BMI View: Two UD$3.2bn rail deals, signed between China, Turkey and Ethiopia, highlight both China's increased commitment to East Africa, but also increased competition in the region. The previously China-dominated turf is now being gradually challenged by construction majors from, amongst many, Turkey.
As part of Ethiopia's ambitious plan to construct a 5,000km railway network by 2020, the government has recently signed two deals worth US$3.2bn with Chinese and Turkish companies to construct the link connecting the landlocked Horn of Africa nation to Djibouti's Tadjourah port.
|An Attractive Way Out|
|Ethiopia Planned Rail Route|
The deals are significant for a number of factors:
Firstly, the US$1.5bn agreement with state-run China Communications Construction Company ( CCCC) to build parts of the railway (360km) to carry potash from mines being developed in the northeast of the country, is yet another example of China strengthening its position on the continent; and increasingly so in East Africa. The deal comes shortly after China Railway Construction signed a US$1.9bn deal with state-owned Ethiopia Railway Corporation ( ERC) for an additional part of the track. Hitherto China was already present in the country through its construction of a 320km rail line stretching from Sebata to Meiso. Likewise, China Export Import Bank is contributing heavily to other various infrastructural projects, a trend we believe is destined to continue.
That said, the US$1.7bn contract between ERC and Turkish construction company Yapi Merkezi highlights an important 'new' entry to the continent; particularly in terms of increased competition in the previously China dominated sphere. We have frequently noted this trend whereby Turkish construction majors are seeking fertile ground outside of their currently capital scarce domestic market. Numerous successful and continuous entries into the Middle East and Africa also underline Turkish firms' advantage in terms of both geographical location and religious ties with the region. Hence, we believe more is to come on this front.
Lastly, once completed, the new rail line will enable the export of Ethiopian potash which is one of the few natural resources in Ethiopia's otherwise agricultural economy. Hence, though a lucrative industry that has attracted Canada's Allana Potash Corp, Sainik Potash from India, and Melbourne-based BHP Billiton Ltd, both China and Turkey's entry into Ethiopia is largely driven by the country's strategic location as a regional power house. Thus, the project could serve a broader plan of using railways to increase the mobility of people and goods.
|Helping With Growth - China, Turkey, Who Else?|
|Ethiopia GDP, Nominal (US$bn), Real Growth (%)|