AFRICA INVESTMENT-Trading houses lured by African growth despite hazards
GENEVA, March 28
GENEVA, March 28 (Reuters) - Commodity trading houses are expanding aggressively in Africa as they look to add volume and take on assets that promise to benefit from a continent achieving some of the highest economic growth in the world.
Merchant traders have historically been mostly concerned with shipping Africa's oil onto global markets but are now viewing Africa as a destination market for fuels and are investing in the storage and retail networks the continent needs to develop.
But their growing involvement in a region where several top firms have faced legal problems or payment delays may worry would-be investors at a time when the firms, typically privately owned, are scouting for new forms of capital.
While several firms have ruled out following commodity trading house Glencore in a public listing of shares, some are issuing bonds or partial sales to fund their quest for assets.
Some of the most alluring assets are in Africa's fuel market, which is set to grow by 40 percent by 2020 to 4.3 million barrels per day, according to Ecobank Research.
"If you want to be in Africa, you have to be prepared to invest. Sub-Saharan Africa is growing at a very decent rate and the highest regional area in the world today," said Graham Sharp, co-founder of oil trader Trafigura and a senior adviser to consultants Oliver Wyman.
"There are some great opportunities there, but it's not in the traditional trading business."
Trafigura and commodity firm Vitol have both bought huge networks of oil service stations from oil majors BP and Royal Dutch Shell over the past few years.
Trafigura is now considering floating its subsidiary Puma Energy, an energy distribution company that has invested over $800 million in Africa over the past 10 years.
One reason the fuel business is so attractive is that African countries have made slow progress in building their own refineries, leaving them increasingly dependent on imported fuels and the traders that can source and deliver them.
Trading houses have spotted this deficiency and, using their newly acquired service stations and storage assets, are extending their reach to landlocked interior countries such as Zambia and Uganda.
"Intra-regional flows of petroleum products in Middle Africa represent a major growth area, particularly with the advent of new oil producing countries ... and the increasing energy demand of Middle Africa's consumer markets," said Rolake Akinkugbe, Ecobank's head of oil and gas research.
Trading houses are also using their growing cash reserves to start exploring and pumping oil, a sector long dominated by listed oil majors.
"They want deals that put more oil on their books to build trading mass, and that's what they've always done," said Gary Still, an executive director at UK consultancy CITAC.
"But we're also seeing trading houses like Glencore and Vitol becoming very interested in the upstream. I think they've got the money for these projects and will go for it," he added.
Glencore has signed a contract to export Chad's oil in 2013 after it agreed to invest more than $300 million in the central African country's Badila and Mangara oilfields to boost oil exports via the Cameroon pipeline. Its warehousing and logistics unit Pacorini has also made its first break into Africa.
Vitol also signed a long-term contract with former French colony Gabon to export its oil.
In the more traditional business of trading, low margins are pushing traders to seek out higher oil volumes by negotiating for contracts with African governments and state oil firms.
Know-how and connections through local staff or "fixers" can give a firm a competitive advantage.
Jean Claude Gandur, chairman of AOG, stunned the industry when he completed a sale of his upstream business Addax Petroleum to China's Sinopec Group for $7.2 billion in 2009.
Now he plans to invest $400 million in the African oil sector and aims to buy Nigerian acreage. The group's expansion in Nigeria may benefit from having a former executive Afolabi Oladele of state oil company NNPC on its board.
Swiss-based Mercuria also employed a son of the former Nigerian opposition leader Moshood Abiola to help with business development in west Africa.
But deals do not always go according to plan in a region plagued by corruption and oil-fuelled civil strife.
Gunvor, historically strong in Russian oil markets, hired a team of traders from Addax Petroleum in 2009-2010 to expand in west Africa.
It now accuses a former employee of fraud and embezzlement with respect to a Republic of Congo oil contract after Swiss authorities launched a money laundering probe. Gunvor itself is not subject to the investigation and is a plaintiff in the proceedings.
Trafigura, which corporate filings show gets nearly 30 percent of its oil turnover from Africa, was locked in a legal dispute last year after buying a cargo of oil the South Sudanese government said was looted by its northern neighbour.
The proceeds from the cargo, worth around 58 million euros ($75 million), were later seized by an English court to establish ownership.
A court document dated Nov. 7 and seen by Reuters showed that a settlement had been reached, though some of the details remained confidential. Trafigura declined to comment
Even so, Trafigura has agreed to begin exporting Dar Blend crude, it said on Wednesday.
Glencore was the first to secure an agreement to market newly independent South Sudan's oil, but the deal was later scrapped after opposition from some South Sudanese officials.
In Nigeria, top trading houses like Mercuria and Glencore are owed dozens of millions of dollars for fuel deliveries that in some cases date back over three years.
"Africa can be a minefield," said Akinkugbe at Ecobank.
"You have to do your homework and have a local champion who can help bridge the knowledge gap."
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