China’s headlong scramble for resources is provoking an inevitable backlash. Governments of mineral-rich nations, seeing China-inspired demand booming, are demanding a larger share of their natural patrimony. Little wonder, then, that the proposed ‘super-profits’ tax on Australian mining has the Chinese worried.
On the surface, Sino-Australian ties are warm ones. Xi Jinping, vice president and heir apparent to President Hu Jintao, met Kevin Rudd in Canberra on Monday (he was still prime minister at the time) amid smiles and handshakes.
Xi announced nearly $9 billion of new investment by Chinese companies, and talked positively about the prospects for a bilateral free trade agreement. Publicly at least, no mention was made of the mining tax. Still, it was widely thought to be the main purpose of Xi’s visit.
Resource taxes have been in the news recently in China, following the announcement of plans to implement one of its own. It will be piloted in Xinjiang, and could then be rolled out to other resource-rich provinces, bringing in much-needed funds for local governments (see WiC62).
China’s own ‘resource nationalism’ is also creating headlines, with Beijing under fire from the US and the EU for its export policies of ‘rare earth’ elements (see WiC57).
But Australia’s relative geographical proximity (and stability) has made it China’s largest supplier of iron ore, aluminium, coal and natural gas. If the 40% tax on mining profits goes through, it will bring in $8 billion annually to the Australian treasury. The Chinese concern is that a large chunk of that will ultimately have to come out of their own pockets.
Chinese miners have invested heavily in Australia, and were not anticipating this sort of ‘political risk’ hitting their bottom line. “[Mining] projects require 3-4 years before they start operating, so many will come online just in time to pay the resource tax and their profits will be affected,” one frustrated executive told the Economic Information Daily.
Hence China’s state-controlled mining giants are applying pressure to the Australian government. Just like the multinational miners, they are threatening to cease exploration efforts. “We are now re-evaluating some of our mining projects in Australia,” warned Huang Tianwen, president of Sinosteel Corporation. It’s a similar response to the one employed by the oil companies when their wells were nationalised in Latin America and the Middle East in the 1960s and 1970s. The miners will be hoping it’s more effective today.
Chinese firms have also responded by restructuring contracts, to mitigate their tax exposure. Instead of buying equity in Australian mines, the deals recently announced by Xi will see them build mining infrastructure in exchange for offtake agreements where they commit to buy the mine’s production at an agreed price.
That’s all well enough for the short run. But in the longer term China Inc will only exert real sway over Australian thinking if it can threaten to look elsewhere. For the most part that has meant doing business in politically unstable places. And that ambition may put China into one of the most unstable of all – if it wants to benefit from the most recently discovered geological prize: Afghanistan.
The US Geological Survey announced last week that it had discovered nearly $1 trillion of copper, gold, cobalt, lithium and iron ore deposits in the war-stricken country. It’s hoped that the finds could help move the Afghan economy away from narcotics, its current mainstay.
Others question whether the mineral finds will be quite the boon that analysts claim. Instead, they talk of a ‘resource curse’ scenario, in which the struggle to profit from the reserves ends up leading to more violence.
The discovery of rich reserves of minerals in eastern Congo in the late 1990s reignited a local civil war that has claimed thousands of lives, for instance.
The real winner from the new natural resource wealth, claims Aziz Huq in an article in Foreign Policy magazine, could be the Chinese. China has a narrow land border with Afghanistan and already invests substantially there. State giant China Metallurgical has committed $3.5 billion to a copper mining venture in Logar province, for example. Recently, it was forced to deny allegations that it paid the (now sacked) minister of mines $30 million to secure its bid (see WiC41). ZTE and Huawei are also involved in telco infrastructure projects in the country.
This has led to complaints that Chinese firms are getting a hidden subsidy from the US military presence in Afghanistan.
The Chinese argue that they can better contribute through investment and trade. They also claim that their commitment is part of a longer term involvement in the Afghan economy, as they will need to hang around to profit from their investments. America’s diplomatic strategy, on the other hand, seems to be geared towards the earliest possible exit.
Any miner contemplating digging in Afghanistan will have to solve the problem of how best to get the minerals out of the country. Three decades of war have left Afghanistan with hardly any infrastructure, and John Hulsman of the Hague Centre for Strategic Research has written in the UK’s Spectator magazine that the resources are most likely to depart via the ports of Chabahar, in Iran, and the Chinese-built Gwadar in Pakistan. This also makes Chinese firms – rather than multinationals like Rio Tinto – the “most likely candidates” to mine Afghanistan’s riches, Hulsman reckons.
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