State Capitalism is supposed to fade away, but it keeps on growing
#17 in a series on THE FUTURE OF TIBET
The state-owned enterprises (SOEs) which own the key mineral deposits of Tibet, such as Zijin and Western Mining, are not yet familiar names outside China, but soon they will be. That’s the plan.
This is dirigiste China reborn. Dirigiste, a French word, means a state that directs, allocates, and distributes wealth according to its political-economic priorities, rather than on the basis of markets and prices. Since China’s multi-trillion counter-cyclical stimulus package of 2009, we encounter a China willing to borrow heavily from future generations to finance construction on a scale that is about much more than market demand. Although neoliberal orthodoxy insists that command economy China is long gone, the reality is that many of the goals of the National Development & Reform Commission’s 12th Five-Year Plan for 2011-15 are declared to be mandatory. Neoliberal orthodoxy insists that planning is just a vestigial twitch, and is purely indicative, but that’s not how the central planners see it when they pitch their credentials as planners and growth managers.
The purist neoliberal critique is that states can never pick winners, that maximize profits, as well as private capital can, for the obvious reason that states have other reasons of state than profit. In China’s case, in its state-directed investment strategy in Tibet, profit appears to be at most a long term hope, while there are other pay-offs in the short to medium term, that do advance state interests.
The more immediate benefit to China, in establishing large scale mines in Tibet, is simply that it makes Tibet more securely Chinese.
China has proven it is as adept at capitalist big business as any of its global rivals, including the biggest resource multinationals. China’s state capitalism has forged an alliance that beats the biggest corporations in the world at their own game of finely calibrating mineral supply to remain just below demand, with an enduring effect on prices. This is the celebrated commodities supercycle, the indefinite extension of historically high prices for almost all minerals, in defiance of the basics of capitalism, the cycling of booms and busts.
Mineral demand and supply are seldom in sync. It is in the nature of mineral extraction that the biggest deposits are the cheapest to exploit in the long run, with the lowest costs per tonne of ore pulled from the earth. But, by definition, the biggest deposits are also slow to turn into a mine. The lead time is a decade, sometimes longer if for any reason the mining plan is controversial, not only with environmentalists on one hand, but with investors wanting fast profits, on the other. The managers of mining companies have in recent years raced to increase production to keep pace with China’s accelerated demand, but remain wary not to bring too much production onstream too early, lest there be a glut and a tumble in prices. But before the “supercycle” began its rise and rise in mineral prices in 2003, decades passed with only minimal investment in new mines, and in the economic geology of proving deposits, readying them for the big investment decisions. These are strong reasons for mining, more than other sectors of a market economy, being prone to booms and busts.
If the first and second decades of the 21st century do prove to be a supercycle, defying the usual creative destruction oscillations of capitalism, it will be due to China’s demand remaining steady enough, and to careful timing of investments in scaling up ore extraction. Conventional wisdom is that the supercycle has enormously benefited the big miners, headquartered in rich countries, even if their operations are global, and everyone else has had to pay their price. Media stories often emphasise the wealth created by those who own mountains of iron ore, for example, the world’s richest woman, whose wealth grew by $52 million a day in 2011, solely through owning millions of tonnes of iron.
Around the world, the assumption was that China, like everyone who consumes commodities, had no choice but to pay the price of the supercycle that its’ demand had created. There was much concern that food commodity prices had also risen sharply, leaving the world’s poor even poorer, with the poorest starving. This was labelled a security threat to the developed countries, thus warranting attention. But the globally interdependent market economy had spoken, new pricing points had been reached, and there was little anyone could suggest except to ameliorate the plight of the poor by aid and official welfare spending.
China too seemed to be a price taker, with no choice but to pay what suppliers demanded. But China’s state capitalism found many ways to challenge the oligopolies of the global commodity oligarchs. The combination of state power and state directed finance, with corporate management of China’s new national champion corporations, was a winner. The team effort orchestrated by the state was capable of setting the terms of transactions, tilting the balance in China’s favour, to such an extent that by 2012 the biggest of global mining corporations were finding their core business model challenged, even fragile. They found fewer opportunities to dictate terms, to dominate entire industries, less and less margins to be earned from vertical integration. The first to learn this sharp lesson were the steelmakers, which had been integrated iron ore miners who then made steel from iron ore and coal, sometimes close to the mine, sometimes close to the coal. As China’s steel industry caught up, in part due to China’s insistence that all foreign investors have to share their technologies, it became clear that steel mills worldwide could not compete with new mills in China, which not only had much cheaper workforce expenses but also huge economies of scale and access to the latest technological advances in efficiency and cost control.
By 2012 it was the turn of the aluminium manufacturers, whose business model had been a vertical integration of bauxite mining, to be processed chemically into alumina, usually close to the mine, then the energy-intensive smelting of alumina into aluminium metal, wherever electricity is cheapest, often thousands of kilometres away. Chilean alumina is made into aluminium in British Columbia, Canada, where the cheapest hydro-electricity is available. In 2012 aluminium smelters worldwide began closing, unable to compete with China. The oldest smelters closed first, unable to produce as cheaply as in China, crippled by inefficient technologies and lack of scale.
By mid-2012, as Chinese demand slowed, “marginal producers of iron ore, zinc, thermal coal, ferrochrome, nickel and aluminium are all losing money at current prices.” Aluminium smelters, which had been profitable, were unable to justify their existence, and began closing, all over the developed world, with many workers losing their jobs. Protectionist arguments were raised, for subsidising the plants and the jobs, but critics pointed out that many aluminium smelters had long benefited from subsidised electricity prices, offered by provincial or national governments keen to be seen boosting employment.
China too has been adept at boosting its manufacturing, starting with the smelting of metals and refining of oil. As in other countries, China’s manufacturers enjoy electricity costs kept low by government decree. But that is only one element of a systemic bias towards industry that has been inbuilt to the Communist party’s rule of China since the revolutionary seizure of power in 1949. From the outset, the bias was towards industry, so much so that the peasants were squeezed for the capital to finance industrial expansion, and it has long been official policy to keep the primary inputs manufacturers need as cheap as possible. This includes water, minerals, fuel and electricity; and until very recently labour costs too.
China’s assistance to manufacturing does not stop there. China leverages its size, and potential market, by demanding foreign investors transfer technologies to their Chinese partners, who then frequently use it against their foreign friends. State policy promotes agglomeration, building a few selected corporations into global scale operators capable of working anywhere in the world, always with China’s diplomatic assistance available to smooth the way. The policy is that, in each industry, there should be only a few players, each big enough to become a national champion capable of taking on the world.
The hidden subsidies the party-state provides to its favoured national champions, the state-owned resource companies, are many and substantial. As a result, the state owned corporations are now making record profits, which is the intended outcome of existing policy, not only to enrich corporate managers and shareholders (mainly the party-state), but also to finance the next stage, in which the SOEs go truly global.
China may not fit the model of neoliberal capitalism, which insists that only free markets can efficiently find the price of anything, and that state interference inevitably causes inefficiencies, shortage and corruption. But the China model is thriving, even if China’s growth has slowed a bit. There is no indication the new central leaders, who have strong family connections with the state owned wealth generating machine, have any intention of reining in the SOEs.
Mining Tibet on a capital-intensive industrial scale is new. But there is nothing new about small-scale gold rush mining, all over Tibet.
Because dredging of riverine placer gold is so prevalent throughout Tibet, on what is charmingly but misleadingly called an artisanal scale, it is all the more surprising that China does have plans for mining on a much scaled up intensity, even competing on a world scale. This is the China more familiar worldwide, the China of long term strategies, central planning, national champions, massive state-directed infrastructure investment programs and high growth rates that do little to put disposable income in the pockets of the masses.
i Jack Farchy, Miners look to big players for production cuts, Financial Times, 25 May 2012