Commodity exporting countries in Asia and Africa are facing potentially serious economic consequences due to the sharp drop in Chinese industrial production and the subsequent reduction in commodity purchases, warned Moody’s Investors Services.
While most African countries rely heavily on selling oil, mineral, and timber to Chinese buyers, Moody’s noted that countries with already weak credit profiles, including Zambia and the Republic of Congo, are especially vulnerable if the slump in commodity prices foes on for much longer.
“These exporters will suffer from both slower demand from China and lower prices globally,” Moody’s said in a report.
This trend is most evident today in the oil and gas sector due to plunging demand for aviation fuel, a dramatic fall in manufacturing output and an across-the-board dip in Chinese industrial production. Analysts surveyed by Reuters said they have cut their 2020 growth forecasts for Chinese LNG demand from 13% down to just 4%.
What the Chinese Industrial Slowdown Means For Africa
- FIRST OIL THEN EVERYTHING ELSE: Oil and gas demand is a leading indicator of overall economic activity and when there is a sharp drop in buying, as has happened over the past several weeks in China, then prices of most other raw materials used in industrial production will similarly fall. African countries are major suppliers of Chinese factories of copper, tantalum, bauxite, and nickel among other minerals.
- DEBT: The Resource-for-Infrastructure deals that China used so prolifically in Africa over the past decade may come under renewed pressure now that the oil, bauxite and other commodities that were used to pay for billions of dollars of infrastructure are now not worth as much. Obviously, if COVID-19 crisis ends soon and prices rebound, then those deals will likely remain intact. The more worrisome concern, though, is if this downturn pushes the Chinese economy into a prolonged period of slow, or even negative growth and those raw material prices don’t quickly bounce back. Then what happens? Angola is by far the most exposed with $20+ billion dollars of oil-backed Chinese debt but so is Ghana that recently signed a $2 billion bauxite-for-infrastructure deal with China.
With Chinese Supply Chains Disrupted, African Businesses Scramble to Find Alternatives
In the weeks and months ahead we’re going to see the adverse consequences of China’s integration into African economies now that supply chains and transportation links have been interrupted due to the COVID-19 outbreak, impacting a wide range of sectors from construction to tech to agriculture.
- SOUTH AFRICA: Delayed or canceled shipments of Chinese construction materials like cement is threatening construction deadlines of a number of projects and prompting some contractors to look elsewhere for suppliers. (FIN24)
- NIGERIA: Chinese-made phones now dominate the African market, especially in Nigeria where Transsion’s brands are especially strong, but phone inventories will soon start to run low until manufacturing operations in China resume. Electronics are also often transported by air and now that most China-Africa aviation links have been halted, that too could put pressure on the supply of phones, PCs and other devices across the continent. (THE GUARDIAN)
- KENYA: The near-total shut-down of China-Africa aviation links is hitting Kenyan farmers who sell perishable products like coffee, specialty teas, and avocados and relied on Kenya Airways’ direct flights to transport their goods to China. “We have had to cut exports on our end and this will definitely affect the country’s foreign inflows,” said Nairobi Importers and Small Traders Association chairman Samuel Karanja. (THE STAR)
