Dear Africa, It May be Time to Buy

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Michael Tekletsion Berhan

African Technology Forum

For a continent that rarely sees all the benefits of trade and commodity upswings but often suffers during downturns, Africa should also look to take advantage of what those in developed nations can even in hard times.

One opportunity that those who can find financing for it could take advantage of is the present global glut of commodities and related industrial machinery.  From the petroleum markets to metals, 2015 saw a strong fall in these global markets.  For example, lower demand due to the deceleration of China’s growth in particular has resulted in six-year lows in copper pricing.  And though present shipments have not totally collapsed, 2015 alone saw nearly a quarter fall in copper price.  Workers and businesspeople in Zambia, the Democratic Republic of Congo, Botswana, South Africa, and elsewhere are painfully aware of what that means locally.  Concurrently pushing prices down for metals is a glut of supply, partially driven by a new generation of large, operationally efficient mines.  As the Wall Street Journal noted on 4 January 2016,

“The big mines cost so much to build and extract minerals so efficiently that mothballing them is unthinkable—running them generates cash to pay down debts, and huge mines are expensive to simply maintain while idle. But as a result, their scale means they are helping miners dig themselves even deeper into the price trough by adding to a glut.

Back then, miners awash in cheap money set out to build the biggest mines in history, extracting iron ore in Australia, Brazil and West Africa, and copper from Chile, Peru, Indonesia, Arizona, Mongolia and the Democratic Republic of Congo. They also expanded production of minerals such as zinc, nickel and bauxite, which is mined to make aluminum.”

Machinery markets, for related reasons, have seen similar drops.  Even in the United States with one of the healthiest national economies, the market for machine tools (equipment for metal cutting and the like) has seen approximately a 17% drop in the total value of orders over the last year.

So, for African businesspeople, what to do?  Slowing demand for natural resource exports, weakening currencies, and the feedback loop that the two are chained in, present major challenges to the whole continent.  However, the same reasons why countries like, and businesses in, China need to acquire iron, copper, petroleum, and the machinery to process it all, are the same reasons Africa has.  Those nations, their markets, and their infrastructures are still developing, and their populations are still growing (albeit at varying rates).  In order to keep feeding that need, there are those who try to gather as many resources when prices are down as when prices are high, if not more.  Who are these people?

Business people who make purchases of, and investments in, assets – property, equipment, stocks, etc., – are often called “vulture investors”.  A pleasant visual?  No.  A fact of nature?  Most assuredly.  Decimation of the actual African vulture population notwithstanding, the African natural environment knows the phenomenon and biological benefit of such savaging and recycling.  Why not the African economic and industrial environment?  Let’s return to one good Chinese example.  During the massive economic and industrial contraction in the United States in 2007-2009, US machine tool demand shrunk by over 60% in one year alone.  A great deal of equipment from US firms that downsized or closed was either transferred to affiliated lower-cost sites overseas or sold off.  These sales were very often at auction to buyers from Asia as full assemblies or quite often even for scrap when Chinese demand for iron was still red hot.  Why would buyers purchase and ship anything from computer controlled lathes to base iron melted down from such machines?  Because that’s what they as individual purchasers needed, and what opportunities distressed market prices allowed them to take advantage of, be it for short term or long term benefit.

Now, where might such potential African customers who can find such opportunities themselves be found?  Along with South Africa, perhaps the Nigerian market for example might contain firms and institutions who could benefit from such investments.  As discussed in BBC’s Africa Today podcast from 31 December 2015, Nigeria is actually not as oil-sensitive as commonly thought.  Oil revenue in and of itself is a smaller percent of its overall economy than it otherwise might be.  Nigeria’s domestic markets are comparatively diversified, with a higher level of internal demand separate from external trading markets.  Therefore, although it may not have benefited as much as it could have under higher oil prices, Nigeria’s economy has conversely been more stable with the commodity pull-back than other exporters have been.

Admittedly, this discussion has been focused on what can be bought.  How to buy depends, again, on who can finance such investments.  Outside of direct cash payments, purchasing commodities such as oil and copper can be done using financial instruments like futures contracts and options.  Expertise in these items may not be high throughout Africa, and this author has no experience with them himself.  However, the same financial firms that deal in such instruments for investors and industrialists outside of Africa to deal with commodities from Africa can be contracted to do the same for buyers and investor groups within Africa.  Purchasing equipment on the open markets is the same if not simpler.  Purchases are generally in cash, as-financed, or via leasing.  For procurement, the same agents and industrial auctioneers who can serve Asian markets can be contracted to serve African markets.

There are few battles in African development that are not hard-won.  However, taking advantage of low prices for assets that Africa itself greatly needs may prove very beneficial.  Best to grab any chances possible.  It may be a brutal fact of nature, but one person’s vulture is another person’s smart investor.

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