the Hong Kong-listed arm of state-owned conglomerate CITIC, announced a net loss of HK$137.2m ($17.7m) for the first half of 2016.
Chairman Yin Bo said in a filing that his company’s major customer, the Chinese steel sector, was facing the “challenge of overcapacity, intense competition and rising manufacturing” costs, along with the ongoing economic slowdown in China.
While demand has dropped, however, costs have escalated. At Sikamo’s Chibuluma Mines, the average monthly salary of a miner is about $1,030, more than 18 times what it was in 1998 when the company was privatised. Payroll now accounts for 26 per cent of operating costs. The drop in prices has squeezed profits. “It is the new normal. We have to find a way to make profits under these new copper prices,” Sikamo said.
Despite the slowdown, however, Chinese companies are staying put in Africa. Amid the turmoil, pain and disappointment, a new reality is emerging: China and Africa are equally dependent on each other.
For China, Africa is important not just for its resources, but as somewhere that can absorb China’s excess output of goods and services in the short term, and as a huge market for Chinese products in the longer term.
In Lusaka, the Zambian capital some 270km to the south, Chinese construction company China Jiangxi Corporation for International Economic and Technical Cooperation is conducting a $360m upgrade of Kenneth Kaunda International Airport. The airport, which opened in 1967, is getting a new terminal, a fire station, a control tower and a hotel.
The Export-Import Bank of China is financing the makeover, with the Chinese government signing a loan facility. “This is the common scheme,” said a Chinese person working in Zambia. “The Chinese government provides the loans to the Zambian government on condition that the tender is awarded to a Chinese company. Then, in subsequent years, the loan will be reduced or maybe cancelled.”
Such projects amount to an aid programme for keeping Chinese construction companies afloat as they struggle to find profitable projects in China. Scarce workers, reflected in rising wages, have become a huge strain on such companies at home.
“China is suffering from overcapacity as the balance of supply and demand has collapsed,” said Keiichi Shirato, chief analyst at Mitsui Global Strategic Studies Institute. “China is not only eyeing Africa as a source for natural resources, but to cultivate it as an outlet to offload its surplus capacity.”
This trend could further accelerate as China faces headwinds in more developed markets. When Chinese exports of surplus steel and other products jumped last year, “the developed world responded with the strongest protectionist reaction of the 21st century,” according to a collection of studies published by the Australian National University, titled China’s New Sources of Economic Growth.
According to the report, “China’s structural change has been occurring through challenging international circumstances. The political consequences of stagnant real incomes in the United States and Europe threaten to further weaken the international environment for Chinese growth.”
Africa, hungry for infrastructure, has, by contrast, welcomed the flood of cheap Chinese steel.
On a dusty road connecting Ndola Airport to Kitwe, in the heart of the copper belt, is Mei Mei Dola Hill Wholesale City, a huge Chinese-run shopping centre popular with Zambians. Hundreds of Chinese products fill the shelves, from rubber sandals to frying pans, rice cookers, wardrobes and flat-screen TVs. A Chinese man in a cowboy hat smiles at Zambian customers eager to fill their homes with affordable appliances.
The McKinsey Global Institute expects total consumer spending in Africa to grow to $1.4tn in 2020 from $860bn in 2008. For Chinese companies struggling to increase sales at home, Africa is an ideal market.
Now that China is in Africa to stay, some Chinese companies are attempting to improve their image. A non-governmental organisation called China House is helping them do that in Kenya.
Huang Hongxiang, the Columbia University-educated 28-year-old who runs China House, advises Chinese companies on local labour and environmental laws, two key sources of trouble. In 2012, a Chinese manager at a Zambian mine was killed in a riot by workers protesting delays at the company in paying higher minimum wages.
“Wage and environmental issues are not that different from European or Indian companies. The difference is in the communication,” Huang said. Chinese employees have traditionally lived in walled compounds separated from the local community. “Isolation brings misconceptions. We want to persuade Chinese companies that engaging with the local public and the local media is beneficial,” Huang said.
China Road and Bridge Corp., the largest Chinese state-owned enterprise operating in Africa’s infrastructure sector, has vowed to make the $3.6bn Mombasa-Nairobi Standard Gauge Railway that it is building, “a green, environment-friendly and ecological railway.”
CRBC has also helped rescue stranded wild elephants and organised a garbage collection campaign in a national park.
“Only through full communication and understanding, can we realise cultural integration, then help the enterprise to smoothly co-operate with local interested parties and finally realise the sustainable development of the enterprise,” said CRBC Chairman Wen Gang during a visit to Kenya this spring.
“Manufacturing in China is dying,” Huang said. “The motivation for state-owned enterprises may be securing resources and strengthening relations with African countries, but private Chinese companies are here purely to do business.”
That means it is in their interest to establish good relationships with local communities in Africa. “In the future, I hope that where there is a Chinese Embassy, there will be a China House,” Huang said.
Peter Guest, Kazuki Kagaya and Kenji Kawase contributed to this report.
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