who benefits from belinga?

in early february, rumors were circling that gabon was thinking about handing over the belinga iron ore project to bhp billiton after mines and oil minister alexandre barro chambrier met with bhp’s senior management in south africa. now it seems like this transfer may come to fruition, with a number of winners and losers.

in 2007, gabon gave the belinga project to the china national machinery & equipment import and export corporation (cmec) to develop it over a 25 years. cmec promised the government that it would begin mining belinga’s high grade iron ore reserves (64%) by 2011, at a rate of 30 million tons per year under a $3.5 billion investment program. the infrastructure plan included constructing a 500km railway, a hydropower dam and port. ever since china began to drag its feet on the 1 billion ton project, the gabonese government has become increasingly impatient with its suitors from the far east. bhp, who had long been waiting in the wing, had been courting the government in the event that china could not fulfill its obligations.

i am confident that the government will formally approve bhp’s acquisition of belinga, and that a number of winners and losers will emerge. bhp will have to manage expectations with the gabonese government on their ability to quickly build out enabling infrastructure. lower commodities prices have accelerated bhp’s slowdown in earnings growth so far this year, even though the company’s most recent interim earnings before interest and tax are expected to rise to $15.7 billion from $14.8 billion in 2011. the company’s full year earnings are forecast to drop by approximately 10%, but if one were to use spot commodity prices in calculating the company’s profitability, earnings would slump even further. given the company’s challenging financial situation, the question remains whether or not bhp will cut capital expenditure spending, and/or how it will prioritize investing in these new projects. in brief, bhp has to recover from its disastrous $20 billion shale gas plays, and belinga is one important piece of the puzzle.

although belinga is positive for gabon’s macroeconomic outlook, the country’s microeconomic outlook—employment and income distribution—will not improve because the quality of iron ore mined from belinga does not need to be beneficiated. in the absence of targeted social spending programs, gabon—which has a relatively low yielding, $1 billion eurobond—like nigeria, will continue to see growth without development. nevertheless, another indication as to why there is likely to be minimal governmental interference in bhp’s acquisition of belinga is that the australian giant’s investments squares nicely with president ali bongo’s desire to break the commercial ties of françafrique that marked his father’s administration. ali’s grip on the country is stronger than that of his father, as he has further personalized his family rule, divided the political opposition, and has skilfully walked the country’s ethnic tightrope by appointing a diverse group of individuals in his government. the centralization of political power in gabon allows for bongo to fast-track many of his preferred investor’s projects through the corresponding ministries.

belinga is one such project that bongo prioritizes given the profile of investors. bhp is partnering with indian abhijeet infrastructure ltd., who will link the project to the trans-gabon railway at booué. if the railway is quickly constructed, sundance resources, which is waiting for the cameroonian government to approve the terms of sale of its mbalam iron ore project to china’s hanlong mining investment, could choose to connect with the trans-gabon railway. although the cameroonian government recently declared the proposed land in rail corridor from mbalam to lolabé port for public utility, it is possible that hanlong (or sundance) could change its mind and decide that exporting iron ore through gabon. after all, the distance from mbalam to booué is about the same from mbalam to lolabé. in this scenario, whose likelihood increases in the event china abandons or brings in an outside partner to develop mbalam, gabon and cameroon would likely run in to the same squabbles as liberia and guinea are having over exporting iron ore from simandou. similarly, bhp could choose to connect export its iron ore through cameroon, especially given that sundance has recently signed a memorandum of understanding with equatorial resources to share iron ore infrastructure resources.

while bhp, gabon, and possibly cameroon could benefit from belinga, china certainly does not emerge a winner, as losing the mine is a further blow to its plan of diversifying its sources of iron ore. about 85% of china’s iron ore comes from australia, brazil, india, and south africa, and the government does not want to be too dependent on a handful of countries. the chinese government has embarked on a flurry of joint ventures and partnerships across west africa—in guinea (chinalco’s simandou), in sierra leone (shandong iron and steel group’s tonkolili), and in liberia (wisco’s bong mines)—with the intention of providing its own domestic steel producers with a stable and diverse supply of iron ore that would ultimately allow them to be self-sufficient. along with mbalam, belinga was to be completed owned by chinese interests (a first in its african iron ore expansion), giving it license to some of the world’s largest iron ore projects. ownership of projects with high-grade iron ore would permit it to skip the expensive process of beneficiation, which would allow it to bypass much of the local content pressures that would ultimately be demanded by host governments. further, direct access and control to some of the world’s best quality iron ore would allow china to challenge the oligopolistic pricing of iron ore by rio tinto, vale, and bhp. despite the shift from an annual to quarterly system that more accurately reflects global trends, china remains uncomfortable being at the whim of the big three. although west and central african iron ore projects will not be the catalyst for china to lead the change in the structure of global iron ore markets, the setback in gabon will certainly prompt it to look more aggressively for new sources of the strategically important resource.


wading in: presidential elections in senegal

if the number of youtube views from senegalese musicians could predict the outcome of the senegalese presidential elections, the 26 february contest would be a foregone conclusion. youssou n’dour—whose biggest hit “7 seconds” has 2 million + views (more than the number of senegalese who voted for wade in the 2007 campagin)—would easily beat abdoulaye wade, who has enlisted senegalese pop star demba dia to campaign on his behalf.

unfortunately, the surprise decision by the senegalese constitutional court on 27 january banning n’dour’s candidacy has, for many analysts, confirmed a wade victory. nevertheless, many have failed to explain the importance of the interim period between the constitutional court’s ruling and the actual presidential election, especially for holders of the ’21 eurbond. yields for the ’21 have been as high as 9.162%, and social unrest in the interim could send them quickly creeping up again, as investors sell off their holdings as they react to headline risk that is certain to emerge from the country over the next few weeks. markets seem to think that senegal’s eurobond “overstates” senegal’s credit risk, short-term electioneering weigh heavily on the country, which could ultimately affect the country’s ability to repay its debts in the medium-term. i think investors are slowly realizing the risk in senegal, as demand for the bond (see below yield history) has slowly declined since mid-january.

although it is common for spending to increase during election season across sub-saharan africa, as incumbent governments draw from government funds to finance their elections, senegal will face the dual pressure of keeping the lights on in the run-up to voting and after to maintain political stability. chronic power cuts across dakar and other urban areas framed the june 2011 riots, and wade is keen not to repeat that scenario. karim wade, who serves as energy minister, introduced the billion dollar plus plan takkal, or “let there be light” in wolof, scheme to create more power. this plan—whose namesake eponymously mirrors the wildly inflated ego of the wade administration—is an emergency attempt to correct the projected 256mw production deficit the country will face in 2013 and senelec’s mounting debt. in the past days, karim has desperately looked for more sources of finance to ensure 35 days worth of supply and an 80mw power surplus, instead of working with a 64mw deficit it is currently running, during this month’s voting. the cost for wade to remain in power is much higher than that of his peers in côte d’ivoire, as buying off senegalese urban voters with promises of infrastructure investment (power, roads, highways, etc.) is much more expensive than buying seeds, trees, fertilizers, and bags for cocoa and coffee farmers.

if the lights stay on for voting and the politically-important marabouts do not come out stronger against the president, wade will win ugly in late february. he remains strong in the face of a divided opposition because of many challengers’ big egos and historical baggage of serving in wade’s administration. on 1 december, benno siggil senegaal or “united to boost senegal” formed an electoral alliance to fight wade’s parti démocratique sénégalais. they nominated moustapha niasse to the anger of ousmane dieng, the leader of the parti socialiste which ruled senegal between 1960 and 2000. further, younger opposition figures, such as idrissa seck and macky sall were former prime ministers and close to wade. yet both sall and seck both fell out of favor with wade. sall confronted his karim wade over shading accounting for the organization of the islamic conference in 2008, while seck has been accused of embezzling $34 million dollars from the thiès road project.

wade has been extremely shrewd in projecting divisions among the opposition to the wider senegalese populace, particularly among the y’en a marre opposition movement that is made up of local rappers that broadly appeal to the youth population. much has been made of an n’dour victory because of his broad appeal, but this argument ignores the fact that many senegalese youth find the style of n’dour’s music—mbalax—as antiquated and are more connected to hip-hop. recognizing this social trend, the state security services (divisions des investigations criminelles) will probably move forward in arresting one of the leading rappers (fou malade) of y’en a marre for attacking another rapper (gaston), an action that will surely expose weaknesses among the group that many think could significantly affect political change. these high-profile, politically-charged arrests will likely continue, as wade strategically sees the benefit in muzzling opposition figures that have the possibility of uniting the dissonant opposition voices.

bittersweet: ivorian cocoa reform

reform of the cocoa sector is one of the major hurdles for côte d’ivoire to achieve debt relief, an important step that will let the ivorian government begin crafting a plan to pay the three missed coupon payments (~$89 million dollars) on its $2.3 billion dollar eurobond. well-managed reform could see new forms of commodity financing emerge in côte d’ivoire, similar to what was seen in ghana this season after its state-run marketing board, cocobod, issued a $2 billion dollar bond.

the most difficult aspect of reform has been securing farmgate prices (prix bord champ in french) for farmers. those involved in the reform process have touted that farmgate prices—the amount the government pays to farmers—will be set at 60% of the export price, which is largely based on the international cocoa price. this proposed farmgate price is in contrast to the 40% guaranteed under the gbagbo regime, and is more in line with the 60-70% received by ghanaian farmers. although côte d’ivoire has said it would purchase one kilogram of cocoa from farmers at 1,000 CFA ($2.08), the government has been unable to guarantee this payment to farmers, and has purchased beans for as low as 500 CFA. ivorian farmers often smuggle their beans in to neighboring ghana, where they fetch higher for their crop, and occasionally hoard beans if they think they can manipulate global prices by decreasing global supply.

collateralization, which would be done through pre-export financing, makes it easier for governments to create a stable pool of revenue, which facilitates the establishment of a farmgate price that can be maintained throughout the season. it would also lay the groundwork for a more stable fiscal management. before the current round of cocoa reforms, ivory coast had been unable to collateralize—or guaranteeing the worth of the season’s harvest by estimating the quality of the cocoa bean—its crop because the country has based the price of beans on the global spot market instead of purchasing them forward. when the ivorian government guaranteed the price of beans as a percentage of international spot prices (as it was in the past), farmers were subject to extreme global price swings, as the cfa franc wildly fluctuates against western currencies. currency yo-yoing increases the incentive to smuggle cocoa beans in to neighboring ghana, which makes it harder for the government to confidently say that there are ‘x’ metric tons of beans available this season at ‘y’ quality. this is probably why participation was weak in ivory coast’s first forward cocoa sale.

for example, if the spot price of cocoa were to be at $2800 one day, $3400 five months later, and falls back down to $3100 three months after—like it was in the 2010/2011 season—it would be difficult for the government to promise farmers a set price for their beans. an ivorian farmer on a 4 hectare plot producing 2000 kg a season could make as low as $832 (if the global price were $2800) and as high as $1,664 (if the price were $3400), depending on when they sold their crop. subtract from this number the cost of seeds and bags the ivorian government sells to farmers to certify that cocoa beans came from ivory coast, and profits are even less. of course, prices were this high for the first time in 33 years, and is unlikely to reach this level again for a long time. getting the farmgate pricing mechanism right is key to the country reducing poverty, an important step in reaching HIPC completion status—a program set by the IMF for debt relief.

the government may continue to trip up working toward cocoa reform and poverty reduction. aging ivorian trees produce half of the cocoa as ghana, and to compete with increasing output from ghana, indonesia, and caribbean/latin american producers, farmers will need to buy more fertilizer to increase their output (the average yield in côte d’ivoire is 500 kg/hectare), or the government will need to buy fast growing, high yielding trees. fertilizer is expensive—which costs on average the equivalent of 50kg of cocoa —and many farmers find themselves indebted to those who own the land. without new trees, farmers will sink further in to debt.

how closely the body in charge of managing the cocoa (and also coffee) sector, the ARCC resembles the now defunct state marketing board (caistab), established by houphouët-boigny and used as his personal bank account, remains in doubt. the ARCC has the overarching mandate to keep statistics on cocoa production and sales, grant export licenses, prevent monopolies from forming, and arbitrating disputes. ivorian politicians have used the cocoa sector to form strong patronage networks with farmers, distributing bags, seeds, and fertilizer at a discount to those that supported their campaigns. in the long-run, it remains yet to be seen whether the centralized coffee and cocoa regulator authorty (ARCC), will become a slushfund for ouattara to distribute political patronage.

it’s not surprising that the violence of the 2010/11 electoral crisis was so relatively low-intensity (in relation to violence seen in liberia, sierra leone, etc.), yet so prolonged. farmers, who had established deep networks with politicians with links to gbagbo and bedie, enjoyed the freebies (agricultural inputs) often distributed in exchange for political support. the possibility of a ouattara presidency was an uncertain prospect for them, an economic gamble many did not want to take because it was unsure that a muslim northerner (“foreigner” in some circles) could guarantee the same access to subsidized inputs like gbagbo or bedie had over the past decade.

although there is certainly no threat to stability like that seen in 2011 or 2002/4, it is when it’s time for côte d’ivoire to choose its next president, the same structures that produced violence, will create a situation we see each decade when ivorian presidents are elected. ouattara has replaced key officials in charge of managing the cocoa sector with some of his closest supporters, like massandjé touré-listé. more interestingly, he has drummed up support among the grand barons, or the traditionally baulé, wealthy PDCI supporters (the party of henri konan bedie), to his camp. absent any fallout in the near term over ouattara’s inability to find a compromise between current prime minister guillaume soro (gbagbo’s #2) and the pdci’s bedie, it is likely that the coalition between the two men could isolate the former supporters of gbagbo. it is possible that disgruntled supporters of gbagbo—if and when they are able to regroup—could express their frustration at the ballot box, just like the supporters of bedie and ouattara have done in the past.

things aren’t falling apart yet: jonathan & boko haram

boko haram—nigeria’s homegrown terrorist group—launched its deadliest attack last friday in kano, the country’s second largest city after lagos. they certainly hit the government  at a point of extreme weakness, as president goodluck jonathan and his economic team are rebuilding their credibility after scaling back ambitions plans on repealing costly fuel subsidies (which cost the government $7.5 billion/year).

the jonathan administration has and will continue struggling to come up with strategies to curb the boko haram threat. although it is clear that boko haram gets training from AQIM (it has been rumored that algerian AQIM members have trained nigerians in bomb making), the group’s small numbers (greater than 200 but less than 1,000) and the growing sophistication of its attacks make it hard for security forces to pursue effective counterterrorism. better cooperation with its neighbors–niger and chad specifically–would be a positive step in sharing intelligence (many rank and file members aren’t actually nigerian), as policy responses such as closing borders of nigerian states under states of emergency have privately incensed nigeria’s neighbors who are generally poorer and rely on cross-border migration to find jobs.

further, despite boko haram’s ties with foreign jihadis, it is important to remember that the group’s grievances are aimed at the nigerian government. although boko haram draws from contemporary salafist ideology, the group’s concerns are protests against legacies of colonial rule. historically, when britain colonized nigeria, they used muslim elites from the north to act as political and economic middlemen, as they sought to legitimize and consolidate their rule across what would become modern-day nigeria. the gradual loss of power in the post-colonial era—seen in the decline of military rule—and the advent of democracy, gave rise to the ruling people’s democratic party (pdp)’s idea of  “zoning,” or the idea that the party’s presidential nominee would rotate between a christian southerner and a muslim northerner. many northerners saw jonathan’s candidacy in 2011 as violating this unwritten rule.

amidst this backdrop, a number of intelligence officials—most of whom are northerners (aliyu gusau for example) and who unsuccessfully sought the pdp nomination in january 2011—see the escalating boko haram crisis as a strategy of weakening the president jonathan and his administration. although jonathan has accused some in his government of collaborating with boko haram (mostly true), the collusion among some in the pdp and boko haram is a political strategy. with each boko haram attack, these pdp officials look to de-legitimize jonathan as much as possible without tarnishing the reputation of the pdp, or leading the nation in to civil war. there has been much debate over the “internationalization of boko haram,” but given collective historical grievances and how the group operates today, it seems as if boko haram will limit its attacks to nigeria. reaching outside of its borders would discredit the party, and ultimately threaten the small cabal of pdp northerners working in security jockeying for key leadership positions in the party’s 2015 presidential bid.

as they have previously done following previous attacks, many in the security establishment will in the short-term argue that nigeria should devote more resources to fighting boko haram. given the partial repeal of fuel subsidies, which represented approximately 25% of nigeria’s budget, raiding the security sector instead of the downstream energy sector is a new, sure-fire way to raid the state’s resources. much has been said about how fuel subsidies are the main point of fiscal slippage in nigeria, but defense and intelligence spending, which also account for a quarter of state spending, is an area where nigeria could slip as much—or even more—than previously seen with fuel subsidies.

in the medium- and long-run, i still remain excited about the potential of nigeria for investors. the country debuted a $500 million dollar eurobond that was heavily oversubscribed in 2011, pointing to investor appetite in the country. nigeria’s strong growth prospects are due to trends in its expanding middle class. despite the growing reach of boko haram, their threats have yet to alter the patterns of demographic and social change, a story which is currently playing out in the south and middle-belts. until boko haram launches a series of high-profile, well-coordinated attacks like the one seen on sunday, i remain a nigeria bull.