MinMetals deal for Noranda offers little for Canada

This is the first of two parts taken from a paper titled China Minmetals and Noranda: A Backdoor Nationalization Process of Canada’s Natural Resources? The paper was written and published by the office of David Kilgour, Liberal member of Parliament for Mill Woods-Beaumont (Edmonton).

Chinese leader Deng Xiaoping once said, “Seek truth from facts”; this is precisely what must be done in examining the proposed purchase of Noranda by China Minmetals. A number of commentators have pointed to China’s need to secure raw materials as the primary reason for the proposed takeover of Noranda by China Minmetals. A state-run entity such as China Minmetals, while having a profit motive, reflects on a continuous basis the policy directives of the Chinese government. As such, this is not a normal commercial proposal but would in effect be the nationalization of a large private Canadian company by the government of China.

China Minmetals probably has little intention of running Noranda in an economically efficient and competitive manner and would in fact be ill-equipped to do so since it lacks the management expertise to run a sophisticated multinational mining concern. Minmetals says it will retain the management at Noranda. This begs the question, What economic benefit would Minmetals incur by purchasing Noranda at this point in time? The timing of the Minmetals purchase seems to be indicative of a strategic rather than economic impetus, given that metals such as copper and nickel, of which Noranda is a major producer, are trading at multi-year highs. Given this, there would be little economic incentive to buy Noranda at this time.

The government of China has openly admitted it desperately needs natural resources to fuel its economy and will pursue an aggressive acquisitive strategy in order to ensure that it maintains a steady supply. China wants to circumvent the discipline of markets by securing captive supplies of raw materials. Ordinarily, the rising cost of such products would prohibit its economy from growing too quickly and placing too much strain on the world’s supply of resources. However, China’s strategy of acquiring resources directly, and thus outside the marketplace, frees it from being subject to the forces of supply and demand. Without market principles to restrain China’s growth, the world may soon face a serious global resource shortage, which will have negative implications for all as commodity price inflation destabilizes economies generally.

China has also shown a disturbing willingness to deal with authoritarian and corrupt regimes in order to secure access to natural resources. Beijing makes no demands on the countries in which it operates, with respect to good governance, and thus makes a good trading partner for governments that are often criticized. In Burma (Myanmar), for example, the Chinese prop up the authoritarian and corrupt regime, thereby continuing to serve as a market for the country’s timber and minerals.

In Sudan, China maintains close ties with Khartoum. China is Sudan’s largest trading partner and accounts for 25% of Sudan’s exports, which constitute 6.9% of China’s total oil imports. To date, China has invested in excess of US$3.9 billion in Sudan, most of which has been directed to the oil sector. Although companies such as Talisman Energy and Austria’s OMV Aktiengesellschaft have ceased operations in Sudan after being heavily criticized by human rights groups around the world, China has continued to invest in Sudan. Currently, China has at least 4,000 soldiers in Sudan to guard its investments there. It is clear that China is out to secure access to resources at any cost and will deal with any government, no matter how repressive or corrupt, to obtain them.

By buying Noranda, China secures a captive supply of key base metals in Canada, and in 18 other countries which it needs, not only as a result of its own voracious appetite but because global demand for them is far outpacing supply. In the case of copper, of which Noranda is the world’s ninth-largest producer (including the production of majority-owned Falconbridge), the International Copper Study Group expects a deficit between global mine output and global copper demand of 701,000 tonnes this year. As mentioned earlier, China would essentially be nationalizing Noranda to ensure it will be able to maintain a steady supply of base metals.

Among other things, this means Chinese demand for Noranda’s products would likely be given preference over the demands of Canadian customers, which would force them to look elsewhere, face higher prices, or, potentially, be unable to meet their base metal requirements for a period. Furthermore, it is foreseeable that China Minmetals may at some point move all or part of Noranda’s processing operations to China in order to take advantage of low labour costs, which would result in Canadian jobs being exported to China.

Moving processing capacity offshore is not something that would be out of character for a state government enterprise such as Minmetals. Despite any promises that Minmetals might make that it will keep processing facilities in Canada, the past actions of other Chinese state owned enterprises (SOEs) speak more convincingly. In 1993, Shougang, which was then a state-owned steel company, made a deal with General Motors of Canada to buy a foundry in St. Catharines, Ont. After purchasing the foundry, Shougang gradually dismantled it and shipped it back to China, resulting in the loss of 2,100 jobs. A year earlier, Shougang bought and exported to China a plant it had purchased from Kaiser Steel Corp. in California. Once Minmetals has bought Noranda, there would be little to prevent it from dismantling Noranda’s processing facilities and reassembling them in China. In fact, reassembling Noranda’s processing facilities in China would be in Minmetals’ best interests as it would not only incur lower labour costs but create jobs for the Chinese economy, which would no doubt please its owner.

There are also legitimate concerns as to whether Noranda would be obliged to offer special prices to Chinese customers, and whether it would perhaps be blocked from making sales to customers disliked by Beijing. If allowed to purchase Noranda, Minmetals would have control of not only Noranda but of Falconbridge, which is the world’s third-largest producer of nickel. Nickel is an important mineral because of its many uses, including the manufacture of important industrial alloys such as stainless steel and armour plating. The U.S. depends on the nickel it obtains from Falconbridge because it has no nickel mines and would find that supply difficult to replace. As of 2003, according to the U.S. Geological Survey, 43% of the nickel the U.S. imported came from Canada. In fact, nickel is of such strategic importance to the U.S that during a shortage in the 1950s, the American government granted Falconbridge a US$40-million subsidy to develop its nickel mines in order to ensure that it would continue to enjoy a reliable supply. If Minmetals were to be allowed to buy Noranda, what would be the repercussions for the U.S. and Canada? Would China discriminate against U.S. buyers? Would they simply refuse to sell to the U.S.? These questions deserve examination and are especially relevant given China’s ambition to become the global hegemon.

In 1994, Minmetals made an agreement with the government of Nova Scotia to run Sydney Steel jointly for three years. The terms of the deal were such that the province would remain responsible for certain obligations of the jointly run corporation until Jan. 1, 1995. After that date, all obligations would be the responsibility of both owner operators. Following the 3-year period, Minmetals had agreed to acquire the remaining portion of the company that it did not already own as per the terms of the agreement. Contrary to the agreement, Minmetals refused to complete the purchase of Sydney Steel and sold its interest to a firm called Global Steel. Ordinarily in such a situation, the province would have brought suit against Minmetals for breach of contract. But in this case, such an action would have proved futile because the province had not been dealing with Minmetals all along. Minmetals had set up a shell company called Mincan Canada, headquartered in Canada, for the express purpose of consummating the deal with the province. Mincan had no assets, and, as a result, litigation would have achieved nothing. Based on the experience that Nova Scotia had with Minmetals, several questions come to mind. Is Minemetals really the acquirer in the proposed transaction to purchase Noranda? If not, what assurances do Canadians have that Minmetals will fulfill any legal and ethical obligations that come with operating in Canada? The duplicitous actions of Minmetals in the past make it is clear that the current proposal to acquire Noranda requires serious scrutiny.

Next week: Part two