It's a steel

By YY

AFRICA'S second-largest iron-ore mine, in Tonkolili, Sierra Leone, lies silent and still. The slump in the price of iron ore and the Ebola epidemic killed off profits, and it was closed by African Minerals, which owned it, last December. China’s state-owned Shandong Iron and Steel Group saw the closure as an opportunity and snapped up the mine in April. Chinese firms, it seems, are buying into the market while stocks are cheap. Hebei Iron and Steel Group is building a massive steelworks in South Africa; last month it received approval to takeover the Swiss firm Duferco’s African steel processing and sales network.

There may be reason to be suspicious of Chinese steelmakers's motives. To some, it looks as if China simply wants to export its domestic pollution abroad. Officials are desperately trying to close dirty domestic steel plants. Persuading China’s Iron and Steel Association to do their business in Africa neatly blends environmental concerns with the government’s geopolitical motives to push investment into the continent.

But many question the economic rationale behind the move. The problem is that China already produces too much steel. The country already makes almost as much crude steel a year as the rest of the world combined—822m tonnes in 2014—adding to the current global glut. Chinese steel is at its lowest price in over a decade and most firms producing the commodity in the country are loss-making. Rather than displacing the sector abroad, China needs to shrink it.

There is a more favourable interpretation, however: that Chinese firms are taking a longer view of Africa’s potential. African steel demand is expected to hit 300m tonnes per year by 2050, according to Mysteel.net, a Shanghai-based trade publication. And an African source of iron ore and basic steel could also give China a more stable supply to feed its industry, which is increasingly specialising in turning these inputs into higher-quality metal. Chinese consumers used over half of the world’s iron ore in 2013. Over-dependence on Australia for iron ore led to a nasty sting in 2010 when the country's mining duopoly, Rio Tinto and BHP Billiton, raised prices.

There is a further reason why China has to play the long game in African minerals. According to Henry Tugendhat from the Institute of Development Studies, a think-tank, Chinese firms use a stick-at-it-strategy because of their newcomer status. Whereas firms from Britain and France have roots going back to African countries’ colonial days, Chinese firms have had to prove their reliability. They hope that good behaviour during a crisis—even if it loses them money in the short run—will secure them better contracts in the future. The better the mine, the fewer impurities in the ore, and the cheaper it is to turn it into high-grade metal. Chinese copper mines in Zambia were the only ones to keep their workers when the price of the metal slumped in 2009. They saw the slump as a temporary set-back in the grand scheme of African and Chinese growth. China's iron and steel giants in Africa must have the same hope.

Correction: An earlier version of this article said that Mysteel.net forecast African steel demand to reach 3m tonnes per year by 2050. This has now been corrected to 300m tonnes a year.