Africa's fast growth transforming commodity flows
DAKAR/JOHANNESBURG (Reuters) - For centuries, colonial era merchants tussled for access to Africa's raw materials, and huge swathes of Africa's geography became synonymous with the main commodity they exported: Gold Coast, Ivory Coast, the Spice Island of Zanzibar.
But the continent's booming economic growth and swelling population give it an opportunity to shift away from the traditional raw material export model towards consuming and transforming its own commodities and selling them to its own expanding local markets.
Miners, bankers and trading houses are seeking to position themselves to take advantage of emerging trade routes within Africa at a time when demand growth from China, the world's biggest commodity consumer, begins to tail off.
Management consultancy McKinsey estimates that African consumer spending will be $1.4 trillion by 2020 and forecasts a more than doubling of the working age population to 1.1 billion people by 2040.
"Any statistics you take are uni-directional so I don't see why demand should look the other way," said Venkatramani Srivathsan, head of Africa and the Middle East for Singapore-listed commodities trader Olam (OLAM.SI).
"For businesses like ours looking into Africa as a market, as a destination, countries like Nigeria and Mozambique are very, very interesting," he said in a telephone interview during the Reuters summit on African business, held in several African cities.
For Srivathsan, whose employer sources a quarter of its sales revenues from Africa and has invested 1.66 billion Singapore dollars ($1.33 billion) on the continent, the secret is knowing how to adapt to the tastes and changing consumption patterns of each individual market in Africa.
Olam, which invests in plantations, food processing and the packaged food business, has introduced subtle differences in its West African tomato paste to suit different palates and is adapting to Nigerian demand for more sophisticated biscuits.
"You have to keep innovating. Even if you acquire brands you need to keep adapting to changing tastes and changing levels of income," he said.
WEALTHIER CONSUMER MARKET
Top oil trader Vitol VITOLV.UL has also targeted investments in Africa's downstream sector, and is bidding for a new refinery in Uganda, to help it meet demand for the $440 million-a-day fuels market.
Oil traders still export Africa's crude oil to sell as refined products in the West, but Vitol now sees robust growth in fuel demand on the continent of around 3 percent a year, driven partly by growing power markets.
It is targeting supplies of niche fuels like liquefied petroleum gas - which can be easily distributed in portable canisters - into large cities of North Africa and Nigeria, a country of 170 million people which recently overtook South Africa as the continent's largest economy.
"LPG will be a growing requirement because it fills the wealthier consumer market that needs alternative fuel as biomass becomes unsustainable in most urban settings," said Chris Bake, director of origination and investments at Vitol.
One way that Africa could seek to supply local markets with commodities is by using mineral resources as bargaining chips to persuade investors to set up processing and manufacturing plants, according to Carlos Lopes, executive secretary of the U.N. Economic Commission for Africa.
He cited data showing the continent had 12 percent of the world's oil reserves, 40 percent of its gold, 80 to 90 percent of its chromium and platinum, 70 percent of coltan, 60 percent of its unused arable land, 17 percent of the world's forests, and 53 percent of the world's cocoa.
"Resources such as these should be leveraged," Lopes told African finance ministers in Abuja on March 29. "We have to find our own recipe, our miracle recipe, if we want to become one of the factory floors of the world."
Hasnen Varawalla, managing director of Investment Banking at Barclays Capital, said that he has an Indian client interested in shipping coal to a new power plant in West Africa from South Africa.
"This is not about taking resources out of Africa to the rest of the world, they are seeing the opportunities within the continent and developing them," he said.
But while such trade is feasible between two African ports - and could partially redraw export routes now dominated by flows to Asia and Europe - poor land infrastructure is a factor limiting the internal trade in commodities across the continent.
A U.N. study last year found that intra-Africa trade represents just 11 percent of the total, compared with around 70 percent within Europe, partly due to insufficient infrastructure.
Investors also say that an important factor limiting their ability to process locally is power supply, as many African countries struggle to increase generation capacity in pace with demand.
South Africa-based miner Exxaro (EXXJ.J) said that Africa should consider trying to sell more commodities within the continent and process them there, as Chinese demand begins to slow.
"What would be fascinating for Exxaro would be if we supplied the iron ore from the Republic of Congo to steel mills within the Republic of Congo or in that region," said Mzilane Mthenjane, executive head of strategy and corporate affairs, referring to its new 10 million metric ton-a-year (11.023 million ton-a-year) iron ore project.
But he said that currently power prices meant production costs were more expensive than China and that this would limit Africa's potential to process raw materials locally.
"For the continent to really make that huge step forward and step up in terms of development, electricity supply is one or two of the basic infrastructure that needs to be in place."
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