Is this the "new face" of Chinese mining in Africa?

Published by MAC on 2010-12-27
Source: Caixin

Walking carefully into South Africa with a big money-stick

Empowerment, Sinosteel Style

By Chen Zhu

Caixin

17 December 2010

Careful negotiations over a black empowerment law helped Sinosteel retain control of a chromite mine

Meeting financial and regulatory conditions brought China's Sinosteel close to securing majority control of a South African mining concern.

Then came the hard part: The company had to negotiate a potential minefield of social and legal issues tied to the legacy of South Africa's apartheid regime.

Zhang Suwie, president of Sinosteel South Africa, led the successful talks with authorities in the country's northern Limpopo Province for a majority in ASA, the chromite ore mining concern Sinosteel now co-owns with the government's Limpopo Development Corp. (LimDev).

At the center of the talks was South Africa's post-apartheid Black Economic Empowerment Act (BEE), a measure designed to help blacks build small and medium-sized enterprises as well as participate in the development of larger, state-owned enterprises.

The law implemented in 2004 set hard percentage targets for black ownership, management and worker training at businesses nationwide.

Sinosteel's special interest was a clause requiring all South African companies to turn over at least 26 percent of shares to blacks and population segments impacted by "a history of unfair treatment."

Strict enforcement of the clause would require a black enterprise to control mineral rights at the chromite mine and could have reduced Sinosteel's ASA stake to just 44 percent.

But the state-owned company's Beijing headquarters refused to consider anything less than majority control of the chromite mine and a related ferrochrome processing facility.

In hopes of preventing friction between BEE enforcers and Sinosteel executives, Zhang and ASA colleagues got help from notable South Africans including Moeletsi Mbeki, a political economist and son of a former South African president, Thabo Mbeki.

Economist Mbeki was a critic of BEE, calling it a way for companies controlled by whites to court the "elite" of the African National Congress, South Africa's ruling party since 1994. He said the measure gave black politicians a chance to get rich without helping the poor.

The economist also said Limpopo Province, not Sinosteel or ASA, actually held the mineral rights - an interpretation Zhang then conveyed to the provincial governor.

The governor later agreed Sinosteel could maintain a 60 percent stake in ASA while LimDev would accept a cut to 10 percent - down from its initial 40 percent. The Maroga tribal community received 5 percent and BEE companies got 25 percent.

Zhang said the decision not only guaranteed Sinosteel a controlling stake but guaranteed ASA's "peaceful transition under adjustments to South African law" while "addressing the strategic question of the company's long-term development."

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Out of Africa, Successful Bet for Sinosteel

By Chen Zhu

Caixin

17 December 2010

Sinosteel helped build a China business beachhead in Africa by waiting on diplomats and accepting risks at a South African mine

The glitter of mineral-rich South Africa caught the eye of corporate Japan during a hunt for overseas investment opportunities in the mid-1990s. But a closer look at the investment landscape revealed political risks, and the Japanese pulled out.

China's largest metals trader, Sinosteel Group, saw something more - and bet on South Africa for the long haul. The state-owned Chinese concern teamed up with a local company and formed what is today ASA Metals Pty Ltd., a profitable chromite ore miner and producer of ferrochrome, which is needed to make stainless steel.

By the time ASA fired up its first ferrochrome furnace in 1997, the Japanese companies were less worried about risk, so they tried to return to South Africa. Marubeni Corp., for example, offered a high price for a stake in ASA.

But Sinosteel rejected Marubeni's offer, ultimately telling the Japanese they could buy ASA's products but never a stake. It was a proud moment and a high point in the career of Dong Zhixiong, who was then the head of Africa business at Sinosteel and one of the company's pioneers for an ongoing China investment push into Africa.

"Before, I had always looked at the Japanese as teachers, figuring they were very careful in overseas mining investment, and very experienced," Dong said. "But this time we won. They would not dare do what we did, and did well."

What Sinosteel did well was establish a successful beachhead in Africa through the South African market during a political sensitive period for the Pretoria government. Not only was the country continuing its painful transition from apartheid, but Sino-South African diplomatic relations were testy as well.

Sinosteel has since accelerated an African expansion while paving the way for dozens of other Chinese companies that invested and are now doing business across the continent.

Sinosteel cut deals in Gabon in 2006, and two years later expanded in Zimbabwe and Cameroon, bringing its total investments on the continent to about US$ 1 billion. It's now the largest, most deeply rooted resource-based Chinese enterprise in South Africa. And it operates 10 companies with 8.9 billion yuan in assets across Africa, all from a regional headquarters in Johannesburg.

ASA is now the world's second-largest ferrochrome producer, with an annual capacity of 900,000 tons.

"I personally think Africa is at the forefront of global profitability," said Zhang Suwei, Sinosteel's current president for South African operations, who's been in Johannesburg for a decade.

Waiting Game

Sinosteel started building its African success story with a proposal to buy a northern South Africa chromite ore mine in the early 90s. The stakes were high, though, and ultimately the Beijing government waited four years before giving the mine deal a green light.

Dong remembers the uncertain diplomatic atmosphere swirling around the mine proposal when he visited Africa as the deputy president of China Metallurgical Import and Export Corp. in 1991. At the time, South Africa and China had yet to establish diplomatic relations.

Dong returned in 1992 to visit the Dilokong chromite mine in South Africa's northern province of Limpopo with representatives of Japan's Mitsui Business Group and Itocho Corp., who were optimistic about the quality of the deposits but concerned about investment risks. The Japanese hoped to make a deal that included a Chinese investment partner.

At one point during the trip, Dong remembers black miners surrounding the foreign visitors' car and shouting, "I want to work!" The experience bolstered his confidence in the venture's potential for success.

Dilikong was then a marginal operation with a black labor force that had been moved to the region in the 1970s by the white apartheid government. The mine's main function was to train black miners.

Dong's saw hope for improving the mine's prospects at a time when there were few market channels for ferrochrome. The mine also suffered from weak management and was losing money.

Dong returned to Beijing with news of Dilikong's challenges and potential, and soon received attention from officials at the Ministry of Metallurgy.

Yet the diplomatic gap separating China and South Africa slowed the Dilikong deal application, which needed central government approval. Few in Beijing at the time realized that overseas resources would be important for Chinese interests long-term. And some leaders handling Dong's request for a Dilikong investment felt foreign reserves would be better spent developing domestic rather than foreign resources.

But later, the proposed transaction received strong support from the Chinese Foreign Ministry due to its interest in building relations with the African National Congress (AFC), the party of post-apartheid president Nelson Mandela. The ministry saw an opportunity after Mandela vacillated over supporting Taiwan, which had contributed US$ 1.1 million to his successful 1994 election campaign.

The Foreign Ministry's chief for Africa, Ji Peiding, traveled to South Africa in June 1994 to push for bilateral relations. Sinosteel's proposal to invest in chromite mining gave him a chance to lay a business foundation for diplomatic relations. Ji and his ministry then accelerated the Dilikong application process in Beijing.

Sinosteel cut the deal with a November 1996 decision to form ASA as a partnership of its subsidiary East Asia Metallurgical Investment Co. and South Africa's Northern Province Development Co., which is now called LimDev. The Chinese promised to invest US$ 42 million for a 60 percent stake in ASA, while the province handed over control of the mine for a 40 percent share.

Dong thought Sinosteel should focus its business overseas including Africa, but for years that was a money-losing strategy. Indeed, before 2003, most Sinosteel subsidiaries were in the red. The entire group in 2003 earned only about 200 million yuan on sales of 13 billion yuan.

Creditors including CITIC Industrial Bank often banged on doors demanding loan paybacks, prompting some top Sinosteel executives to suggest selling overseas assets and concentrating on domestic business.

But Dong and others understood that China would need more stainless steel and key ingredients needed for stainless steel - including ferrochromium - to meet rising consumer demand. Nationwide steel capacity was 10 million tons then, but stainless steel production was only 300,000 tons.

"The thinking at the time was that, given China's economic development and the increasing use of household appliances, demand for stainless steel would also increase," Dong said. "So certainly we needed to go out and find resources."

ASA was in a perfect position to provide those resources. Thus, it started building a second furnace in 2002, and business grew.

Consolidation Era

Dong left Sinosteel's Africa business as part of a management changeover in 2002, and Huang Tianwen was named the group's new CEO after being transferred from another Chinese metals concern, Minmetals.

Huang insisted on maintaining Sinosteel's overseas presence, but not without a corporate clean-up. So in 2004, he launched a consolidation program that eventually eliminated or overhauled 48 subsidiaries, cleared debt, and created 14 market-specific companies.

Under Huang, Sinosteel formed an overseas holding company and set a goal: Half the company's revenues were to come from foreign sources within three years.

A top overseas priority for Huang was to pursue Australian iron ore projects. But South African chromite ore and ferrochrome projects got his attention as well. Thus, in 2007, Sinosteel increased its investment in ASA by 3.3 billion rand.

Sinosteel management in South Africa welcomed Huang's initiatives as local wages rose and business prospects brightened. A glitch occurred in 2005, when ASA executive Liu Wei asked to return to China after he and his wife were robbed in their Polokwane home. The couple was later persuaded to stay.

Zhang rose to president of Sinosteel South Africa in 2006. Although just 33, he had experience in smelting, mining, management, international trade and accounting. Zhang coordinated Huang's expansion strategy and added two furnaces at ASA's plant to raise annual ferrochrome production capacity to 365,000 tons from 128,000.

Sales improved, and industry forecasts said China's demand for ferrochromium would increase 50 percent. Zhang thought eventually global ferrochromium demand would come from China, while the bulk of the world's supply would come from South Africa.

A bottleneck for Zhang's plan, however, involved the electricity needed to operate furnaces. Power shortages, rising prices and South Africa's power monopoly Eskom gave ASA headaches. In 2008, Eskom proposed production cuts of at least 10 percent by South African ferrochrome companies.

But the Chinese beat back Eskom's threat by prepaying for two years worth of electricity at a set price, guaranteeing plenty of power for its furnaces.

None of the other South Africa metals companies are expected to build new ferrochrome furnaces before 2013, Zhang said, which means "South Africa won't have new ferrochrome production capacity to compete with us. We can make a fortune."

ASA also managed to profit and even plan expansions after the 2008 global financial crisis at a time when competing companies were cutting production.

The Chinese company's success left a deep impression on Cassel Mathale, governor of Limpopo Province, the site of the chromite ore mine. Now, whenever a Chinese company official visits, he is always enthusiastic.

"I'm most concerned about jobs," Mathale said. "When others reduced production and staff, ASA did not. This makes me believe that our future is closely linked with China."

Behind the Scenes

South Africa government regulations initially let Sinosteel buy only mining rights to underground ore. Building a ferrochrome plant, however, required approval from members of the local Maroga tribe and its chief.

At first, the chief would not sign, so the company sought help from a Limpopo official in charge of mining who, with help from trade unions and the South African Communist Party, pressured the chief to sign.

Liu, the executive who was robbed, said he later heard that the chief had been burned alive by an opposing tribal faction "because of differing views on distribution. Places with money are places of life and death" in South Africa, he said. "This sort of thing is common here."

Zhang is familiar with South Africa's social issues as well, and said he learned that Chinese investors who get directly involved may make troubling situations worse. That's why he lets ASA's local managers intervene if needed in local affairs.

Indeed, Sinosteel uses local management throughout Africa: Only 19 of the company's 7,000 workers on the continent are Chinese. ASA has two senior management teams - one local, one Chinese.

Typically, Zhang oversees the Johannesburg headquarters while three Chinese managers are stationed in Polokwane, near the mine. They travel to the mine only once or twice a month, leaving day-to-day management and ferrochrome plant oversight to local teams.

Sinosteel is now looking beyond South African chromite ore to the country's other resources such as uranium, manganese and coal. It sees numerous opportunities and room for growth.

In coal, for example, Zhang said South Africa offers easy-to-reach beds that cost as little US$ 20 per ton to extract but could fetch US$ 60 a ton on the market, especially since local governments across the country are interested in resolving power shortages by building new plants, some of which are expected to come on line by 2014.

Sinosteel now hopes to raise capital to meet growth goals, although a public listing plan for ASA on the South African exchange was abandoned in 2007 after Sinosteel Group launched an IPO. More recently, the group's investment losses have hurt chances for squeezing capital out of the group's headquarters in Beijing.

Neither are Chinese state-owned bank loans an easy cash prospect, since overseas resource entities that get such loans are required to bring a sizeable portion of their extracted resources back to China.

ASA, however, is not much of a Chinese industry supplier. In 2008, for example, the company sold almost all its ferrochrome to Japanese, American and European buyers at prices up to 15 percent higher than China's offers.

Vast ocean miles between South Africa and China means ore shipping for Chinese buyers is not cost-effective. Nevertheless, to hedge against western downturns, ASA started setting aside 20 percent of production for Chinese customers after the 2008 financial crisis.

Zhang said barring a resource shortage in China or war, his company has no obligation to trade national interests for business interests. And this attitude has helped Sinosteel succeed, which in turn has motivated other Chinese mining companies including Zijin Mining to seek fortunes in Africa in recent years. More may be coming.