The strategic acquisition of control over natural resources does not really compete with national security, appeals to religion and caste, or even the economic downturn as an issue that raises the electoral pulse. It would be at the fringe of the public debate. Such a situation is at variance with our neighbour, China, where control over resources is in the forefront of public policy. Since 2000, the Chinese government has had a stated policy of obtaining access to large swathes of natural resources and it has walked the talk. In India, the government that comes to power next month may want to address, among its various challenges, the need for a strategy on resource independence.
To understand why resource gathering occupies such a great share of the Chinese establishment’s mind, one only needs to note that China needs to import at least 25% of all base metals to buttress its status of the global factory for the 21st century. This strategic manufacturing monopolistic space was occupied historically by the colonial powers, many of which now view with suspicion any organized resource-hunting as mercantilism in another form. This distrust boiled over in 2005, when political pressure forced China National Offshore Oil Corp. to abandon its bid for US oil firm Unocal Corp. even though it made the highest offer. Chinese plans again came under the scanner when state-owned Aluminum Corp. of China successfully bid for 18% of Australian mining company Rio Tinto Plc. earlier this year. These questions have not doused Chinese fire, though. The Middle Kingdom has poured $39 billion (Rs1.96 trillion today) into Russia, Brazil and Venezuela to secure oil supplies, which could run to several million barrels per month. Indeed China is willing to take on the risk of making investments in countries such as Sudan, Kazakhstan and Angola, where others have feared to tread. Author Fareed Zakaria notes how in late 2006 President Hu Jintao hosted a summit on Sino-African relations promising aid to several African countries with no threat of interference in their domestic affairs (rather unlike the complex and frequently less successful prescriptions of the International Monetary Fund). China has not been squeamish in its dealings with a range of countries that have been the subject of sanctions.
Until recently, various economic interest groups were quick to link these investment decisions with other elements of the Chinese polity, notably its record in human rights. In the cash-strapped environment of 2009, there are fewer loud noises being made. Indeed, some erstwhile naysayers are beginning to recognize the attractiveness of Chinese companies with fat pocketbooks. From an economic standpoint, China’s willingness to invest, when others are unable to do so, is actually desirable, to bring some life to the market for deals and to generate some inflows into economies ravaged by the financial downturn. The loans given by China to Russia, Venezuela and Brazil will indirectly boost demand from the countries. Similarly, some part of the citizenry of Jamaica, Pakistan and some African nations must surely have benefited from China’s soft loans there. Despite the occasional moral outcry, few can deny that providing generous loans from rich to poor countries is helpful, at a time when world gross domestic product is likely to drop.
The financial crisis has added a further reason for the Chinese to renew their hunt for resources. China has to find alternative sources for its trade surpluses, but is caught in a bind today. In better times, it might bank on good returns via the continued investment of its giant surpluses in US treasurys. If China does not continue to invest in the US treasurys, the likely fall in value of treasurys may cause their existing holdings to lose value. At the same time, they must surely recognize that continued exposure to the dollar could run significant risks if the value of the reserve currency falls. Using one’s dollars to buy up natural resources seems a safe hedge. China can use its vast currency pile, some of which may anyway end up in the US treasurys, restoring their value, but China gets another asset in return, at the same time diversifying its risk through overexposure to the US market. Some of China’s other investments have lost money, most notably in Blackstone Group Lp. and Morgan Stanley. Natural resources-based financing seems so much more stable in today’s environment.
China stands particularly well-placed to effect this strategy in two ways. First, its banking system appears to have been unscathed by the current crisis. Furthermore, despite the steep downturn, it retains a healthy trade surplus that would make acquisitions easy to finance. And in an economic downturn, many countries and companies can do with financial support; in China, they seem to have found a willing partner.
The situation in the case of India could not be more different. In contrast to the billions of dollars in investments made by China, a report by Thomson Reuters says that India invested only $170 million in the first quarter of this year towards expanding its resource base. Oil and Natural Gas Corp. Ltd has attempted to obtain stakes overseas, notably through its acquisition of Imperial Energy Corp. Plc. and the Sakhalin field, but such acquisitions seemed to have dried up just when prices are ripe for such deals. Ironically, recently, Indian oil companies were asked to spend 2% of their profits on certain corporate social responsibility projects, a somewhat debatable choice of priorities. Spending on acquiring a cheaper source of scarce resources is perhaps a social responsibility and one they are better equipped to undertake. State-run Steel Authority of India Ltd, Rashtriya Ispat Nigam Ltd, National Mineral Development Corp. Ltd and NTPC Ltd had formed a joint venture to acquire overseas coal mines, but there has been no evidence that this venture has been active. India’s absence in the bidding, earlier this year, for OZ Minerals Ltd of Australia and Rio Tinto was as conspicuous as the active Chinese presence.
China’s holistic approach to accessing key resources is seen most clearly in Burma, a country that was historically aligned with India, but which has now awarded China various oil production contracts and also has a new six-lane highway into Kunming in China. Indeed, after the US strengthened sanctions on Burma in 2000, China has raised its economic interests there, more than offsetting any losses that might accrue on account of the sanctions. Even in parts of Africa, which only a few years ago shared a much higher level of cultural and economic engagement with India, the Chinese government now appears to be far more firmly entrenched. While a few private groups, notably the Tatas, have established a presence in South Africa, Malawi, Zambia and other countries, individual initiative cannot substitute government policy. The chasm between China and India in this regard has not gone unnoticed. Harvard professor Tarun Khanna indicates that even in issues where national interest ought to rule supreme, the practice of post-mortem audits of large financial transactions, sometimes just to score political points, makes India a slow and ultra-cautious bidder in such international transactions.
That India has a requirement for similar resources is beyond doubt. If we do not move now we run the risk of being priced out of the market for these resources, potentially at a great cost to the country’s economic future. In particular, given the attractive valuations that exist today, there is a window of opportunity for potential acquirers. There needs to be a bipartisan view at a senior level in the government that can cut through the chaff of Indian bureaucracy and financial institutions and make the bold acquisitions required. One hopes that the new government will adopt as proactive an approach as China has, to securing our natural resource future, through the acquisition of overseas assets at the valuations prevailing today.
Govind Sankaranarayanan is CFO, Tata Capital Ltd. He writes on issues related to governance. The views expressed in this column are personal. Write to him at email@example.com