Dancing the Canadian Chinese mining two-step

Tibet, Congo or Papua New Guinea

When, in 2012, I wrote a book about mining in Tibet, it seemed China’s appetite for minerals was insatiable, having survived the great global recession of 2009 onwards with hardly a blip in demand. By then the global commodity boom had been rolling on nonstop for a decade and nothing, it seemed, could slow it, not even a global financial crisis. And all the long term predictions, based on assuming China can, must and will achieve the same  consumption levels of the richest countries, cheerfully forecast decades more of rising mineral extraction worldwide to meet China’s needs.

How wrong we all were. The unstoppable Chinese demand, in the aftermath of the global crash, was fuelled by endless stimulus money pumped in by China’s central authorities, ostensibly for infrastructure construction, which uses up lots of metals and other basic commodities. Much of that money was diverted, often by local governments, to much more profitable real estate ventures, constructing all those tower blocks and ghost cities of empty apartment blocks in the desert. They too needed lots of copper, steel and other metals.

Then the music finally stopped, just after the book, Spoiling Tibet: China and Resource Nationalism on the Roof of the World was launched in October 2013. As well as empty apartment towers, all that stimulus had built many more smelters and refineries than China, or the world market, actually needed, and suddenly the big new problem was oversupply.

Now, in mid-2015, that problem is bigger than ever, so big that a major driver of China’s New Silk Road project is to establish export markets in neighbouring Asian countries for all the excess supply. But prices have fallen sharply, and have now remained low for years, and show no sign in the short term of recovering, even if the long term pundits are right that there is still a long way to go before China uses copper and other metals as intensively as the US.

Until the recent over supply crisis, China’s mining companies, nearly all state-owned, pursued an aggressive strategy of mergers and acquisitions worldwide to get hold of more raw materials, as well as expanding rapidly into Tibet, notably the big copper/gold deposits at Shetongmon near Shigatse, at Kham Yulong between Chamdo and Derge, and Gyama upstream from Lhasa.

Two companies stand out in this rush: Jinchuan and Zijin. Jinchuan has long dominated nickel supply in China. Its home base is far inland, in Gansu,  close to the main rail line connecting China and Tibet, placing Jinchuan in the ideal position to be the smelter for the first big copper mine to get under way in Tibet, at Shetongmon. The Canadian company Continental, part of the Hunter Dickinson Group, did much of the work of quantifying the size of the deposit and the most profitable strategy for extracting the copper, gold and silver there. Then Jinchuan bought out not only Continental’s interest in Shetongmon, aided by China’s national rule forbidding foreign investors from actually mining molybdenum (one of Shetongmon’s minerals). Jinchuan went one further and bought Continental, which is now a subsidiary of Jinchuan.

Jinchuan also pressed ahead with constructing a big new copper smelter, just as the prices started tumbling. By April 2014, Jinchuan’s  oversupply problems became so acute, they reneged on contracts with their suppliers in far away Chile, relying on the concept of force majeure, meaning uncontrollable disaster, to cancel contracts for Chilean copper concentrates. Jinchuan announced a problem with oxygen supply to the main Gansu smelter, a problem so severe it would knock out all production for as much as four months, giving Jinchuan a breather.

This occurred just as China, at great expense, completed the rail extension from Lhasa to Shigatse, well to the west, leaving only 80kms to the Shetongmon mine. So Tibetan copper, in big quantities, became available, along with supplies from Chile and elsewhere, at exactly the time demand tanked.

That’s a major reason we don’t hear so much about mining it Tibet these days. From the perspective of China’s major mining companies, access to capital isn’t a problem, especially since the stock markets are again booming, and investors are keen to get a slice of the action, despite the overall economic slowdown. The problem is where to invest, where to get the best bang for the renminbi. Tibet doesn’t cut it, compared to the available alternatives.

This brings us to the other company with a major slice of Shetongmon, Zijin Mining, based in eastern China, its fortune built on gold. In 2011 Jinchuan sold a 45 per cent stake in Shetongmon to Zijin, a big company with a strong history of going global. In May 2015 Zijin acquired half of the troubled Porgera copper/gold mine in Papua New Guinea, from a heavily indebted Canadian miner, Barrick. At the same time, Zijin also announced it had bought almost half the Kamoa copper/gold mine in Democratic Republic of Congo from another Canadian miner, Ivanhoe.

Zijin has also acquired mines in Inner Mongolia, Xinjiang, Tuva (the most Tibetan part of Russia) and Kyrgyzstan, a literal embarrassment of riches.

Why, at a time of over supply, depressed prices and force majeure, would  Chinese miners want to buy mineral deposits in difficult places like PNG and Congo? This tells us much that is relevant to Tibet. Remarkable as it may seem, mining projects ready to roll, in remote Congo and PNG are actually less remote, less difficult than mining in Tibet, building it all from scratch.  Tibet is actually harder.

Much of this is because the Tibetan Plateau is huge, and mineral deposits are often in areas difficult to access. China has spent decades building infrastructure, but there is still so much to be done, especially before the massive copper/gold deposits at Yulong, in precipitous Kham, are ever to be mined, concentrated, smelted and shipped out to lowland Chinese industries.

But there is another reason why Tibet is harder than PNG or Congo: the Tibetans. Although Tibetans feel disempowered by authorities declaring protests to be criminally splittist, they persist in protesting against mining, often taking care to quote Xi Jinping’s environmental pronouncements in the biggest possible banner headings. As the eminent Tibetanist scholar Gray Tuttle pointed out recently in article in Foreign Affairs, it takes a state with 1.3 billion population to hold down the Tibetans. That is how Tibetans see it.

While small scale mining is rampant across Tibet, the much more publicly visible, capital-intensive large scale mines in Tibet are taking a long time to develop, longer than one might expect if all those Five-Year Plan announcements of mining as Tibet’s “pillar industry” were to be believed. It is certainly taking longer than I expected when I wrote that 2013 book on mining.

Longer is not never. Demand may yet rebound, mining is highly cyclical. If China is serious about adopting the American life style and American consumption, the minerals of Tibet will be in demand, especially as China’s biggest manufacturers move far inland, close to Tibet. But not just yet.

When the minerals cycle ticks up again, as it will, Tibetans may need friends worldwide. But because China reserves the mining of Tibet for itself, with very little international investment, what traction do Tibet’s friends worldwide have?

Here again things have moved on since that 2013 book. Not only are Chinese and Canadian miners doing deals to take over each other’s assets, so too the global minerals commodity traders are buying into a slice of the action in China. Specifically, the Swiss commodities trader Trafigura has bought 30 per cent ownership of Jinchuan’s new copper smelter –Jinchuan’s other smelter, the one that didn’t have the oxygen problem and the four months of force majeure repudiation of contracts. Jinchuan would like to believe it has done Trafigura a favour by giving it access to Chinese markets, but, given chronic over supply, it is Trafigura, able to sell the new smelter’s output into other Asian countries, that is helping out Jinchuan. That new smelter, a big one, is also in a minority nationality area, in Guangxi province.

Jinchuan, the owner of the Shetongmon mine near Shigatse, may also hope that its connection with Trafigura gives it (and China) entrée to the world of commodities futures, hedging, arbitraging and financialisation of minerals. China wants to get into the big league worldwide.

Trafigura, however,  probably knows how much reputation affects stock prices, and how much a brand can be damaged by hanging out with the wrong crowd.

This entry was posted in China, Tibet. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *