Double Handshake

Last month, a group of 15-20 gunman attacked a Chinese-owned copper project in northern Peru at dawn, killing three workers and torching 80% of the site. According to news reports filed in the following days, two other workers were still missing. The US$1.4 billion Rio Blanco copper project (bought by Fujian-based Zijin Mining Group in 2007) has been the site of violence and controversy before. In 2005, before Zijin took over, security guards killed one protester and allegedly tortured two dozen more. Those who oppose the mine argue it harms the environment and has a negative impact on local society.

Like the Bagua protests earlier this year, November’s Rio Blanco attack illustrates the major tensions between Lima’s economic and industrialization development plans for the country and some locals who fiercely resist it. Peru’s president Alan Garcia himself is a perfect example – he is lauded by international businesspeople for his open foreign investment policies and reviled at home, with an approval rating of 26%. Chinese companies, who are heavily invested in Peru’s mines, are caught in the crossfire.

Chinese mines in Peru have been targets of violence before, but I would argue the backlash against Chinese companies in Peru have little to do with them being Chinese. It is fast, polluting, large-scale development, and social and environmental upheaval that protesters are lashing out against. American and European energy and mining companies have been targeted as well.

Conflicts like the one in Rio Blanco are about development – about if and how it should happen, and who whose decision it should be.

In China, of course, fast, unconstrained, top-down development is near Gospel – The Gospel of Fazhan (or development). I’m using “fazhan” instead of “development” from here out because the word connotates so much more than new buildings and roads. You hear “fazhan” everywhere in China; it is a mantra, an obsession. Fazhan is progress, a thing to believe in. Fazhan levels are the way you compare countries. Fazhan is tied closely to national pride and unity. There are those who want fazhan and those who don’t know any better.

So note how state-owned newspaper China Daily handled the Rio Blanco attack:

Drug cartel behind Zijin Peru copper project attack

A weekend attack on a copper project in northern Peru that left three dead may have been the work of drug traffickers who want to keep the area undeveloped in order to protect their trade, the head of a business leaders group said on Tuesday

…

“There is no dispute or conflict with the community, so this makes you think that criminal interests are behind it, probably drug traffickers,” said Ricardo Briceno, head of Confiep, Peru’s largest business federation. Police said they were still collecting evidence from the attack.

Big mines tend to bring roads, police and development to areas where those involved in the drug trade want to keep a low-profile.

…

The company and people from the business community say townspeople now support the construction of the mine, though violence has broken out before at Rio Blanco.

The Peruvian government has also struggled at times to win the public debate over the benefits that big mines bring to isolated towns in the Andes.

The article is lifted from a Reuters report filed the previous day, which distanced itself a bit from the all-is-well comments from Briceno. Rio Blanco’s violent history disappears, as do mentions of environmental concerns. Indeed, with a few edits, the article becomes China Daily’s perfect affirmation of the Gospel of Fazhan – everyone welcomes fazhan with open arms except for the criminals.

It is much easier for China’s government to convince its own people that fazhan is a universal aspiration. Again, few of them need converting to the Gospel, and there’s no reason foreigners wouldn’t believe in the same thing. For every protest or attack against a Chinese mining interest abroad, China Daily and Xinhua will be there to dutifully explain that the cause was a few bad seeds at odds the vast majority of supporters.

But how does China sell the Gospel of Fazhan abroad to those who might resist it, to those who don’t share the same values? There is no doubt China will continue transform all of Latin America with its resource-buying and fazhan-leading. This reality is settled by governments, by trade agreements and investment policies.

But if China hopes to get along harmoniously with the Latin American people whose lives are being utterly transformed by all this fazhan, it may be useful to recognize and plan for the fact that not everyone is a believer.

Chuquicamata, or Chuqui for short, in northern Chile is one of the largest open-pit copper mines in the world. It has been in operation since 1910 – first run by American mining concerns and then nationalized in 1970. It is now operated by Codelco, a government-owned entity. Twenty-four hours a day, 20,000 workers and over 100 giant German Liebher and Japanese Komatsu trucks haul rocks out of the 1-km-deep pit to be processed nearby. Explosions at the bottom happen everyday at 5pm sharp.

When writing about Chuqui, it’s tempting to just reel off statistics: the main pit is 5-km long and 3-km wide; trucks cost US$4 million each (tires alone cost US$30,000 each and last one year); 600,000 tons of rocks are transported daily. The one stat that stood out to me, though, was 22% – the percentage of the mine’s output that heads to China, the mine’s biggest buyer. I visited Chuqui last week and asked our guide about China and the global recession.

“Oh, we’re having a very difficult time!” she told me cheerfully. “But you don’t understand how much money we had been making before the recession, when we were selling cathodes for US$1000.” (current copper prices are approximately US$600 per cathode).

China was largely responsible for Chuqui’s flush years. Now, she said, Chinese demand for copper had fallen a bit, but not nearly as much as demand in other countries. This corroborates news from Peru in recent months of Chinese mining companies announcing expansion plans as other foreign interests shutter mines and smelters.

From the viewing platform above the mine, the enormous trucks hauling 400 tons per load looked like toys in a sandbox. Puffs of dust rose up as rocks were moved. Trucks emitted black diesel smoke as they climbed the packed-dirt inclines. From my vantage point, the lines cut into the side of the pit looked like dusty rice terraces.

Image: sxc.hu

Conventional wisdom has it that, in the eyes of China, Latin America and Africa are largely interchangeable: vast tracks of land full of precious commodities. It’s simple, really: China invests billions building mines, derricks, roads and schools abroad in exchange for a steady supply of oil, iron ore, copper and bauxite to feed the factories back in Zhejiang. And so, if it’s truly all about the commodities, then when demand plunges, as it has in the last nine months, China should start getting cold feet about, well, being in places like these.

Indeed, the New York Times recently ran a piece on China’s retreat from Africa. Here’s the gist:

But so far Guinea has not gotten what it really wants from the world’s fastest growing economy: a multibillion-dollar deal to build desperately needed infrastructure in exchange for access to the impoverished nation’s vast reserves of bauxite and iron ore.

As global commodity prices have plummeted and several of China’s African partners have stumbled deeper into chaos, China has backed away from some of its riskiest and most aggressive plans, looking for the same guarantees that Western companies have long sought for their investments: economic and political stability.

The article goes on to suggest that China’s misgivings in Guinea extend to the rest of the continent. Whereas China would once invest in places forsaken by the West, the country is now reining in expansion plans (at best) and pulling out (at worst). Should we believe the hype? Aleksandra Gadzala, at her excellent blog China in Africa, offers a counter argument:

Indeed, while some Chinese companies might be fleeing, the general trend is seemingly one of firm restructuring. China is continuing to invest in natural resource sectors across the continent, with projects picking up now that the weather is improving. Small-scale entrepreneurs are likewise continuing to pursue independent ventures in states across the region, peddling cheap goods in African markets. Though we may be witnessing a slowdown in such trends, it is hardly the end of ‘China in Africa,’ as such.

Two points that Aleksandra mentions here can, I think, be said for Latin America as well. In fairness, I haven’t come across any reports arguing for a similar “end of China in Latin America”, so I don’t want overdo it here, but I thought I’d try to pre-empt any hungry journalists on “the Crisis beat” nevertheless.

First, the crisis may be forcing some Chinese companies here to adjust their operations, but projections for Chinese investment are rosy. This largely due to the fact that China knows that this crisis is short-term and its resource needs are long-term. Of course, it helps your companies’ long-term vision when you’re flush with cash and backed by massive amounts of foreign reserves if needed. In Peru, while some American mining interests are begging for an 11th-hour bailout from Alan Garcia to survive, China’s mining interests are begging the government for a bigger port to handle the surge of future exports in the coming years.

Second: Though commodities trade gets most of the ink, China has a definite interest in both Africa and Latin America as markets for its manufactured goods. Chinese textiles, shoes, heavy machinery, appliances and consumer electronics are everywhere in Latin America. Meanwhile, China’s big automakers Geely, Chery and Zhongxing are cutting their teeth in Latin America as they try to internationalize their brands. Finally, the small-scale entrepreneurs that Aleksandra mentions are also a major component of China’s presence in Latin America as well. These sellers will stay on even after the last ounce of copper is extracted from the Andes.

Image: Columbia.edu

How bad is the economic crisis hurting mining concerns in Peru? It depends on who you’re asking.

Chris Kraul at the LA Times has the latest on Chinalco’s US$2 billion copper mine project at Toromocho, including an interview with the Chinalco Mining Peru’s president Gerry Wolfe. The gist: China is still cash-flush despite the global crisis and hungrier than ever for natural resources like copper. Wolfe is optimistic:

“They (China) went through the last 10 years selling things and piling up billions of dollars in surplus reserves, which they are now using to finance an expansion into the world.”

And, as for the issue of falling demand for commodities like copper, he takes the long view.

“They (Chinese people) want to become similar to the U.S. or Europe,” Wolfe said. “They have a long way to go, but it cannot be done without metals and other natural resources. Domestically, there are 1.3 billion Chinese, and all of them want cellphones, cars, appliances — just like you and me. And that takes copper, lots of it.”

Contrast this with another news story that broke late last week: Doe Run Peru, subsidiary of US-based metals producer Doe Run, halted all non-copper production at its giant smelter at La Oroya, Peru. The La Oroya smelter processses copper, zinc, lead, silver and gold, and is the country’s fourth-largest exporter. The company’s finances have been hit hard by a drastic drop in demand.

“The company doesn’t have any working capital despite making money over the past four years,” Castillo said. “We will meet with Energy & Mines Ministry officials to find out if the company can be saved.” Belaunde, the Doe Run Peru spokesman, said the company is working on a solution with banks and declined to comment further.

The company is not alone. Prices of copper, zinc, lead and silver have fallen at least 24% since last July. According to Bloomberg, the crisis has shuttered about 30 other mining companies across the Peruvian Andes. At Oroya, thousands of jobs have been cut, and confusion abounds.

“Everything’s apparently on hold pending a government bailout,” Roiberto Guzman, a Doe Run Peru metallurgical union spokesman, said by telephone from La Oroya, Peru. “The union has requested an interview with Doe Run management, as we can’t go on with this suspense.”

Another headache for Chinese mining giant Chinalco and its US$2.2 billion copper mining project in Toromocho, Peru surfaced last week. In January, you may recall, the company was struggling to find common ground with local residents over resettlement packages. Last week, chief executive of Minera Chinalco – the Peruvian arm of Chinalco – Gerald Wolfe told El Comercio that the opening of its Toromocho mine is at risk of delay or worse because of inadequate facilities at Callao Port, the country’s main exit point.

Wolfe described conditions at Callao Port as unchanged from 30 years ago and called for at least US$70 million worth of upgrades before 2012, when the Toromocho mine is to be up and running. Toromocho, to be Peru’s largest copper mine, will boost Chinalco’s annual tonnage in Peru by 35% to about one million tons.

Wolfe and a consortium of other mining interests are asking for a new terminal at Callao Port dedicated solely for metals. Renovations for Callao Port have been in the works for years – and must have been talking point when the Toromocho deal was brokered in 2007 – but Wolfe said the government has not provided any details or answered any questions concerning the upgrade to date. Peru’s minister of transportation and communication said there are four studies underway to assess how to modernize Callao Port, but no deadlines have been set.

With so much of Peru’s economic growth pinned to its attractiveness as a metals source for China and other nations, I’m sure Callao Port will eventually get the facelift it needs. It’s just a question of when. At present, though, no one seems very confident that the needed work will be completed by the beginning of 2012.

Image: David Baggins

An interesting story was published over at the Inter Press Service (IPS) yesterday. The piece is about Morococha, a tiny copper mining village in the Peruvian Andes, and its dealings with Chinalco (Aluminum Corp of China), one of the Asian country’s state-owned mining giants.

Chinalco obtained the Toromocho mine, a project in the district of Morococha, from Canada-based Peru Copper in 2007. In mid-2008, Chinalco upped its investment to US$3 billion and said it expected to produce 210,000 metric tons of copper annually by 2012. Toromocho stands to become Peru’s largest copper mining project. In June 2008, the BBC did a piece on Toromocho, saying that Chinalco stood to make a 2,000% profit on the investment, as copper prices soared at the time. Click here for a good BBC video of Toromocho and the issues at hand.

Things are now, ahem, a little more complicated for Chinalco. First, copper prices have plunged more than 50% from a year ago on weakened demand. In October 2008, a Chinalo rep in Peru said the company had yet to line up “definitive” financing for the Toromocho project. Second, Chinalco is now about to go to the negotiation table with some Morococha residents over their resettlement packages.

Chinalco has to resettle more than 1,300 families before it builds its three-square-kilometer open-pit mine. The company has already purchased 72% of the housing units in question and said it will spend US$40 million to build new houses for villagers.

But, there are some villagers holding out for a better deal, and negotiations are underway. From IPS:

The president of the association of property owners, Johnny Frías, said “it is not a question of handing over our land at just any price. Just as the state puts a value on the natural resources that are underground, they should put a price on our houses. The town should not agree to move unless better conditions are obtained.”

According to Frías, the company aims to pay just three dollars per square metre, when a fair price would be closer to 3,000 dollars per square metre.

In response to a question from IPS as to whether that was a very high price, even higher than what is found in any residential area in Lima, he said “At least it would serve as a starting-point for negotiations.”

Chinalco pays between three and nine dollars per square metre of land and between 51 and 129 dollars per square metre of construction, said the company’s public relations manager, Francisco Sarmiento.

You gotta love those starting prices…

“We’re asking for 3,000 dollars per sqm.”
“We’ll give you three dollars.”

It will be interesting to see how Chinalco handles the inevitable handful of I’ll-never-move! Morococha hold-outs. Although the company has the support of Peru’s government, it’s unclear to me what kind of legal leverage Chinalco has to resettle Peruvians. Within China, forcible demolitions and relocations are nothing new, but in a foreign country, it may take intervention from Lima before the drills actually start whirring.

Image: Getty Images