Thursday, 20 September 2007

China and the Congo: The battle for resources

China's role in developing countries, specifically Africa, is an important and growing one that I beleive deserves more attention.

The FT covered this issue recently. Whilst this case is specific to Congo the general prenmise behind China investment in Africa is a complex one. With the continued commodity boom and high prices control over resources into the future is crucial.

China's continued interest in Africa should not be underestimated.

Alarm over China’s Congo deal

Mining companies, the International Monetary Fund and other donors were scrambling on Wednesday for clarification of a planned deal between China and the Democratic Republic of Congo.

The deal would tie up mineral resources in exchange for $5bn (€3.6bn, £2.5bn) in infrastructure projects and loans. A preliminary agreement was signed this week just as an IMF mission landed in Kinshasa to review progress towards the resumption of budget support for Congo.

IMF, World Bank and African Development Bank officials seem to have been caught offguard by the scale and timing of China’s plans.

These come at a delicate stage in Congo’s negotiations towards forgiveness of debt accumulated under the dictator Mobutu Sese Seko, who died in 1997, totalling about $8bn, or equal to 800 per cent of current national exports.

Western mining groups, awaiting the results of a government review of about 60 contracts signed during the recent civil war, were also seeking more details from the Kinshasa government.

The Katanga region of Congo has some of the world’s best deposits of copper and cobalt. Other areas host rich sources of minerals including diamonds, gold, iron and uranium.

After years of war, dictatorship and turmoil, however, the country’s infrastructure is either non-existent or in ruins, and extraction operations are producing at a fraction of their potential.

IMF and World Bank officials have acknowledged the scale of Congo’s infrastructure needs. But they are seeking to ascertain whether the Chinese loans are in line with Kinshasa’s commitment under the financial institutions’ heavily indebted poor countries debt reduction initiative not to contract new debt on anything but concessional terms.

In a best-case scenario, the IMF would restart a lending programme – the last one stalled in 2006 because of poor implementation – and Congo would stand to benefit from an 80 per cent write-off of its external debt in mid-2008 at the earliest.

“If the terms of the deal do not meet the concessionality issue, that would be a concern,” said an IMF official.

Most of the mining activity in the country is being carried out by smaller, more entrepreneurial companies. Large western mining groups are keen to gain access to these resources to replace their dwindling deposits but have largely held back from investing in the country – put off by continuing unrest, widespread corruption and the lack of infrastructure.

Alex Gorbansky, managing director of Frontier Strategy Group, a political risk consultancy, said China’s $5bn draft agreement with Kinshasa would put pressure on both the large mining companies looking to get in and the small miners already there.

“It will give China a distinct advantage in the Congolese copper belt,” he pointed out.

He said large western mining groups, such as Anglo American and Rio Tinto, were spending increasing amounts of time and money weighing opportunities in Congo. But China’s move might mean they had left it too late to secure the best assets.

Mr Gorbansky added that there was a risk that some of the mining licences held by smaller companies could be transferred to Chinese investors but Victor Kasongo, the country’s deputy mines minister, insisted this would not be the case.

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