February 5, 2013 6:44 pm
 
Mining: Andean concessions
 
As Peru’s copper output rises, Lima must soothe disputes between indigenous communities and mining companies
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Peasants camping near the Conga mining project stand nearby the Laguna de Mamacocha Peru©Getty
Pitted against the elements: Peruvians gathered late last year at Laguna Mamacocha to demonstrate against the Conga mining project



Perched at an altitude of 5,200m in the Peruvian Andes, the newly built town soon to be christened Nueva Morococha is an incongruous sight, its immaculate rows of matching red roofs dominating the bowl-shaped valley below.


Chinalco, a Chinese mining company, has built the settlement from scratch to relocate about 3,500 people from the village of Morococha – a former mining camp built on a slag heap in the early 1900s.

Peru-Chile copper charts


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Nueva Morococha boasts paved streets, playgrounds, schools, churches and water-processing plants. It stands in stark contrast to the old village, 15 minutes drive up the hill, where shacks and ramshackle adobe houses with rusty corrugated metal roofs cluster around potholed roads. A pungent smell from the communal latrines hangs in the air.


Chinalco’s motive for relocating the villagers is visible in the scars gouged across the cone-shaped, ochre mountain that looms over the old village. It is here on Toromocho– the bull with no horns – that Chinalco is investing $2.2bn in a copper mine and processing facility. The villagers of Morococha are, quite simply, in the way.


According to the company, 77 per cent of households, about 900 families, have agreed to move. Chinalco says it is still calculating the cost of the resettlement, but estimates suggest somewhere between $150m and $200m.


The problem is that not everyone is ready to move immediately. Marcial Salomé, the mayor, has defied Chinalco and has pledged not to move to the new village until he gets what he believes is owed to his people.


“I am not opposed to the move, I just want the company to give us what’s fair,” he says. He is representing a few hundred residents who have resisted the terms of the relocation. He wants Chinalco to guarantee jobs in the new mine and the company to compensate his townspeople with $300m for destroying their village. “This is our home,” he adds. “We need to defend what is ours.”


Mr Salomé’s resistance to Chinalco lays bare the simmering social tensions that pose one of the most severe challenges to Peru’s aspirations to challenge Chile’s supremacy among global copper producers.

 


Lima’s targets are ambitious. If Peru receives all the investments it has in the pipeline over the next 10 years – about $53bn for 52 projects – the Andean country will produce 5m tonnes annually by 2025putting it right on the heels of Chile, the world’s top copper producer, with output of 5.7m tonnes. Peru is currently the third-biggest copper miner, producing about 1.3m tonnes. Mining is the backbone of the fast-growing economy and accounts for 15 per cent of gross domestic product.


But the exploitation of copper reserves presents President Ollanta Humala with a knotty political challenge. While many of Chile’s mines lie in remote, unpopulated areas such as the Atacama Desert, Peru’s copper is more frequently found near the villages of indigenous communities.


This has forced Mr Humala to perform a delicate balancing act. The 50-year-old former army officer won a close election in 2011 on a social democratic platform, pledging to support the poor in the country’s many mining disputes. On the other hand, Mr Humala is acutely aware that the billions of dollars from promised mining investments are crucial to sustaining the nation’s stellar 6 per cent economic growth. This generates the extra revenues he needs for social programmes, supporting more than a quarter of the population who live below the poverty linepeople like the inhabitants of old Morococha.


Peru has the mineral potential to be a copper superpower, and it is certainly far closer to this status than it was 20 years ago. So it is moving in that direction,” says Anthony Bebbington, a former World Bank consultant. “The question, then, is can that move forward be sustained? And what would be the social and political institutional conditions that will allow that to happen?”


Mr Humala’s first year in office gave him a bloody introduction to the sort of institutional reforms he would have to make as he faced protracted riots around the northern city of Cajamarca, famed as the place where the Inca empire met its end.


The stand-off was over a planned $5bn investment by New-York listed Newmont Mining for one of the country’s largest open-pit gold and copper mines, Minas Conga. Local politicians and residents say the Conga mine, which is still at the construction stage, will harm the water supply. The company denies this. The total number of deaths is disputed. In July last year five people were confirmed killed but human rights and environmental activists say as many as 15 or 16 people have died since September 2011.


The government admits to more than 200 conflicts, with others reportedly bubbling just below the surface. Those that most often turn violent involve mining and increasingly focus on water use. They include not only Minas Conga but also Xstrata’s Tintaya-Antapaccay operations in the southern region of Cusco. And late last month some people were wounded in clashes between the police and local communities demanding the abandonment of Candente Copper’s Cañariaco project in Lambayeque, northwestern Peru.


Analysts say the problem with all of these projects, which would require total investment of almost $8bn, is that anti-mining groups believe they have already won a battle to halt them. Digging in, the protesters will not even accept the projects with alterations that satisfy all of their original demands.



“They should scratch most of those projects, sometimes they do more harm than good, it’s as simple as that,” says Marco Arana, a softly spoken former priest, who has been at the forefront of protests in Cajamarca. “I am not anti-mining, but we need to find a balance,” he says.


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Since his baptism of fire, Mr Humala has attempted to forge a more coherent strategy for dealing with the unrest, helping affected communities in advance with infrastructure projects – such as education, water supply and healthcare.


The scale of the promised mining projects gives Mr Humala the financial leverage to be able to make these kind of infrastructure pledges. The projected output from mines such as Toromocho has inspired Peruvian leaders with confidence. The Chinalco mine is expected to produce an average of 250,000 tonnes of copper a year for 36 years. China, which imported 55 per cent of its unrefined copper in 2011, will be the main customer. China’s imports are forecast to rise in the next few years, with supply expected to grow 3 per cent a year between 2012 and 2016.


Jorge Merino, Peru’s mining minister, believes such levels of demand will lead investors to his country. Chile has old reserves ... Peru has new projects, new areas for exploration, that is why it is still attractive,” he says.


The government is welcoming investors with open arms. Last year it granted 4,668 mining permits to 582 companies, up from 3,100 in 2011, according to the Geological, Mining, and Metallurgical Institute of Peru.



BHP Billiton was granted 144 permits. Peru’s Buenaventura – the local partner of Newmont – received 100 and Barrick Gold was granted 84.


Money is being committed at breakneck pace. Southern Copper of the US is planning a $1.6bn expansion at its Toquepala and Tía María mines. Freeport-McMoRan has approved a $4bn expansion of its Cerro Verde operations in Arequipa, southern Peru, while Antamina is investing more than $1bn in expansion work. Anglo American is set to invest $3bn in Quellaveco.


“We are a country blessed by God in mineral terms. We already are a mining superpower and we are destined to become a copper superpower,” says Luis Rivera, Xstrata’s vice-president of operations in Peru. Xstrata has invested more than $6bn in building up Tintaya-Antapaccay, and its flagship project, Las Bambas, which will have a final cost of $5.2bn. Once operational, the latter will be Peru’s largest copper mine, expected initially to produce 400,000 tonnes a year from 2015. In a similar fashion to Chinalco, Xstrata will also relocate 475 families.


Still, despite his strong hand, Mr Humala must play his cards wisely. The National Mining Society has warned that a number of projects are already doubtful because of social problems, with anti-mining forces from Cajamarca taking up positions to oppose projects in other regions.


This is most obvious in the case of Southern Copper’s Tía María, a $1bn project located in Arequipa. Farmers blocked the project in 2011, saying it would deplete the water supply for agriculture. The company redesigned the project to include a desalination plant, thereby seemingly resolving the water issues. However, opponents have now switched their focus to air pollution and soil contamination.


Anglo American’s Quellaveco $3bn copper project, also in southern Peru, is another important test case for Mr Humala. The company has agreed to set up a $385m social fund for development and has announced that it will make a final decision on the project by the time of its next board meeting in April. Anglo American was granted a “social licence” in July, after years of talks with community groups.


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Despite the disputes, Mr Humala appears to be weathering the storm. Most recent polls put his popularity at or above 50 per cent, leading some analysts to label him “the Teflon-coated president”. His support has risen largely because the ferocity of many disputes has started to ebb.


There have been no more deaths since those related to Minas Conga. Some believe this may be because mining projects are running more effective vetting processes, helped by new agencies. Mr Merino, the mining minister, insists the best way to combat poverty is through a properly regulated mining industry “that protects the environment and includes the poorest”.


The government is also trying to cool disputes by involving regional authorities directly in conflict management and resolution processes, as well as including them in the negotiations for projects. Finally, the administration is putting its faith in a prior consultation lawrequiring the government to consult local communities before big mining projects – to ward off conflicts, although this has attracted widespread scepticism.


Back in Toromocho, Chinalco is pressing ahead. To Ezio Buselli, the company’s vice-president of environmental and corporate affairs, the crux of the problem is that investments in Peru have advanced at a faster pace than social policies, and many people feel left behind.


When there is a bonanza, everyone wants to invest,” he says. “When everyone invests, then everyone wants to jump on board.”


 
Copyright The Financial Times Limited 2013


February 4, 2013 7:41 pm
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QE takes a toll on emerging economies
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The surge of quantitative easing around the world should be a reason to worry for many emerging economies. In a recent wave of announcements, Japan, under new prime minister Shinzo Abe, has followed the lead of the US and the eurozone by introducing greater liquidity into the markets.


Developed countries are acting to support their economies, but it is emerging markets that have absorbed the bulk of the severe currency appreciation that follows every round of QE – and in particular those countries committed to flexible exchange rate regimes and open markets. This is particularly true in a world where China continues to manage its exchange rate. After all, currency wars are zero-sum games.


This is the case for the most successful Latin American economies Colombia, Mexico, Peru and my own, Chile – which experienced appreciations of close to 10 per cent against the US dollar in 2012.


In the same fashion, in developed open economies such as Australia and New Zealand, currency appreciation against the greenback has reached almost 15 per cent since 2010.


Certainly, Chile’s annual average growth rate of almost 6 per cent in the past three years has had a role to play. This is high compared with most industrialised economies but the appreciation we have seen cannot be explained by this fact alone. The price of copper has not been on a clear upward trend since 2010, so it bears little or no blame for the exchange rate picture. It is hard to escape the conclusion that a significant part of the appreciation we have seen in Chile is the result of the various rounds of QE.


In our economy, which is fully integrated with global capital and product markets, a cheap US dollar is a cause of concern for export sectors, such as copper.


Seen from Santiago, three questions must be asked by countries currently pursuing unconventional monetary policies. First, how long can loose money be maintained without undermining the desired outcomesgrowth, higher employment and so on – for those countries actively pursuing it?
 

Monetary policy can be a useful tool to cope with particular demand problems in the short term but it is rather ineffective in fostering sustainable growth over the long term.


Second, is QE effective in a scenario with zero or negative real interest rates? The risk is that a liquidity trap – as notoriously depicted by Japan’s prolonged stagnation of the past two decades – is just around the corner.


Third, will the quick fix of QE mean that countries avoid facing the urgency of implementing much-needed structural reforms?


These questions are, ultimately, for the governments of developed countries. But assuming that QE is not going to stop soon, what should emerging economies do?


The answer begins with a responsible fiscal policy that keeps public spending in check so that appreciation can be limited.


In Chile we have pursued this objective by expanding public spending significantly less than the growth of gross domestic product in the past two years.


But sometimes that is not enough. Countries can also fight appreciation through foreign exchange purchase programmes, but this is an expensive tool that would probably generate losses for central banks’ balance sheets.


Purchase programmes could, though, be complemented with so-calledmacroprudentialmeasures such as limits on banks’ foreign exchange exposure. These measures could therefore prevent short-term speculative capital inflows.


Less virtuously, severe appreciation pressure upon domestic currencies entails the risk that countries embrace the appeal of capital controls. In addition, the detrimental effect of real exchange rate appreciation on exports could induce the temptation of new forms of trade protectionism.


One thing is unmistakably clear: the greatest share of the exchange rate adjustment costs resulting from quantitative easing is absorbed by a small group of developing and open economies, particularly in Latin America.


This is the real world effect of the beggar-my-neighbour policies pursued by developed countries. By seeking relief at the expense of other economies, QE is, in its essence, a globally counterproductive policy.



The writer is Chile’s minister of finance

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Copyright The Financial Times Limited 2013.


IMF sees 140m jobs shortage in ageing China as 'Lewis Point' hits

China’s vast reserve of cheap workers in the hinterland is vanishing at a vertiginous pace.
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By Ambrose Evans-Pritchard

6:48PM GMT 03 Feb 2013
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Graduates throw their mortar boards into the air after their graduation ceremony at Fundan University in Shanghai
Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. Photo: Reuters




Beijing revealed last week that the country’s working age population has already begun to shrink, sooner than expected. It will soon go into “precipitous decline”, according to the International Monetary Fund.

 
Japan hit this inflexion point fourteen years ago, but by then it was already rich, with $3 trillion of net savings overseas. China has hit the wall a quarter century earlier in its development path.

 
The ageing crisis is well-known. It is already six years since a Chinese demographer shocked Davos with a warning that his country might have to resort to mass suicide in the end, shoving pensioners onto the ice.
 
 
Less known is the parallel - and linked - labour drain in the countryside. A new IMF paper - Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point? - says the reserve army of peasants looking for work peaked in 2010 at around 150 million. The numbers are now collapsing.


The surplus will disappear soon after 2020. A decade after that China will face a labour shortage of almost 140m workers, surely the greatest jobs crunch ever seen. “This will have far-reaching implications for both China and the rest of the world,” said the IMF..
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These farm workers are the footloose migrants that pour into the cities from the interior, the raw material of China’s manufacturing workshops. They are carefully regulated by the semi-feudal Hukuo system to keep their families tied to villages at home, and to keep the lid on social revolt.


There is little Beijing can do to head off the shock. The effects of low fertility rates - and the one child policy - are already baked into the pie. It would take half a century to turn around the demographic supertanker.


The Lewis Point, named after St Lucia's Nobel economist Sir Arthur Lewis, is when the supply of workers dries up and city wages soar. It is when labour turns the tables on capital, and profits crash.


You could argue that such a process already well under way, and is why Chinese equities are trading at a third of their 2007 peak in real terms. Manufacturing pay has risen 16pc a year over the last decade in the East Coast hubs of Shenzhen, Beijing, Shanghai and Tianjin, though this slowed sharply in 2012.


Boston Consulting Group says that “productivity-adjusted wages” were just 22pc of US levels as recently as 2005. They will reach 43pc by 2015, or 61pc for the American South.


It is a key reason why General Electric, Ford, Caterpillar and others are “re-shoring” from China back to the US, though cheap shale gas, a weaker dollar, and shipping costs all play their part.


This is no bad thing. The world economy is rebalancing. China’s current account surplus has fallen from 10pc of GDP to just 2.5pc.


China’s corrosive gap between rich and poor should narrow. The GINI coefficient measuring inequality should come down from stratospheric levels, 0.61 according to researchers at Chengdu University.


Yet it is also a dangerous moment for Beijing. The Lewis Point is the great test for catch-up economies, when they can no longer rely on cheap labour, copied technology, and export-led growth to keep the game going.


The air is thinner at the technology frontier. Success depends on such intangibles as the rule of law and the free flow of ideas. Those that fail to adapt in time slide into the `middle income trap’, and most do fail.


The Soviet Union failed. The Philippines -- richer than Korea in the 1950 -- failed. Most of the Mid-East failed. So did most of Latin America in the 1960s and 1970s, and it is far from clear that Argentina and Brazil will break free this time.
 

We still do not know which way China is going to go under Xi Jinping. Vested interests - aligned with Maoist nostalgics - are putting up a formidable fight against reformers. It is worth reading an investigative series by Caixin showing how close hardliners came at different times to reversing Deng Xiaoping’s free-market drive. Nothing is set in stone.


What we see so far is that the Politburo has turned on the credit spigot again, and the reforms are mostly talk. Railway investment almost doubled in the second half of last year. The authorities at all levels have pledged stimulus worth $2 trillion dollars since the economy swooned last year. Some of it is a fictional wish-list, but some is real.


The shares of construction firms have surged since premier Li Keqiang uttered the magic words: “unleashing urbanisation as the most important growth engine”. Cynics suspect that China’s leaders are reverting to bad old ways: manic over-investment, more steel and concrete
George Magnus from UBS said investment made up 55pc of all growth in 2012, and will soon have to reach 60pc to keep up the pace. It is becoming unhinged, a sort of Ponzi scheme.


The boom is rotating, of course, which makes it harder to read. The epicentre is moving West, deep into the Upper Yangtze and heartland regions holding 700m people.


The Sichuan capital of Chengdu is completing the world’s biggest building, a glass and steel pagoda. This will soon be eclipsed for sheer chutzpa by the world’s tallest tower in Changsha, to be erected in three months flat.


Standard Chartered has just upgraded its China growth forecast to 8.3pc year and 8.2pc next, and others are doing much the same. They are probably right, but one watches this latest spree with a mixture of awe and alarm.


The balance sheets of China’s banks have been growing by over 30pc of GDP a year since the Lehman crisis and are still growing at a 20pc, wildly exceeding the safe speed limit.


Fitch Ratings said fresh credit added to the Chinese economy over the last four years has reached $14 trillion, if you include shadow banking, trusts, letters of credit and off-shore vehicles. This extra blast of loan stimulus is roughly equal to the entire US commercial banking system.


The law of diminishing returns is setting in. The output generated by each extra yuan of lending has fallen from 0.8 to 0.35, according to Fitch.


Mr Magnus said credit has reached 210pc of GDP - far higher than other developing countries - and only half of new loans are “plain vanilla” under the full control of regulators.


How and when this will end is anybody’s guess. He fears a “Minsky Moment” when the investment bubble pops, as such bubbles always do.


My guess is that there is one last cycle of Chinese fever to enjoy -- if that is right word -- before the aging crunch and the credit hangover combine with toxic effect. One thing is for sure: a middle-income country with a shrinking work force is not about to displace the United States as global hegemon.