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The APEC leaders who swung through Santiago, Chile, in November for their annual summit mostly popped in and out of Latin America. Even longtime advocates of trade in the region didn't dally too long. U.S. President George W. Bush made a four-hour pit stop in Colombia on his return, and Prime Minister Paul Martin added a two-day working visit to Brazil before jetting off to Africa. China's President, Hu Jintao, did stay, however, making full-blown state visits to Argentina, Brazil, Chile and Cuba. By the time Hu left, Argentina and Brazil had bestowed official market-economy status on his Communist nation, coming away in turn with billions of dollars in promised investments.
Several of those investments are to be made in the Latin American metals and minerals sector. Heads of Chinese metal companies, such as Minmetals and Baosteel, accompanied the president's visit, announcing new projects and partnerships in copper, iron and nickel. In Chile, Minmetals was in talks aimed at pursuing a strategic partnership with Codelco, the world's largest copper producer, in a potential new mine that could see investments of at least US$550 million. Jinchuan Nonferrous Metals Corp. is investing in another Chilean copper mine in a joint venture with Switzerland's Marc Rich Investment Co.
The day before Hu landed in Argentina, Shanghai's A Grade Trading scooped up the rights to rebuild and reactivate the defunct Hiparsa iron ore mine and processing complex there--a US$25-million deal. In neighbouring Brazil, China's steel giant Baosteel continued negotiations with Companhia Vale do Rio Doce for the construction of an iron-ore production plant potentially worth US$2 billion. In Cuba, Hu pledged a US$500-million investment in the nickel industry; China will build a new mine in the island's northeastern Moa Bay area.
China's interest in Latin American mining is closely tied to its current needs. Over the past few years, China's insatiable hunger for raw materials has driven up metals prices on commodities markets. China's growth rate is historic (GDP growth ran at 9.1% in 2004), and its round-the-clock industrial output makes securing feedstock a top priority. In 2003, imports of iron ore stood at 148 million tonnes, and the country is now the world's largest consumer of ore and steel and one of the largest producers of those products. Chinese aluminum demand is set to outstrip that of the United States, and its appetite for copper, as well as nickel, continues to tighten metals markets. Imports of Latin American metals have steadily increased.
"I think demand is tied quite closely to their political and economic plan," says Albert Keidel, a China program senior associate at the Carnegie Endowment for International Peace in Washington, D.C. "China is looking globally to secure and ensure what they need when they do get larger." Keidel claims the current debate within China is whether the country can rely on the market to get its supply, or if it must secure resources by undertaking new projects. Hu's trip, the new investments and Minmetals' bid to acquire Canada's Noranda (which holds copper and nickel assets in Latin America) strongly indicate China is ready to dig for metals. Nicholas Lardy, senior fellow at the Institute for International Economics in Washington, and a top China watcher, agrees. "[The Chinese] have this psychological ideal," he says. "They feel if they own it, they control the price and feel it is better than buying it on the spot market."
Latin America is a first-tier market for Canadian mining companies, and undoubtedly the most important region for the sector in the past decade. A large move by Chinese companies into the continent brings competition from a mega-power with endless pockets. The recently announced deals are some of the first in the area, and China is still kicking the tires, so any effects will be felt in the longer term. "It won't be a case of waking up in five years and saying 'Where are the Canadians?'" says Tim Wood, editor of Resource Investor, an online mining newsletter. "There's always a risk Canadians will get pushed out, but the discipline Canadians have in the market is healthy."
The most apparent challenge will come when Chinese and Canadian companies are bidding for new properties. Chinese companies, all state-owned, will have no trouble accessing capital, and are not restricted by the unstable will of shareholders, market regulators or analysts. They have more cash and flexibility than the private Canadian firms, and are supplying a seemingly limitless domestic demand. "The bottom line is, who wants to overpay," says Daniel Roling, a senior industry analyst with Merrill Lynch in New York. "Hopefully Canadians won't get into a bidding contest....Heaven help us if the Chinese start overbidding."
Such a move could have a double effect for Canadian companies. On one hand, so-called juniors--small companies involved in exploration, and primarily financed by risk capital out of Vancouver--could see demand for their discoveries rise. Chinese companies have so far been reluctant to explore, preferring to purchase discovered properties and then exploit them. Canadian juniors dominate much of Latin America's mineral exploration, and they'll be well positioned to reap benefits. "I think [China's presence] will create a greater market for exploration," says Niko Cacos, president of Amera Resources Corp., a Vancouver-based junior with exploratory properties in Argentina. He sees China's ambitions fuelling those of Canadian exploration. "[Chinese] strengths don't lie in exploration," Cacos says. "As an explorer, that's a positive. More juniors will enter a South American market with increased Chinese demand."
On the other hand, Canadian majors (larger corporations that build the mines and extract the metals) could find it increasingly difficult to get their hands on prime concessions. They may be priced out of the market if the Chinese bid high, and would need to downscale future ambitions (in turn possibly edging out juniors). Victor Lazarovici, managing director and senior base metals analyst at BMO Nesbitt Burns in New York, puts it bluntly: "[It is] hard if you are a US$100-million company to win a concession if a $20-billion company is interested." Lazarovici claims that those who are most likely to be affected are "second- or third-tier companies," medium-sized majors such as Teck Cominco, Noranda and Falconbridge, which cannot afford to get into a spitting contest with the Chinese.
Chinese mining companies also wield advantages not limited to their pocketbooks. They are a direct extension of the political and economic powerhouse of the East, and bring with them all the tools at hand. China's ability to enter a restricted market such as Cuba is unique, and offers an advantage against Canadian competitors. Most importantly, metals markets are set to follow China's demand for the near future, and the Chinese are likely to give preferential access to their own providers. Canadian mining companies are currently losing ground in China. In the past three years, sales of copper to China by Canadian companies have been cut significantly, and now make up only 3% of the country's imports. "It is worrisome, of course," says Bill Hayes, Placer Dome's executive vice-president of project development and corporate relations. "When you have a much larger competitor, it's a concern. We will need to be sharper, more knowledgeable, more aggressive, innovative and creative."
Uncertainty is the most common reaction to China's ambitions in Latin American mining. No one has seen the Chinese in action yet and cannot ascertain what effect, if any, they will have on Canadians operating in the region. One of the few Chinese mining projects is the Shougang iron company in Peru. State-owned Peru Iron was privatized in 1992 and sold to the China Shougang International Trade & Engineering Corp., for US$120 million, even though the company was only valued at US$22 million. Shougang's relationship with Peru has been rocky, marked with frequent labour troubles and spats with the government. A 2002 Peruvian congressional report cited Shougang's various failures to meet required investment targets, forcing the government to levy fines of US$12 million against the company.
Further fines were issued in 2002 after the collapse of a containment area at one of Shougang's mines caused environmental contamination. The accident was said to be due to deficient design, non-compliance with prevention and safety rules, and the lack of an emergency plan. Since taking over, Shougang has doubled its annual production to 4.5 million tonnes, while shedding half its workforce. The company exports half its production to China, accounting for 1.5% of total Chinese iron ore imports. With no shareholders, analysts, or press to answer to, Shougang can drive ahead full-steam, operating at lower costs with little consequence for management. Fines to a Chinese government-owned company are a pinprick in the dragon's tail. As Tim Wood puts it, "Greenpeace can't just protest in Tiananmen Square."
If Shougang's Peruvian experience is any indication, Canadian companies could be facing increased competition from an aggressive player abiding by different rules. As China wades deeper into Latin America's mining sector, Canadian miners will be wise to keep their eyes peeled--and their ears to the ground.
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