Indigenisation plays into China's hands

Tim Wood | Fri, 03 Dec 2010 16:52[miningmx.com] --

It’s also revived a leviathan once thought tamed, if not extinct: resources nationalism or, euphemistically, “indigenisation”.

Following a benign period of global deregulation, liberalisation and privatisation – the “Washington Consensus” of the post-Cold War era – natural resources investors have been plunged into waking nightmares that recall previous periods of heavy nationalisation.

The common factor is high and rising commodity prices. Unsurprisingly, the oil and gas sectors led the drama as prices raced to record all-time highs. The peak year was 2006, when Evo Morales gave a nationalisation ultimatum to Bolivia’s natural gas producers.

That time the victims were neighbours rather than the Yanqui Imperialists of prior confiscations.

Venezuela went on to nationalise or press gang swathes of its economy.

Russia gobbled up once-private mineral interests and brought its mining magnates to heel in the process. Ecuador resorted to armed forces to grab hydrocarbon assets.

Throughout Africa, development agreements were also being ripped up in apparent defiant repudiation of the conditionality imposed by the IMF and World Bank, which underwrote the Washington Consensus.

It’s not a developing nation problem either. Both the United States and Australia have demanded windfall taxes on the extractive industries. It’s become rather respectable to go after mining company returns.

The last time mining and energy companies suffered an equivalent rash of nationalisation and expropriation was during the Sixties and Seventies. Then, the US dollar was released from its gold moorings and commodity prices rocketed in response.

So did government demands for more of the cash flow, along with a desire to throw off the colonial taint of many arrangements.

"A state mining company would undoubtedly turn to China for capital and assistance."

Nationalisation’s high water mark was set in 1972, when Salvadore Allende nationalised Chile’s copper industry. Chile veered back to a prosperous free market orientation, although Codelco remains a national copper enterprise. Oddly enough, it’s actually efficient.

While Codelco is a source of pride for Chile, the same isn’t true of Africa’s disastrous mining takeovers.

Take Zambia and the Democratic Republic Congo.

They reduced their once-productive and wealthy mines to rubble, thanks to a blend of local and imported management incompetence and a long commodity bear market. There was also the penchant for dictator-scale looting.

Humbled by war and poverty, and disciplined by multilateral agency lending, both countries turned back to foreign investors to revive their mining industries. Despite instability and uncertainty, Zambia and the DRC succeeded in attracting billions of dollars of new investment.

As copper and cobalt prices soared, the governments initiated a series of reviews.

Zambia demanded windfall profits, higher taxes and new royalty scales; a process that also played out in several other markets. The DRC complained of corruption in previously awarded licences.

The results have been discouraging: except for insiders.

Though greed, corruption, sharp dealing and the global credit crisis played a role in those machinations, it’s also material that from 2003 China had shoved aside the US and Europe as the world’s largest consumer of many industrial raw materials.

Therefore, securing raw materials at source has become a priority of Chinese national security strategy.

Massive investments are earmarked for exploiting Africa’s minerals: US$15bn in Ghana; $13bn in Angola; $9bn in the DRC; $9bn in Guinea; and $5bn in Niger. These are just the marquee deals.

China’s low-interest, long-term loans are invariably repaid with commodity export arrangements that ship output directly to China.

Conveniently for China, these loans are recycled into infrastructure projects in recipient countries built by Chinese entities and even Chinese labour.

It’s a potent combination that’s given China a great deal of political leverage throughout Africa. It wouldn’t be overly cynical to say African governments have strong incentives to pursue “indigenisation”.

Noteworthy is the prevalence and value of “signature bonuses”, which have risen dramatically. China paid $1,1bn up front to secure Nigerian oil blocks and put down $350m against its DRC deal.

Private companies aren’t immune.

Freeport-McMoRan and Lundin, which control the Tenke Fungurume project, were pressured to raise their signing bonus from $100m to $250m.

The DRC’s insouciance regarding arbitration for the Kolwezi Tailings fiasco confirms it has little fear of losing access to foreign capital or mineral extraction expertise.

Another key change from the prior nationalisation wave is that it crosses boundaries once thought impermeable. Canadian companies – previously beneficiaries of anti-colonialism – are increasingly victims of China’s passive-aggressive investments.

SA – once considered to have abandoned all thoughts of nationalisation – is again flirting with the idea for its mines. Rabblerousing is a motive, but there are indications nationalisation talk is a precursor to a new State mining company.

That may avoid wholesale nationalisation, but it seems probable local companies will surrender some equity or assets in a derivative of the Mining Charter.

SA elites are certainly looking at China’s lavish investments to the north and wondering how it is so little has turned up at home.

That’s more remarkable, given one of the three overseas branches of China’s ExIm Bank is in Johannesburg. A state mining company would undoubtedly turn to China for capital and assistance.

An ambitious successor to President Jacob Zuma might manoeuvre to use signature bonuses and infrastructure deals to win over constituents with rapid and tangible “returns” on “the people’s minerals”.