Spare a Nickel? On the tail of Chinese resource investment in the Pacific

Graeme Smith is a research fellow at the China Studies Centre, University of Sydney Business School and a visiting fellow at the State Society and Governance in Melanesia Programme, Australia National University.—The Editors

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In this travelogue, masquerading as an overview of Chinese companies involvement in the nickel industry in the Pacific, I hope to bring two points to light, at least one more than any reader can reasonably be asked to take home. Chinese investors are late to the resources table (while always preferring a majority portion) with little appetite for local politics (while facing large helpings of them). The travelogue will shift between scenic Madang province, in northern Papua New Guinea, home to China Metallurgical Corporation’s $1.4 billion Ramu NiCo project, and New Caledonia, home to one-quarter of the world’s nickel reserves.

Last to the Table

A common refrain served up by the managers of the Ramu project was that Chinese mining companies were left with the crumbs at the mining resources table. At first, I dismissed this as useful cover for not attempting to reach best practice in the mining industry. The resources are sub par, so our working and environmental conditions are sub par. In the case of the Ramu project, wages and conditions were well below average, as I detailed in a recent piece for Asian Studies Review.

Ramu River, Madang, Papua New Guinea.

Ramu River, Madang, Papua New Guinea.

The comments of the Beijing-based managers echoed the views of the China Metallurgical Group’s president, Shen Heting, who told Caixin magazine:

High quality resources have already been taken by others, so at present, we can only go wherever there are still good resources. Which regions we invest in is not up to us to choose. As for risks, we can only rely on the support of the central government and our own efforts to avoid them. As long as it is a good resource, we will go for it (zhi yao shi hao ziyuan, women dou na 只要是好资源,我们都拿).

The Ramu project had been on the table for some time. More than four decades had passed before Highlands Pacific, a Brisbane and Port Moresby-based mining company, found an interested investor with the help of Standard Bank (international investment banks play an increasingly crucial role in brokering Chinese outbound investment deals). From the 1960s onwards, the mining lease had passed through several hands, and it was not always considered as a nickel mine. The reserves of chromium, said to the largest in the world, were of interest to prospective developers. With the end of the cold war, appetite for the metal cooled. World demand for nickel (two-thirds of ‘first use’ nickel ends up in stainless steel) has risen steadily, although fluctuations in production and stocks have led to some spectacular peaks (over $50,000 per ton in 2007) and troughs (less than $10,000 at the end of 2008).

No Op Ed on China and resources is complete without the words ‘voracious appetite’, and on the surface this seems to be the case with nickel. Nearly half of the world’s nickel ends up in China, and the State Council lists the metal as ‘strategic’. The word is as meaningless and plastic in Chinese as it is in English. Yet it provides justification for Chinese state-owned companies to make a case for marginal mining ventures, which is how many mining analysts have viewed the Ramu nickel project, which has average nickel deposits of 1.01 percent. It also required the construction of a 135km pipeline to transport the nickel slurry to the refinery and port in Basamuk Bay.

 

Mine workers, Basamuk refinery site, Papua New Guinea.

Mine workers, Basamuk refinery site, Papua New Guinea.

In New Caledonia, Jinchuan – the largest nickel mining company in China, and the third largest in the world – is the last to the table. Fortunately, it is the world’s richest banquet of nickel deposits. Through an accident of geology, the slender island is home to one quarter of the planet’s terrestrial nickel. As local proponents of expanding the nickel industry never tire of informing you, it only accounts for six percent of world supplies. Plenty of room for more diners.

Though Jinchuan hardly intended to do so, its interest in these nickel reserves has made it a player in a game of a geological and colonial nature. In a geological sense, it has to accept the scraps, as French colonial interests, such as SLN (Société le Nickel) long ago claimed the richest nickel deposits. Leached downwards by millennia of tropical downpours, and sitting just above the bedrock in the saprolite layer, nickel reaches concentrations of around three percent.

Slightly lower grade deposits, with a high iron content, sit just above this. Jinchuan had some prospect of obtaining these deposits, but baulked at the requirements of its local partner, SMSP (Société Minière du Sud Pacifique). This locally owned company, whose majority shareholder is the Northern Provincial government, wanted a controlling share (51 percent), not just in the mine, but also in the refinery to be built in China. Under Chinese law, joint ventures based in China should have majority Chinese ownership. To date, the only mention of the project in the Chinese media is a brief article questioning the legality of the Jinchuan-SMSP joint venture.

A Korean company, Posco, soon claimed these ferronickel deposits. They were willing to accept minority shareholder status in this lucrative project. Jinchuan was the first preference of SMSP. They viewed the Gansu provincial government’s controlling stake in Jinchuan positively, seeing it as complementary to the management structure of SMSP, which is subordinate to SOFINOR (Société de Financement et d’Investissement de la Province Nord), a holding company in which the Kanak-dominated Northern Provincial Government has majority control. State-owned is not always a dirty word.

Facing financial pressure, SMSP could not afford to wait for Jinchuan management to overcome their reluctance to be junior partners. This preference for gaining full control of mining projects, rather than focusing on the viability of the project, has been detrimental to several Chinese SOEs initial forays into the international mining sector. Practices that are appropriate in the domestic market, where sectoral monopolies and local protectionism are the norm, translate poorly into the international mining industry, as a leaked report from the State Council has shown.

Nickel smelter built by CMIIC, a Chinese construction company. Koniambo nickel mine, New Caledonia.

Nickel smelter built by CMIIC, a Chinese construction company. Koniambo nickel mine, New Caledonia.

Eventually, Jinchuan overcame their reservations, but only lower grade laterite ore, taken from the yellowish limonite stratum, was left on the table. The limonite stratum sits atop the Korean- and French-owned saprolite layers, but due to leaching, it is geologically the most impoverished. The average amount of nickel ore present (1.4 percent) is richer than the Ramu deposit, but exactly half the percentage required by SLN for its Doniambo smelter in Noumea. Posco’s ferronickel resource, extracted from the layer in between, contains just over two percent. But even before it can enjoy the scraps, Jinchuan faces some unwanted, and unsought, political challenges.

The deal between Jinchuan and SMSP to form the Chinese Caledonian Mining Company (CMCC) was signed off in clandestine fashion in Sydney and Brisbane, as it impinged on the politics of independence in the French Pacific dependency. Historically, the nickel industry in New Caledonia was dominated by SLN, a subsidiary of Eramet, a company with strong ties to the French state. At present, SLN controls 53 percent of New Caledonia’s mineral resources. It is reluctant to cede them to a Chinese multinational.

In order to provide ores for Jinchuan’s refinery – which will be built in Fanchenggang in Guangxi province, the only major Chinese port in the Tonkin Gulf – CMCC has three options. They can source ore from SLN or other mining operators (SMSP has offered to take on SLN’s unwanted mines, in exchange for rehabilitating these ‘zombie mines’); take ore from mines exploited by Posco; or acquire their own mines, most likely on the eastern side of the island, on the aptly named Cote Oubliée (Forgotten Coast). As partner in a project with ores that have not yet been sourced, Jinchuan finds itself – entirely unwittingly – a driving force behind Kanak demands for ‘economic rebalancing’. This is the central principle of the 1998 Noumea Accords, signed ten years after the Matignon Agreements brought an end to violence between loyalists and separatists. While most of New Caledonia’s wealth is concentrated in the French-dominated Southern province, the majority of its nickel resources lie in Northern province.

The chauvinism that prevented Jinchuan from initially contemplating a minority stake in the Chinese Caledonia Mining Company is mirrored by New Caledonian anti-independence politicians opposing any watering down of French control of SLN. The leader of the gloriously named RUMP (Rassemblement UMP), Pierre Bretegnier, declared that: ‘If the STPCI [Société Territoriale Calédonienne de Participation Industrielle, a public company controlled by New Caledonia’s three provincial governments] takes 51 percent of SLN, ERAMET will leave. It won’t have any reason to stay if it is a minority stakeholder.’

Much of the credit for bringing the Jinchuan to the table lies with the director of SMSP, Andre Dang, who, in the words of his biographer, still runs the company like a car dealership. His entrepreneurial skills have brought the Koreans and the Chinese to the table, but perhaps his greatest coup has been in bringing Xstrata on board to finance the $5 billion l’usine du nord (northern refinery), which will process ore taken from the Koniambo massif, a huge nickel ore body wrested from SLN in 1998. As the nickel will be processed on site, by a company majority owned by the Kanak-controlled SMSP (Xstrata has a 49 percent stake in Koniambo), this represents a step towards economic independence for the Kanaks, who in theory could find themselves part of a sovereign nation as early as 2014 (although most analysts agree this is unlikely, as it requires three-fifths of Congress to support the idea). Many Chinese workers at the Koniambo project (a Chinese contractor is assembling the refinery for the mine) were well briefed on the politics of independence for Kanaky, the preferred Kanak name for the island. They generally hewed a pro-colonial line. One welder from Shandong, admittedly impaired by several bottles of Number One beer, offered a novel solution to the colonial impasse. New Caledonia, he ventured, was ‘just like Taiwan.’ Australia should ‘take it back.’

Kurumbukare mine site, Madang, Papua New Guinea.

Kurumbukare mine site, Madang, Papua New Guinea.

The politics of the Ramu nickel project, like most mining ventures in PNG, are more local. In a nation where 97 percent of the land is under traditional ownership, successful mining ventures take time to get off the ground. While the PNG national government, then led by Sir Michael Somare, were courting China Metallurgical Corporation, issues of land ownership were little discussed, and assurances seem to have been made that the government would smooth the way for the new investors. Unfortunately, with the deal signed, the central government failed to appear on the ground, and took the best part of a decade to organize the land titling process. It failed to meet its side of the Memorandum of Agreement, which would have provided complementary social and physical infrastructure. The sidelined provincial government displayed little inclination to support the project, even when it was stalled in the courts for two years by landowners belatedly protesting the impact of mine waste being dumped into Basamuk Bay. All of this led to exasperation on the part of the project’s slightly stir-crazy Chinese managers. As a community affairs officer said, ‘Look, we don’t want to colonize them, or convert them to any religion. We just want the nickel.’

Protest against amendments to PNG's Environment Act, Madang, Papua New Guinea.

Protest against amendments to PNG’s Environment Act, Madang, Papua New Guinea.

With the project gradually scaling up its output, the politics of who benefits from the mine are likely to occupy the thoughts of local landowners. As the new Prime Minister, Peter O’Neill remarked in 2012, ‘We have not done a good deal whereby we have not taken up more equity for our country… Our country is not going to disappear, but we will not let people come in and just take our resources away.’ The model for resource exploitation is different in PNG and New Caledonia. At a mining conference I attended in Noumea in 2011, there was consternation among conference guests from the Anglophone branch of Melanesian studies when they were told, non merci, royalty payments to landowners would never be contemplated in the French Pacific. Yet it is arguable that a larger local stake in mining projects, if managed well, would deliver more sustainable benefits to the local community. In the case of the Ramu project, the management of China Metallurgical not only claimed 85 percent of the equity for their consortium, they also succeeded in negotiating a reduced rate of royalty payments, and a ten-year tax holiday. Good for business, bad for optics.