Making Way for Mines

Chinese Investment in Peru

Photo courtesy of Cynthia Sanborn

 

Imagine that you have to move. Imagine that you must pack all of your belongings and memories and move six miles down the road. Your town will be swallowed up to make way for an open pit copper mine. The mountain you’ve looked at all your life will be leveled to the ground. But you know—or you have been told—that the new place will offer you better public services, new schools and roads, a new clinic and church. And for the first time in your life, you will get a home of your own instead of renting. Although you have misgivings, you agree to give it a try.

The relocation of Morococha, an old mining town in Junín, Peru, has drawn enormous national and international attention. For one thing, it is the first voluntary resettlement of a community to make way for a mine in recent Peruvian history. Most of the town’s 5,000 residents were consulted by the company involved and, amidst tears, fears and tough negotiation, agreed to the move and various forms of compensation. Furthermore, the company moving them is part of the Aluminum Corporation of China, Chinalco, a multinational owned by the Chinese state. Since obtaining the concession in 2007 for the Toromocho project—named for the mountain to be removed—Minera Chinalco Perú S.A. has invested considerable time and money in trying to construct not only homes, schools and the mine, but also viable community relations, leading many to ask if this signaled a new phase for Chinese investors in this region.

In the last decade Peru has been able to achieve sustained economic growth, cutting poverty in half and producing an expanding middle class, making it one of Latin America’s success stories. The country’s recent boom has been driven in part by the increasing global demand for the minerals and other primary commodities that Peru exports, as well as by sound macroeconomic policymaking and strong commitment to international trade. Expanding relations with China form an important chapter in this story.

The demands of a growing China have offered exceptional opportunities to attract new investment and markets for traditional exports. In recent years, copper, iron, gold and other minerals have made up about 60 percent of total Peruvian exports, 25 percent of total FDI and 15 percent of total tax revenues. While investors from more than 30 countries are involved in Peru’s mining industry, China has become a leading market for these resources. Nearly a third of the exporting country’s total projected mining portfolio of US$56 billion over the next decade will come from direct investment from Chinese sources.

Although many in Peru see economic relations with China as a blessing, the heavy investment has also revived concerns about the “resource curse,” the risks of excessive dependency on primary commodity exports with the accompanying structural challenges that can hinder a more diversified and productive economy. To the extent that Chinese demand for Peru’s minerals and oil is higher than the world average, some argue that it contributes to reinforcing this pattern.

Dependency on mineral exports also raises concerns about the social and environmental implications of large-scale extractive activity. The mining industry within China has had serious problems with safety and environmental regulations, raising the issue of whether Chinese companies can comply with global standards. Transparency is another concern; many in Latin America have come to demand a high standard of transparency that some Chinese companies do not offer. The Chinese have not been active participants to date in voluntary efforts such as the Extractive Industries Transparency Initiative (EITI). Yet recent scholarship by Kevin Gallagher, Rubén González Vicente, Deborah Brautigam and others has suggested that the key issue is not whether a company is Chinese, or of any other nationality, but rather the willingness and capacity of host countries to regulate firms adequately.

Peru leads Latin America in efforts to implement new standards for the mining industry and to use the abundant revenues from mining to advance an array of development goals. In 2011, Peru became the first country in the Americas to be declared compliant within the EITI framework. That same year, the government of President Ollanta Humala launched efforts to implement ILO Convention 169, guaranteeing the rights of indigenous and tribal peoples to prior consultation on major public policies that affect their lives, including the granting of mineral and hydrocarbon concessions.

But as China’s growth and world minerals prices take a downturn, the drive to increase new mining production has come into conflict with social and environmental concerns. Government initiatives in these areas have also been hampered by institutional weaknesses, conflicts of interest and outright corruption, generating numerous and often violent disputes between companies and communities over land and water rights, revenues and environmental contamination. Such conflicts pose challenges and delays for all firms, including Chinese investors new to the country.

For the last few years, colleagues at the Research Center of the Universidad del Pacífico (CIUP) and the Peru-China Center have been studying various aspects of Chinese involvement in Peru’s economy and society. Along with macro-level issues of trade and investment, we are asking if growing Chinese direct investment in Peru’s extractive industries—especially mining—will have any social or environmental implications different from those involving other multinational or Peruvian investments. Have Chinese state-owned firms reacted differently from their peers in the industry to social conflict or changing regulatory demands? Have local actors—government, communities and NGOs—reacted differently to Chinese investors?

China has actually been present in Peru for more than 160 years. During the mid-19th century, thousands of Chinese men were brought to Peru as coolies—indentured agricultural workers—to labor on sugar plantations and the rich guano islands. Chinese workers also helped build railroads and extract rubber and gold from the Amazon region. But direct Chinese investment in Peru was virtually nonexistent until 1992, when the Shougang Group bought the state-owned iron ore company, Empresa Minera de Hierro del Perú (Hierro Perú). Then the largest Chinese investment in Latin America, at US $118 million, it was one of the first state enterprises privatized by the Fujimori administration. In 1993, SAPET, a subsidiary of the China National Petroleum Corporation (CNPC), also purchased some state-owned assets in the Peruvian oil industry. Yet fifteen years would pass before more significant Chinese investments would flow towards the Andes.

Today around one hundred Chinese firms are legally registered to operate in Peru, with at least fifteen Chinese firms holding important concessions, and hundreds of smaller ones also in Chinese hands. Peru is now a leading location for Chinese mineral investment in Latin America. The majority of these firms are state-owned, purchased directly or through takeover of smaller Western firms with most investments in copper or iron. Most concessions are still in the exploration stages, although Toromocho is expected to go into production in December 2013. A Chinese firm or consortium may also purchase another enormous copper project, Las Bambas in Apurímac, as a result of negotiation with Chinese regulators over the takeover of Xstrata, the prior owner, by Glencore.

One might ask if there is a “Chinese way” of doing business in Latin American mining? The short answer is no. Diverse Chinese firms operate here, with both public and private capital, and the policies of the Chinese government towards its overseas companies are evolving fast. Rather than generalizing, we consider it fundamental to analyze more closely the nature and operations of each firm, and their relationships to the Chinese state, local authorities, other mining firms, and diverse stakeholders. In Peru, the two best-known cases are also ones that demonstrate the sharpest contrasts: Shougang and Chinalco.

 

SHOUGANG: STARTING WITH THE LEFT FOOT

Although Chinese investment is increasingly important for Peru’s mining sector, there is still only one operating mine owned by a Chinese company in this country, Marcona, the largest iron mine in the country, located in the Ica region. Its owner is Shougang Hierro Perú S.A.A., part of the Shougang Group, a state-owned conglomerate founded in 1919 in Beijing that focuses mainly on the steel industry. It was the first Chinese mining company to “test the waters” in Latin America. In 1992, Shougang bought Empresa Minera de Hierro del Perú, and with it the Marcona mine, which was developed by the U.S.-owned Marcona Mining Company in the 1950s and expropriated by Peru’s military government in 1975.

For Peru, this was the first sale of a state-owned company under the Fujimori administration’s dramatic liberalization effort, and the primary concern was restoring investor confidence. At the time of the purchase, Hierro Perú was a run-down firm with significant economic losses, an aging labor force and highly politicized union. The town of Marcona, a former mining camp, had also seen better days.

In preparation for the sale, the Peruvian government laid off half the work force, but apparently left the unemployed in company housing. According to comparative development expert Rubén González Vicente, when Shougang arrived, it promptly evicted these people, bringing in Chinese workers to take their place. Locals burned the company’s three Chinese arches in protest, González reports, and the foreign workers were quickly sent back home. In this sense, Shougang had already started on the wrong foot, provoking conflict with both its remaining labor force and the surrounding community.

Under two decades of Chinese management, Shougang Hierro Perú became a highly profitable company. In 2011, for example, it produced more than seven million tons of iron ore, and last year it recorded a 50 percent growth in its net profits. Yet Shougang also remains one of the most widely criticized foreign mining firms in Peru, perhaps rivaled only by the Yanacocha gold company, jointly owned by the Denver-based Newmont Mining Corporation and the Peruvian Buenaventura. First of all, Shougang broke its original investment commitment, reneging on plans to modernize the mine itself. Privatization had promised to create conditions to improve worker safety; the company fell short of that. While economic and political setbacks for the mother firm in China in the mid-90s apparently account for part of this situation, workers and local authorities received no explanations. The company´s broken promises would not be forgotten. Then short on cash and facing debts back home, Shougang executives took a hardline approach to union negotiations, leading to annual strikes and protests that grab media attention. In addition to accusations of low wages and poor working conditions, the firm has been accused of noncompliance with environmental regulations, and has had conflicts with the surrounding community over provision of water, electricity and alleged contamination. In the eyes of many Peruvians, as well as the international media, Shougang represents the negative stereotype of a Chinese company that ignores global standards in the race to feed its demand for ores.

However, a recent study by Amos Irwin and Kevin Gallagher, Chinese Investment in Peru: A Comparative Analysis, indicates that Shougang “has not performed significantly worse than its foreign or domestic counterparts.” Although the company’s labor and environmental records are weak by international standards, these authors claim that Shougang lies somewhere in the middle when compared with a selection of other multinational and national firms operating in Peru. Examining wages, working conditions, safety and accident records and environmental sanctions, they find that Shougang is neither the best nor the worst. While its rate of serious accidents is relatively high, and it tops the charts for man-hours lost to strikes, Shougang ranks better than most in terms of percentage of workers on payroll with full benefits and profit-sharing rights. The conclusion is not that Chinese firms have low standards, but rather that Peruvian authorities have been weak in enforcement of standards with virtually all operating firms.

Shougang inherited a difficult situation that is not comparable to newer greenfield projects without prior constraints. However, this does not explain the persistent conflicts it has generated, its absence from voluntary fora such as EITI, or its reticence to invest in improving community and public relations. For some observers, these problems can be attributed to cultural and political differences between Peruvian and Chinese managers, the idea being that the Chinese do not know how to deal with free trade unions, a free press or local democracy. However, more recent cases suggest that Shougang’s problems may have more to do with the company back at home per se than its Chinese origins, as Shougang Corporation is facing an increasing number of challenges in an industry with more and fiercer competition. Furthermore, since 2011 the company reports investing over US $1 billion in modernization and expansion of its facilities, leading to an increase in profits and payroll, though not in labor peace.

Chinese companies moving into Peru in the past decade are trying to learn from, and avoid, the mistakes of their predecessors, including not only Shougang but also Western-owned firms like Yanacocha, which also began working in Peru in 1992 and has faced growing social conflict since. En route to becoming truly global firms, a number of Chinese companies are making efforts to act with social responsibility, and to be perceived as such. The leading example in Peru today is Chinalco.

 

CHINALCO: EXCEPTION TO THE RULE?

Chinalco is building a new city of Morococha with an investment of $50 million,” according to the Spanish-language announcement. “First a new city, then we begin operations. This is responsible mining. We’re Chinalco. We believe in Peru.

—Bloomberg News, November 1, 2010

The Aluminum Corporation of China (Chinalco) is a state-owned enterprise founded in Beijing in 2001 after the merger of a group of aluminum companies as part of China’s efforts to consolidate and restructure its industry. Today it is one of the world’s largest aluminum producers. In 2007, Chinalco acquired the Canadian junior firm, Peru Copper Inc., obtaining the Toromocho project in central Peru. The project is named for Mount Toromocho (in Spanish, “bull with no horns”), which is being razed to build a copper mine and processing plant, carving out an open pit larger than New York City’s Central Park.

According to reports, Chinalco has invested more than US$3 billion in this project, which should have a life span of 36 years. With an annual output of more than 250,000 tons during its first decade, it is expected to generate close to US$7.5 billion in income tax revenues.

Located in a high-altitude historical mining region, this project stands out for its state-of-the art construction, investment in an acid water treatment plant for the area, and diverse forms of social investment, as well as the relocation of the nearby town of Morococha (see box on left).

In this case, Chinalco executives—aware of Shougang’s reputation—explicitly wanted to mark their distance and establish a socially and environmentally responsible company. The first CEO of Minera Chinalco Peru, Gerald Wolfe, had previously run Antamina, considered a global model for “new” mining and CSR. While the current CEO, Huang Shanfu, is Chinese, most of the management team and workers are Peruvians. Indeed, since the Shougang protests in the early 1990s, no subsequent Chinese mining company in Peru has tried to bring its own labor force from home. Chinalco also retained the community relations consultants originally hired by Peru Copper, working with them to try and conduct an exemplary relocation process.

By objective standards, the old town of Morococha is a bleak site. Built as an earlier mining camp, it is cold and rundown, with communal latrines and a limited water supply. The majority of residents were renters who lived in overcrowded and dilapidated buildings, while working in mines nearby. At the edge of town sits a toxic tailings dump around which local children play.

Yet moving is always hard, and Chinalco initially encountered resistance, led by the town’s mayor and an influential group of property owners. Over time, and with considerable patience and astute negotiation, the majority of residents agreed to relocate, and in October 2013 the mayor reluctantly agreed. In the new town, all families have their own home with running water, sewage and a property title. Hence even before the mine goes into operation Chinalco will have established a new standard in Peru. And ironically, executives from Peruvian and other international companies complain that Chinalco is distorting the market, offering better wages and benefits than the industry average. Its financial backing also appears to be unparalleled even by other Chinese firms operating in this region.

So is Chinalco the new model of Chinese overseas investment? Or is this the exception to the rule? Whichever the case, it is yet too soon to tell.

 

Winter 2014Volume XIII, Number 2
Cynthia Sanborn is Director of the Centro de Investigación de la Universidad del Pacífico (CIUP) and a Professor of Political Science at the same institution. Since 2007 she has been a member of the Peruvian National Multisectoral Commission of the Extractive Industries Transparency Initiative (EITI).

Victoria Chonn Ching is a researcher at the Centro de Investigación de la Universidad del Pacífico (CIUP) and Assistant to the Director of the Peru-China Center at UP. She holds an MA in Chinese Studies from the University of Michigan.

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