Cablegate: South Africa/Mozambique Trade On the Rise

VZCZCXRO6982
RR RUEHBZ RUEHDU RUEHGI RUEHJO RUEHMA RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHSA #0638/01 0880745
ZNR UUUUU ZZH
R 280745Z MAR 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 3954
RUEHTO/AMEMBASSY MAPUTO 5813
INFO RUEHZO/AFRICAN UNION COLLECTIVE
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 03 PRETORIA 000638

SIPDIS

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: ECON ETRD EINV EPET ENRG PREL MZ SA
SUBJECT: SOUTH AFRICA/MOZAMBIQUE TRADE ON THE RISE

1. (U) Summary: Economic ties between South Africa and Mozambique
continue to strengthen. Trade between the countries has grown 65
percent since 2004 and the trade relationship is heavily in South
Africa's favor. South Africa has been the largest foreign investor
in Mozambique for more than a decade, and its investments in
infrastructure and energy mega projects have greatly contributed to
increased trade between the two countries. End Summary.

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Booming But Lopsided Trade Relationship
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2. (SBU) As of 2007, Mozambique is South Africa's 24th largest
trading partner, representing 1.1 percent of all South African trade
and its fifth largest trading partner in Africa, behind Nigeria,
Angola, Zimbabwe, and Zambia. Mozambique is South Africa's 31st
largest source of imports (4th in Africa) and the 15th largest
destination for its exports (2nd in Africa). According to the SAG's
Department of Trade and Industry (DTI), trade with Mozambique has
grown 65 percent since 2004, with total trade in 2007 reaching 11.2
billion rand (USD 1.5 billion). DTI's Africa Desk Officer Deenan
Prouty attributed the close and growing trade relationship to
several factors, chief of which is "high-level political
engagement," including heads of state and ministers, focused on
economic development. SA Institute of Foreign Affairs official
Neuma Grobbelaar told econoff that Mozambique is South Africa's
strongest political ally and therefore the close and growing trade
relationship is only natural.

3. (U) The consistent growth in trade between the neighboring
countries is demonstrated in the table below (figures in million
Rand):

SA/Mozambique Trade
2004 2005 2006 2007
SA Exports 5,077 6,402 6,204 8,905
SA Imports 280 199 318 2,351
Trade Balance 4,797 6,203 5,992 6,554

The nearly 90 percent growth in imports between 2006 and 2007 is
skewed by the inclusion, for the first time in 2007, of electricity
and natural gas imports in the SAG's trade statistics. Although
South Africa has been importing electricity from Mozambique since
1988 and natural gas since 2004, these imports were not recorded
until 2007 and now represent nearly 70 percent of all South African
imports from Mozambique. Excluding electricity and gas, South
Africa mostly imported textiles, animal products, and vegetable
products. Excluding electricity and gas, South African imports from
Mozambique have still increased by 25 percent, signaling continued
strong growth in trade well exceeding Mozambique and South Africa's
individual GDP growth of 7 percent and 5 percent, respectively.

4. (U) South Africa has consistently been Mozambique's largest
trading partner: some 40 percent of Mozambique's imports come from
South Africa and approximately 26 percent of Mozambique's exports
are destined for South Africa. Like many lesser developed countries
seeking to industrialize, Mozambique mostly imports mineral
products, machinery, electrical equipment, and base metals.

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Robust But One-Sided Investment Relationship
--------------------------------------------

5. (SBU) Mozambique's stable political environment, sustained high
rates of economic growth and significant returns on the first of its
infrastructure and energy mega projects have spurred investor
confidence in recent years, and South African companies have led the
Qconfidence in recent years, and South African companies have led the
charge. According to Grobbelaar, Mozambique was the second largest
recipient of South African investment in Africa by 2004. SAG
estimates show that South Africa has invested approximately USD 4
billion in Mozambique, accounting for nearly 50 percent of all
foreign direct investment in the country through 2006, confirming
its position as the single largest foreign investor in the country.
According to Prouty, more than 400 South African companies have
invested in Mozambique, in a diverse basket of industries, including
infrastructure, construction, tourism, and retail. Examples of
significant South African investment in mega projects in Mozambique
include:

- BHP Billiton invested USD 2.1 billion in the Mozal aluminum
smelter in Maputo Province. The smelter has made Mozambique one of
the world's leading exporters of aluminum and is considered the
primary catalyst for foreign direct investment in Mozambique.
Mozambique uses the South African power transmission system to feed
power to the smelter.

PRETORIA 00000638 002 OF 003

- South African state-owned SASOL Petrochemicals Group invested USD
1.2 billion to develop the Pende and Temane gas fields in Inhambane
Province. SASOL pipes some 120-million gigajoules of natural gas
per year (524 million cubic feet per day) to South Africa.

- South Africa's privately owned Tongaat-Hulett Group is investing
USD 177 million to expand production of its four sugar companies in
southern and central Mozambique, bringing its total investment to
USD 477 million.

- BHP Billiton and the South African Industrial Development
Corporation are expected to invest an estimated USD 300 million in
the Corridor Sands titanium project in Chibuto, Gaza Province to
extract 250,000 tons of titanium slag per year.

6. (SBU) Mozambican investment in South Africa, on the other hand,
is negligible, but not because of any barriers imposed by the SAG.
Prouty said that Mozambican companies do not have the capacity to
compete in South Africa. Mozambican High Commission in South Africa
Economic Attache Godinho Alves confirmed that while he sees
opportunities for Mozambican companies in the areas of public works
or services, there is a general lack of financing for these
companies to compete in South Africa. The Mozambican Government is
appreciative of South African investment and believes it has few
options to address the considerable trade imbalance.

7. (U) "South African" mega projects have played a significant role
in increasing Mozambique's overall trade with the rest of the world,
accounting for about 72 percent of exports and 17 percent of
imports. In particular, the development of Mozambique's natural gas
deposits has led to a dramatic increase in extractive-industry
exports, which has boosted the balance of payments and created the
foreign exchange needed to support Mozambique's overall development.
The mega projects have also encouraged further investment in
Mozambique. The GRM confirmed that South African foreign direct
investment inflows increased significantly from 2006 to 2007.

(U) Private investment by South African companies in tourism
activities in Mozambique is also on the rise, particularly since the
two countries eliminated visa requirements in 2006. South
African-owned guest lodges, restaurants, and tourism operators are
now firmly established in several regions of Mozambique, offering
numerous options to the burgeoning number of South African tourists
visiting the beaches in southern Mozambique. The Mozambican
Ministry of Tourism estimated that nearly one million tourists
visited Mozambique in 2007, of which South Africans represented the
great majority. South African Airways operates two daily flights
between Johannesburg and Maputo. Mozambican Airlines operates two
daily flights, and has increased the number to four on Wednesdays
and Fridays to meet the growing demand.

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SA Watching Mozambique Energy Expansion
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8. (U) Recent developments in Mozambique could pave the way for an
even closer energy relationship between the two countries in the
midst of the worst power crisis in South African history, and the
increasing regional demand for electricity (estimated at 1,000 MW
per year) and alternative energy sources, such as natural gas and
biofuels. South African state power company ESKOM currently imports
approximately 1,400 MW of the 2,000 MW generated by Mozambique's
Qapproximately 1,400 MW of the 2,000 MW generated by Mozambique's
Cahora Bassa Hydroelectric Plant under a low-cost, long-term
contract. Some 950 MW is then "re-exported" to Mozambique to
provide electricity to the Mozal Smelter.

9. (U) In mid-2007 the GRM announced several ambitious investments
in the country's energy sector to increase generation capacity,
including a 750 MW gas-fired power station in Inhambane province; a
2,000 MW coal-fired power station in Tete Province; the new 1,200 MW
Mpenda Nkua hydroelectric plant in Tete Province; and an expansion
of the Cahora Bassa dam, expected to increase capacity from 2,000 MW
to an estimated 14,000 MW should all phases of the expansion be
implemented. None of these projects currently involve South African
investment, but the ongoing energy shortages in South Africa suggest
the SAG will have an interest in increasing its electricity imports
from Mozambique.

10. (U) South Africa's SASOL is investing USD 160 million to expand
its natural gas facilities in Mozambique and construct a gas
compression station, aimed at providing natural gas for a new
gas-to-liquids plant in South Africa. All of the above projects are
expected to increase the supply of gas from Mozambique to South
Africa by an estimated 20 percent (from 120 to 147 gigajoules per
year) by 2009 and will ultimately satisfy a quarter of the fuel
needs of South Africa's Gauteng and Mpumalanga provinces.

PRETORIA 00000638 003 OF 003

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Maputo Corridor an Impetus for Trade
------------------------------------

11. (SBU) South Africa has invested significantly in transport
infrastructure projects along the Maputo Corridor, which links
Mozambique's deep water ports of Maputo and Matola to South Africa's
industrial Gauteng Province. Maputo Corridor Logistics Initiative
CEO Brenda Horne told econoff that since 1998 key investment
projects include the N4 toll road from Pretoria to Maputo, the
upgrading of the railway line from the Lebombo/Ressano Garcia border
post to Maputo, the upgrading of the Maputo Port, and the dredging
of the Maputo harbor. Another major development is the current
construction of a "one-stop border post" set to begin operation in
2010. The streamlined border post will cut customs clearance times
by an estimated 50 percent. Such improvements have already been a
major catalyst for increased trade between the two countries.

12. (U) The Maputo port is closer to Johannesburg/Pretoria by road
and rail than the ports of Durban and Richards Bay in Kwazulu Natal
Province, and recent investments by South African shipping and
logistics company Grinrod demonstrate confidence in the Maputo
Port's potential as an alternative to the regional corridor from
Gauteng to Durban. Grinrod, which owns a 12 percent share in the
consortium that runs the Maputo port and a 95 percent share of the
Maputo coal terminal, has invested USD 40 million into the Maputo
harbor and has plans to invest a further USD 80 million through
2010. The investment includes construction for a car storage
terminal with an annual capacity of 250,000 cars. Such an expansion
appears to be attracting the attention of international car
companies with factories in South Africa. BMW SA, Toyota, and
Nissan have all indicated interest in using the Maputo port as an
alternative to the congested car terminal at Durban.

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COMMENT
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13. (SBU) South African investment in Mozambique has and will
continue to spur Mozambican economic growth and assist in developing
local industry and supply chains. Increased energy and
transportation trade and investment will also contribute positively
to regional integration mechanisms such as the Southern African
Development Community and the Southern African Power Pool.

14. (U) This cable was prepared jointly by Embassy Pretoria and
Embassy Maputo.

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