Mining the Future: Mining the Future: Chinese Investment in South Chinese Investment in South

American Extractive IndustriesAmerican Extractive Industries

Dr. Cynthia A. SanbornDr. Cynthia A. SanbornUniversidad del Pacífico Universidad del Pacífico

Lima, Peru Lima, Peru

Context .Context .

• Global demand and competition; all MNCs and SOEs seeking LA commodities.

• Renewed development concerns. Can we diversify, escape “resource curse”?

• Rethinking role of State, public institutions • Democracy, diversity of actors & issues

– Rights, environment, revenue distribution

• Higher global standards for industry, CSR

QuestionsQuestions

• In this context….• What are the development implications of

expanded investment by Chinese SOE?• Do Chinese firms – and government -- behave

differently than others in this region?• Do governments behave differently with them? • What can we learn from recent cases?• What more do we need to know?

General CommentsGeneral Comments

• Chinese interest primarily oil & minerals, but also relative social stability, local capacity (vs. Africa)

• Actively recruited by governments, partners• Primarily SOE, but also firm diversity• What do Chinese offer?

– Broad government-government agreements – “Accomodationist” position vis governments, local elites,

changing rules (Gonzalez V.)– More money on the table, access to finance– Access to China market

• Increasing Chinese government concern about firms´ behavior, at home and overseas

However…However…

• Goverment directives hard to implement afar & on the ground. – When host governments not strong – When firms not “national champion”, central government linked

• Limited experience with community relations, multi-stakeholders– Tend to assume governments will resolve social problems– Limited vocation for dialogue, media

• Lack of transparency. Part culture, part distance and language– Do not participate in EITI, local counterparts– Delisting acquisitions (Toronto, London)

• Few effective channels for communication – Limited local staff with main office authority – Shareholder contacts, activism unlikely

PeruPerucasecase

Peru:Peru:

• Minerals 62% of exports

• 25% tax revenues, 20% FDI

• 6% GDP, 20-50% regions

• 26% Chinese world mineral M&A

• 34% M&A in Peru from China

• First projects 1992-93

• Second wave 2007+

• 8 major firms

• China #2 trade partner

• FTA with China 2009

Peru contextPeru context

• Since early 1990s, governments promote foreign investment with favorable tax, legal measures.

• Since 2006, renewed courting of China - FTA framework

• Relatively weak State capacity/will to regulate firms

• Challenges: property rights (private, community), water rights, environmental impacts, labor, indigenous – even Church.

• Increasing “socio-environmental” conflict. Communities vs firms, with State on sidelines.

• Chinese investing in conflictive situations

Major mineral investmentsMajor mineral investments

• 1992, Shougang – buys government-owned property• 2007-2010, Chinese acquire private juniors

– Zijin Consortium, Rio Blanco copper, 186m– Chinalco, Toromocho copper, 792m– Minmetals/Jiangxi, Galeno copper/gold, 432m– Nanjinzhao, Pampa de Pongo iron, 100m– China Sci Tech, Mina Justa copper, 240m

• Total announced mining investment in next five years $6.8 billion

• Also oil since 1993, CNPC - today 40% of total oil production in Peru. Amazon and coast.

Case 1: Shougang CorporationCase 1: Shougang Corporation

• Fourth largest steel company in China, 90 year history• 1992 – buys Hierro Peru (Marcona) for US $188 million ($311 bid)

– First privatization for Peru mining sector – Largest foreign investment for China in LA

• Labor conflicts: 350 Chinese staff, fire locals, resist union • Local government conflict over water, electricity • Environmental impact: outdated facilities, fines for non-compliance • Initial investment commitment not honored, govt assumes $266 debt

• Three anti-corruption investigations since 2002, shelved due to perceived threat to expansion, other Chinese investments

• What learning here?

Case 2: Zijin ConsortiumCase 2: Zijin Consortium

• Copper project on Northern border with Ecuador, UK junior firm• Inherited troubles: non-mining area, fragile environment, land rights

disputed, strong opposition from local communities, violence • Three Chinese investors (Zijin, Tongling, Xiamen C&D) - mixed• 2007: Only bidder, recruited by diplomats-turned-directors• Chinese CEO, little change in community relations, conflicts persist• 2008: President Garcia visits China, meets CEOs, promises help • Project declared National Priority, protesters charged as “terrorists”• Fined in Peru for safey violations, EIA

not approved, expanded concessions • 2009: more violence, project stand-off

Case 3: ChinalcoCase 3: Chinalco

• Large new copper project in Junin, Canadian junior• Requires relocation of entire town (5,000) • 2007 bought by Chinalco, “national champion” SOE• Non-Chinese (expat) CEO, former head of world-class

Antamina copper mine• Staff 99% non-Chinese, local experience• Extensive investment in environmental programs,

cleanup old Acid Water Treatment Plant • Greater engagement with local community, authorities,

social investment – residents approve move.

Most likely to succeed?Most likely to succeed?

ConclusionsConclusions

• Chinese investment a major opportunity for commodity producers, but development impacts mixed

• National level: ability to “harvest” these resources for sustainable development, depends more on will and capacity of national policymakers - and vigilance of civil societies.

– Chinese more positive force, when local states are (Chile, Brazil)– High potential for conflict when not the case (Peru)

• Local level: reducing negative impacts still relies heavily on voluntary action of firms

– Chinese less experienced with stakeholders, unions, media– Lack of transparency, accountability– How fast can they learn?

• Latin Americans also need to learn more about China, its firmst and government institutions – urgently.

FinFin