Do we need state-owned enterprises?

Aug 17, 2020

Per Capita’s recently released paper on Auspost becoming a bank begs the question of state-owned enterprises helping economic growth and create jobs? The Simandou mining project in West Africa may offer an answer.

US Secretary of State Mike Pompeo recently said ominously that either “we” change China or China will change us. He could not have meant that democracies might take to China’s one-party political system. More likely, he was talking about China’s state-private hybrid capitalism versus free-market neoliberal capitalism.

The US and Australia subscribe to neoliberalism, which shuns state-owned enterprises (SOEs). Thatcher famously wanted to privatise everything. Many other countries do embrace SOEs to some degree and have found them useful.

There are three common rationales for SOEs. Simandou is an example of the first: how they might be used when projects are too risky or lack the profitability that private corporations want.

Per Capita’s paper on government-owned Auspost becoming a bank is an example of the second rationale, aimed at remedying a situation where there is insufficient competition and/or systemic poor practices in an essential industry, in this case banking.

Brazil’s iron-ore giant, Vale, is an example of the third, allowing the state to share in resource riches. While Vale has shares listed on the stock exchange, the state has veto power over important corporate decisions and state pension funds have a controlling interest.

Simandou a tricky project

The high-risk Simandou project may become an interesting case study of state-private capitalism.

Simandou is a rich iron-ore deposit in west Africa’s Guinea to be developed by Chinese state-owned enterprises (SOEs) and African private businesses. The project is too difficult and risky for businesses to justify on purely commercial considerations. International companies have looked at it in the past two decades and sat on their hands. Guinea meanwhile fretted as its rich resource lay idle. China now considers it strategically necessary and it is throwing in some heavyweight SOEs with established track records and accumulated expertise to give it the best chance possible.

Guinea has a troubled history. Since independence from France in 1958, it has been wracked by dictators, corruption, and general political instability. Its population is 85% Muslim, mostly Sunnis. Main language is French. The poverty rate is high.

The entire project, including a new port for very large Capesize ore carriers and a 650-km railway, will cost upwards of US$15-20 billion. The rail route will include 39 bridges, 1,000 culverts, 13 passing slides and 28km of tunnels. The train to port will be 2,500m long and will travel at a speed of 80km/h. Based on purely financial considerations, the project would probably be un-bankable and un-insurable.

Mining rights to the main Simandou deposit have been split into four blocks. Blocks 1&2 have gone to SMB-Winning, a consortium of Guinean, Singaporean and Chinese companies. Blocks 3&4 have gone to Chinese aluminium SOE, Chalco, and Anglo-Australian giant Rio Tinto with the Guinean government having a small minority interest.

If all four blocks are developed, Guinea’s annual iron ore production capacity will grow from nil to 220 million tonnes by 2030, about 14.5% of global seaborne iron ore trade in 2019. Guinea is expected to become the world’s fourth largest iron ore producer after Australia, Brazil and China, and just ahead of India and Russia.

An earlier technical study proposed that mining will be very similar to methods in Australia, using open pit mining. A feasibility study will be given to the Guinean authority in 30 months for validation, construction to commence right after. The timeline is for the first commercial production in 74 months, around 2026.

The largest iron ore exporters, including Brazil’s Vale, expect a long-term shift by China’s mills to favour higher-purity ore, allowing higher plant efficiency and to comply with tougher pollution standards. Simandou’s ores contain 65% to 66% iron, above the industry’s benchmark 62%.

A very state hands-on approach

China’s SASAC (State-owned Assets Supervision and Administration Commission), which oversees the biggest SOEs, has been pushing the project over the past year and has been enlisting large SOEs into the project.

The SMB-Winning consortium already includes four big partners – Shandong Weiqiao, China’s largest aluminium producer; United Mining Supply, west Africa’s leading transportation group; Chinese Yantai Port Group which is a specialist in berths for very large bulk carriers; and the Singapore-headquartered Winning International Group, which is the largest shipping carrier in Asia.

SASAC a few months ago also brought in Baowu, world’s second largest steelmaker after India’s Arcelor-Mittal, to corral smaller steelmakers to provide some of the financing as well as agree to take some of the ore output. Baowu said at an industry association meeting in January that it expected the landed cost of Simandou ore to settle at around US$40 per tonne which would be competitive. Last year, the average production cost for international miners was around US$40.

The railway company that built China’s rail network, CRCC (China Railway Construction Corporation), is expected to be drafted in to build the rail line. In the longer term, a steelworks might be built alongside the railway. China Development Bank, the state specialist infrastructure bank, is likely to provide some of the funding while the Asian Infrastructure Investment Bank is also being considered.

China has been paving the way into Guinea for many years. Eyeing the value of its minerals, China has been cultivating the political leadership. In 2017, Beijing agreed to loan Guinea US$20 billion over almost 20 years in exchange for bauxite concessions.

The SMB-Winning consortium that will develop Simandou blocks 1&2 has been in Guinea for many years. It started exporting bauxite from Guinea in 2015, becoming that country’s largest bauxite miner while Guinea has become the world’s largest exporter and third largest producer.

The consortium has been undertaking a PR campaign, building clinics for the general population in mining areas and funding cultural activities. These PR activities, or “foreign influence” in Australian terms, may have helped the current president earlier this year successfully take a constitutional referendum to the people and gain a reset to his 2-term limit which would have expired this year. The reset will allow him to stand for election for two more 6-year terms, until 2032.

The bottom line

Simandou is part of a long-term strategy by China to spread its supply-chain risks, accelerated by the recent US-Australia-China tensions. In Australia, Whitehaven coal complained that China was preferencing domestic production and Russian and Indonesian coal against Australian even though cost could be US$30 a tonne higher. Glencore made the same comment in announcing it is cutting back coal production in Australia. In May, China imposed anti-dumping and countervailing tariffs of more than 80 percent on Australian barley.

It is still too early to predict the effect of Simandou on the future of Australian exports. The project has many risks and much can go wrong to scuttle China’s plans. China may also decide not to have mine output at maximum capacity, especially if market prices go too low, preferring to lengthen the mine life beyond the expected 30 years based on current known ore reserves.

In Australia, Per Capita’s Auspost paper poses the possibility of a state bank. The paper has so far received a frigid response from the neoliberal media. Perhaps, it deserves to be taken more seriously?