Chinese involvement in South Africa

During the early 1990s, direct trade relations between China and South Africa were initiated, and within a relatively short period of time, two-way trade increased significantly. The volume of trade in 1991 was only US$14 million, but by 1997 this had grown to over US$1,5 billion.

Claude Kabemba's picture

Director of the Southern Africa Resource Watch (SARW)

October 4th, 2012

During the early 1990s, direct trade relations between China and South Africa were initiated, and within a relatively short period of time, two-way trade increased significantly. The volume of trade in 1991 was only US$14 million, but by 1997 this had grown to over US$1,5 billion. The establishment of formal diplomatic relations in 1998 provided a further boost to commercial interaction, with two-way trade growing substantially. Investec bank’s investment strategist Michael Power contends that South Africa is an ideal trading partner for China, and thus the potential for increased two-way trade is significant.

Since 2000, the China-South African relationship has grown significantly across a wide spectrum of political, economic and cultural interactions. With a GDP of US$240 billion (more than 25% of Africa’s total GDP), South Africa is significantly different to most other African countries in terms of political, economic, social and commercial development. It is the only country in Africa to invest in China, and it is well known that many of South Africa’s advanced technologies (such as liquid fuel from coal and pebble bed nuclear reactors) are sought after by China. In 2006, South Africa’s exports to China stood at US$2 billion, with imports calculated at US$6,7 billion. In 2008, South Africa’s exports had grown to almost US$3,5 billion, but imports from China stood at over US$10 billion. A sudden surge in Chinese clothing exports amounted to an increase of over 335 percent during the period 2002 to 2006. The impact on the industry has been a job loss of almost 40 percent, with little prospect for any improvement over the longer term. By 2006, the majority of clothing items for sale in South Africa originated in China.

China also sees South Africa as a convenient base for involvement in the region. COSCO, a Beijing-based global shipping company, and First Automotive Works (FAW), a 2006 Fortune 500 vehicle manufacturer, are two examples of Chinese companies using South Africa as a base for their regional activities. COSCO Africa has a 55 percent share in a joint venture with Rennies called Sosren Shipping Agency and also manages COSCO Group’s operations in southern and western Africa. FAW has an assembly plant in Gauteng where it assembles trucks and busses for the SADC market. Its sales programme extends as far as Uganda. FAW South Africa’s company slogan is ‘China’s Gateway into Sub-Saharan Africa’ and, while this is typical of most mission statements’ idealism, it is possibly a useful indication of the thinking of several Chinese multinationals.

Both sides acknowledge a trade imbalance favouring China, which could have significantly negative consequences for South Africa over the longer term. Imports from China now make up over 10 percent of South Africa’s total imports, making China South Africa’s largest trade partner. South Africa’s exports to China are resource-based, with ores and metals accounting for almost 70 percent of the total. At the same time, South African exports of minerals to China have not grown significantly compared to exports from other developing countries. Base metals and mineral products account for over 70 percent of South Africa’s exports to China. Machinery and equipment has shown robust growth. Other strongly growing export categories include chemicals, pulp and paper, textiles, clothing, and live animals. China’s low-cost manufacturing base provides the foundation for exports to South Africa, which are expected to continue as China’s manufacturing capacity increases. The range of products South Africa now imports from China includes machinery, electrical equipment, footwear, textiles and toys. Thus the trade structure approximates the typical colonial relationship, with South African raw materials exchanged for Chinese manufactured products. With China’s manufacturing capacity expected to rise further over the next few years, the pattern of trade is likely to remain largely unchanged for the foreseeable future. Chinese low-cost manufactured products will continue to flood the South African market, undermining the competitiveness of local producers.

China’s investments in South Africa extend considerably further than natural resources industries. Chinese companies presently involved in South Africa include Zijin Mining, Minmetals, Jiquan Iron and Steel (Jisco), East Asia Metals, and Sinosteel. As long as South Africa remains the easiest sub-Saharan African country in which to do business, it is safe to assume that it will continue to be the first port of call for future Chinese (non-oil) investment. Standard Bank’s decision to sell a 20 percent stake to the Industrial and Commercial Bank of China (ICBC) for US$5 billion is believed to be China’s biggest international investment to date. ICBC-Standard Bank has set aside US$1 billion to invest in African resources, while the new corporate strategy is expected to focus on brand acquisition, new technologies, advanced management processes, and market networks. ICBC is 70 percent owned by the Chinese government and is thus expected to drive a more geo-political corporate strategy in Africa, with less concern for margins. Chinese officials suggest that ICBC-Standard Bank intends to open new opportunities for small borrowers in Africa and South Africa, but no evidence of this intention is yet available from the bank itself. The Chinese embassy in Pretoria estimates that investments in South Africa totalled US$1 billion prior to the ICBC-Standard Bank deal, which stands at US$5 billion.

There is general agreement that South African companies have invested more than US$800 million in China. South African investments in China have included technology transfers and job creation in China, but have no measurable impact on employment and poverty reduction in South Africa. The Kumba Group exports iron ore to, and owns a zinc mine in China. Naspers has enjoyed significant success in China’s Internet sector, while Anglo American has acquired exploration permits for gold, platinum and diamonds, along with an investment of US$150 million in Shenhua Energy Corporation, China’s biggest coal-producing company. SABMiller now partly owns 55 Chinese breweries. Sasol is planning a major investment, estimated at US$14 billion, to build two coal-to-liquid processing plants in China. South African investments in China have facilitated technology transfers, sharing of management skills, and job creation. The planned Sasol investment in China will have a major impact on China’s ability to access petrol-from-coal technology, with significant potential for development of the Chinese hydrocarbon industry.

Following China-South Africa bilateral discussions in 2008, it was confirmed that the US$5 billion China-Africa Development Fund (CAD-Fund) is available for mining investments in South Africa. China will thus provide state backing for its corporations seeking new investments in South Africa. Chinese companies are looking for stable and profitable companies which can guarantee long-term supply of selected raw materials to the Chinese market. Joint-venture partnerships with economically sound entities is the chosen strategy, rather than turn-around strategies for struggling ventures.

In late 2006, Larry Yung Chi Kun, son of the former Chinese Vice-President Rong Yien, invested US$800 million in Anglo American, one of South Africa’s leading mining companies. Purchasing shares in South Africa’s mining companies is a direct and obvious way of extending control over mineral production, but could prove costly and unreliable over the longer term. Given the size of South Africa’s key mining companies, buy-outs may not be cost-effective. Buying selective mines, smelters, or smaller mining companies appears to be more appropriate as a business strategy for China’s engagement with South Africa’s mineral sector.

Chinese investment in South Africa’s mining sector is, however, limited (only five examples) and indirect, via joint ventures, so the Chinese footprint is limited and the impact confined. However, given China’s global investment strategy and the continued demand for commodities to sustain economic growth in China, significant Chinese investment in South Africa’s raw material extraction process is expected over the next few years. A possible expansion of investment activity could include coal (depending on transport facilities), platinum, chrome and vanadium. Generally, China’s South African investment strategy in the mining sector appears to be based on a business model intended to minimise costs in purchases and maximise profitability in commodity sales, with little involvement in local economies.

China’s approach approximates that of Kumba Resources to the extraction and sale of iron ore. At a seminar in 2004, Kumba’s Chief Executive, Dr Con Fauconnier, explained the simplicity of iron ore exports to China – direct from Kumba’s Sishen mine to the port at Saldanha, followed by shipment to China. The business model included no job creation, skills enhancement, beneficiation, or Chinese investment in South Africa which could promote development. In 2009, demand for some commodities showed a marginal increase, with iron-ore sales to China showing sustained expansion. China was described as the ‘life-line’’ for Kumba, which increased sales to that country by almost 130 percent during the first half of 2009. At the same time, demand for iron ore in Europe, Japan and Korea declined sharply over the same period. In response to strong demand in China, Kumba now has plans to increase its output to 53 million tons by 2013 with a focus on sales to China. Ongoing and continued demand for resources in China is expected to remain a key factor in sustaining South Africa’s mining sector over the longer term.

The relationship between South African chrome producers and Chinese steelmakers is considered mutually beneficial, with South Africa producers assured of access to a growing market, and Chinese investors assured of supplies at a reasonable cost. Deputy Managing Director of International Ferro Metals, Xiaoping Yang, has suggested that Chinese investments in South Africa are not strategically intended to control price, as prices are determined by the market. Chinese investments are therefore focussed on guaranteeing supply for the growing steel market in China.

In platinum group metals (PGMs), during 2006, Zijin purchased 29,9 percent of Ridge Mining for US$16 million (subsequently purchased by Aquarius Platinum). The focus of the investment is on Sheba’s Ridge Mine and Blue Ridge Mine, both of which produce PGMs. Mineral reserves are estimated at 51 million tons, with an approximately 20-year production cycle. Zijin’s business model in acquiring the investment is intended to assure long-term supplies at affordable prices. The Zijin Mining Group Co (formally Fujian Province Shandong County Mining Co) is listed on the Hong Kong Stock Exchange and is presently the largest gold producer in China (responsible for 10 percent of China’s total output). The company has 80 subsidiaries across China, and the major shareholder is Pinnacle Mines Ltd, a Canadian company.

Aquarius Platinum (South Africa) (Pty) Ltd (AQPSA) is Zijin’s South African joint venture partner. AQPSA focuses on the production of PGMs in southern Africa, and in turn is owned by Aquarius Platinum Limited, an Australian company registered in Hamilton, Bermuda. Aquarius mining is the world’s fourth largest platinum miner. AQPSA purchased Ridge Mining (originally a UK-owned company) in July 2009. Chen Jinghe, the Chairman of Zijin, has explained that the investment in Ridge was an important step in the company’s long-term strategy to increase resources and production facilities overseas. Purchasing a South African platinum mine was considered a breakthrough for a Chinese company.

Aquarius Platinum CEO Stuart Murray has suggested that Chinese companies are not planning to invest in South Africa as they have done in other parts of Africa, such as the DRC, Zambia and Zimbabwe. Rather, they are seeking partnerships, joint ventures and supply relationships with well-established and profitable enterprises. In South Africa, the emphasis is on surety of supply, rather than ownership, extraction and transportation. Given that South African mines have solid track records and international-level technology, China’s capital injections can focus on plant expansion and production increase which favours both South African producers and Chinese consumers.

The South African chrome mining industry sees China as an ideal long-term partner, and has been working hard to develop its position as a reliable and low-cost supplier. Thus Sinosteel’s partnership with Samancor offers the Chinese investment company a ready-made solution to navigating South Africa’s complex legal environment, and a well-established corporate structure which efficiently produces chrome ore for the Chinese market. Sinosteel requires no direct interface with South African labour or mining legislation, while benefits in the form of guaranteed supplies at competitive rates are available for the Chinese market.

In 2007, China’s Minmetals Development Company, a subsidiary of the state-owned China Minmetals Group, purchased exploration rights for the Naboom chrome project from Mission Point and Vesatex. Based in Beijing, Minmetals is China’s biggest metal-trading company with a range of international interests. The company specialises in the production and trading of metals and minerals, but also has interests in finance, real estate and transport, while its major exports from China are coke, coal, ferroalloys and refractory minerals. Other exports include copper, aluminium, tungsten, antimony, tin, rare earth, tantalum and niobium. Minmetals has operations in the UK, Germany, Italy, Sweden, Russia, Hong Kong, Japan, Korea, India, Singapore, Australia, the US, Brazil and South Africa. Minmetals is a major purchaser of South Africa’s iron ore, mainly from the Palabora Mining Company, while recent reports suggest it is interested in buying Anglo America’s zinc mines. The company is also seeking new iron ore suppliers, given that Vale SA, Rio Tinto and BHP Billiton dominate global markets.

Until 2006, the project was owned by Chrometco, which sold in favour of focussing activities on copper and cobalt. Minmetals executives explained that the growing demand in China for steel was the driver for investment in South Africa. Ensuring supply from South Africa, along with price predictability, were seen as the incentives for the new venture. At the same time, Minmetals was satisfied with a less than controlling share in the Naboom project, allowing South African companies to retain control. The Minmetals strategy thus excluded China from direct management of workers and from interaction with the local communities affected by production. The approach was rather a partnership through which China would provide a capital injection and assurances of purchasing output, while the day-to-day management of the project remained in South African hands.

The Jiuquan Iron and Steel Corporation (Jisco), one of China’s largest steelmakers, has invested US$157 million for a 26,1 percent share in International Ferro Metals (IFM) which owns the Buffelsfontein chromite mine and smelter near Brits. Jisco is the largest stainless steel manufacturer in northwest China and is wholly-owned by the Chinese government. The mine includes both open-pit and underground operations, with an operational life-expectancy of approximately 15 years. Annual ferrochrome production is an estimated 270 000 tonnes, of which 50 percent is shipped to China. There is no beneficiation of the chrome ore, and only 1000 new jobs were created as part of the mine expansion process. According to IFM’s Managing Director and founder, Stephen Turner, Jisco played a key role in developing the Buffelsfontein project. Jisco has agreed to purchase 50 percent of chrome output at a price proportional to that of the open market (the other 50 percent being sold on global markets). This gave IFM sufficient financial backing to secure full funding for the completion of the project. Jisco’s motivation for the investment was to ensure security of long-term supply.

The Buffelsfontein project makes IFM the fifth-largest producer of ferrochrome in South Africa, making up approximately 6 percent of the country’s production. Xstrata is the largest producer of ferrochrome in South Africa, accounting for 49 percent of the country’s output (followed by Kermas at 20 percent, Hernic Ferrochrome at 12 percent, and Ferroalloys at 8 percent). The Buffelsfontein mine has an estimated capacity of 32,9 million tonnes with the possibility of major expansion in future. Only five Chinese management-level staff, representing Jisco’s interests, are employed on the project. The mine is presently one of the cheapest producers in the world and is thus highly competitive in the Chinese market.

Jisco’s investment has been a major boost to production and long-term export prospects.  

Only a handful of Chinese managers are involved in the project, while a capital injection into the mine has opened possibilities for the expansion of activities and new employment opportunities. Jisco executive Yang has suggested that his company’s involvement in the mine has ensured jobs for South Africans and helped build capacity. Jisco’s agreement to purchase fifty percent of the mine’s production guarantees jobs and provides a long-term commercial base for the mine. In effect, Jisco is not merely exporting raw materials, but is providing capital, helping to build the mine, create new jobs, and add some value to chrome (turning it into ferrochrome) and then buying the output at a market-related price. The Jisco investment model is thus significantly different from Chinese corporate activity in other parts of Africa, where the criticism has focussed on China’s exploitation of local labour and a neo-colonial engagement.

Sinosteel owns 50 percent of the Tweefontein chrome mine and Tubatse ferrochrome smelter, based on an initial investment of US$230 million in the form of a joint venture with Samancor Chrome. With an estimated annual production of 300 000 tons, chrome is sold to China as well as on international markets. Samancor is a key player in South Africa’s ferrochrome industry and a major exporter. The company has a long history of activity in South Africa and has developed cutting edge technologies and advanced operational management strategies. Five business units are currently operating in South Africa: two mining operations and three smelters. The company produces chrome ore, intermediate-carbon ferrochrome, and low-carbon ferrochrome. Samancor’s business model includes building joint ventures with Chinese companies to ensure long-term access to the Chinese market.

The largest joint venture operation involving a Chinese company is ASA Metals in Polokwane. Sinosteel has partnered with the Limpopo Province Development Corporation in a project that is mining 400 000 tonnes of chrome ore per annum, and producing 120 000 tons per annum of ferrochrome from an on-site smelter. This operation is primarily a response to China’s growing demand for industrial inputs from the world’s extractive industries. East Asia Metals (EAM), a subsidiary of Sinosteel, owns 60 percent of ASA Metals, which is a joint venture with the Limpopo Economic Development Enterprise, for ownership of the Dilokong chrome mine. The mine has an estimated reserve of 50 million tons. EAM’s investment has facilitated the construction of two additional furnaces, which has boosted production and export capacity. Chrome from the mine is exported to China, Europe, Korea, Japan and Taiwan.

Before ASA purchased the Dilokong Mine, it had been supplying chromite to various local smelters to produce charge chrome. The ASA investment enabled the mine to establish its own smelter, through vertical integration of smelting and mining, creating an opportunity for Dilokong to compete more effectively in local and international markets. The mine produces approximately 420 000 tons of raw chromite annually which is transformed into 320 000 tons of chromite ore for export. The smelting process is a marginal beneficiation to raw chrome, but few new jobs have been created in the process and the real value-add remains in the Chinese market (where chrome is used in making stainless steel). ASA has plans to expand operations by sinking two new shafts and building a processing facility in South Africa. According to company MD Richard Zang, the company has mining rights to more than 47 million tons of unexploited chromite resources. Plans include a 1.2 million tons per year smelter, a 600 000 tons per year pelletising and sintering plant, two 66 MVA closed submerged arc furnaces, and a raw-material handling and batching facility.

About the author(s)

Claude Kabemba is the Director of the Southern Africa Resource Watch (SARW). In 2006, the Open Society Initiative for Southern Africa (OSISA) asked him to spearhead the formation of SARW. He holds a PhD in International Relations (Political economy) at the University of the Witwatersrand (Thesis: Democratisation and the Political Economy of a Dysfunctional State: The Case of the Democratic Republic of Congo). Before joining SARW, he worked at the Human Sciences Research Council and the Electoral institute of Southern Africa as a Chief Research Manager and Research Manager respectively. He has also worked at the Development Bank of Southern Africa and the Centre for Policy Studies as Policy Analyst. Dr. Kabemba’s main areas of research interest include: Political economy of Sub Saharan Africa with focus on Southern and Central Africa looking specifically on issues of democratization and governance, natural resources governance, election politics, citizen participation, conflicts, media, political parties, civil society and social policies. He has consulted for international organizations such Oxfam, UNHCR, The Norwegian People’s Aid, Electoral Commissions and the African Union. He has undertaken various evaluations related to the work of Electoral Commissions and civil society groups interventions in the electoral process in many African countries. He is regularly approached by both local and international media for comments on political and social issues on the continent. His publication record spans from books (as editor), book chapters, journal articles, monographs, research reports, and newspaper articles.

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