Over the past 30 years China has embraced international trade and encouraged investments, allowing foreign companies to capitalise on its low-cost advantage by setting up production facilities and factories. These investments fuelled an export-led growth.
However, things are changing. China’s economy has slowed considerably, with growth last year (6.9%) being the lowest in 25 years. And according to Dr Anil Gupta – the Michael Dingman Chair in global strategy and entrepreneurship at the University of Maryland – it is likely growth rates will decline further as China shifts from an investment to a consumption-driven economy, led by domestic demand for goods and services.
The result is a slowing appetite for hard commodities, such as iron ore, aluminium and coal, which China has been a major consumer of globally. This holds particular relevance for resource-rich Africa since the Asian powerhouse is its largest trading partner. Recent data shows the continent’s exports to China in 2015 are down 38% from the previous year, while Chinese direct investment into Africa fell 40% in the first half of 2015.
On the other hand, India’s economic growth outpaced China’s last year, averaging 7.5% – with growth for the year ending March 2016 forecast to accelerate to 7.6%. And the World Bank predicts that India will be the world’s fastest growing large economy for the foreseeable future.
Speaking at the Investing in African Mining Indaba in Cape Town yesterday, Gupta said it will take India about 15 years to reach the economic size of China today, with its economy in 2016 being compared to China’s in 2001.
But will its demand for commodities from 2016 to 2030 be like China’s between 2001 and 2015? Probably not, according to Gupta. While the country has opened itself up for foreign investment and is positioning itself as a manufacturing hub for exports such as smartphones and vehicles, its economy is “likely to be driven simultaneously by growth in investments and consumption”. This is fundamentally different to China’s previous fast-paced growth that was almost entirely driven by investments, and Gupta believes the difference is in part due to India’s democratic governance.
“Also the growth of India over the next 15 years will take place in a different context… to China’s growth over the last 15 years.”
Climate change concerns – which China was less sympathetic towards – has shaped today’s global agenda, and Gupta argues India will be more focused on clean growth. The result will be a stronger push towards renewable energy sources and a slower growth in demand for fossil fuels. India is also a leading iron-ore exporter with large reserves of thermal coal, making it less reliant on these imports.
So while there may be a demand for specialty materials such as lithium, titanium, cobalt and graphite, Gupta believes India’s demand for major commodities will not pick up to the extent of China’s over the last 15 years, even if its economy accelerates to 8-10%.
“Therefore, over the next decade, India will compensate only marginally for the loss of growth in commodity demand from China. I think we can bet our money on that.”
However, the solution to waning demand for African commodities could come from Africa itself. Gupta noted there is a huge opportunity to tap into the continent’s manufacturing potential, which is considerably underdeveloped. Value addition in its largest economy Nigeria, for example, is just a small percentage of GDP.
“India’s manufacturing value-added to GDP is about 17-18%, and that of course is very weak because China’s is about 30%… But in Nigeria, what is the contribution of manufacturing value-added? About 4-5%,” he highlighted.
“If [Africa’s manufacturing] story plays out… there should be a significantly greater demand for commodities from Africa itself, and therefore put Africa on the demand side, not just the supply side, so it can begin to shoulder a greater chunk of the world economy.”