China feels a sugar rush for African biofuel projects

China is eyeing investment in African biofuels as another strand of its growing economic relationship with the continent. Hua Lien International is planning ethanol projects in several countries.

The unit of China’s largest government-owned investment firm, State Development & Investment Corp (SDIC), has signed a memorandum of understanding to set up ethanol projects in various African countries.

In a statement to the Hong Kong Stock Exchange this week, Hua Lien says it is planning to establish a joint venture for the investments with China-Africa Development Fund (CADFund), a $5bn fund created by Beijing in 2007 to promote business ties.

China’s Complant International Sugar Industry, which operates sugar-cane plantations in Africa, will have a stake in the venture. Complant is owned by SDIC, and is also a substantial shareholder in Hua Lien.

The three companies plan to launch the venture in Benin and roll out to other countries in the coming years. Hua Lien will have a 65% stake, with the development fund holding 25% and Complant 10%.

Ethanol production in Africa is drawing growing levels of investment from abroad. Foreign companies have invested about $710m in Mozambique to produce 440 million litres of ethanol a year from sugar cane, a government official told Reuters recently.

Research firm Frost & Sullivan says that Africa’s suitable climates and vast arable land for feedstock production are driving interest in the industry. A need to reduce fuel-import bills is also spurring growing investment. Frost & Sullivan estimates that the Sub-Saharan African bio-fuels market earned revenues of $26.9m in 2009, and expects this to reach $229.9m in 2017.

However, concerns have been raised that using land to supply biofuel demand could squeeze food supplies in a region vulnerable to shortages.

China has itself banned the use of food crops for biofuel production over concerns about food security. But this has not stopped Chinese firms from investing in biofuel production overseas.

Chinese electricity power company Wuhan Kaidi is reported to be in talks to invest in a jatropha plantation in Zambia, while telecoms equipment firm ZTE is developing a palm-oil plantation in the Democratic Republic of Congo.

Hua Lien’s venture will produce ethanol from sugar cane and cassava, to be sold mainly in Europe and Africa. This is because Europe is closer to Africa than China and has more government support for biofuel consumption.

To finance the venture, Hua Lien will raise HK$54m ($7m) by selling 90 million new shares in CADFund at HK$0.60 each, and a further HK$24m through a convertible bond. Hua Lien may also sell another HK$312m worth of convertible bonds to fund other joint ventures over the next three years.