Shougang Hierro Peru, the subject of my research in Peru. Angry workers set fire to this building in 2007, and security is still very tight-- I had to sneak this picture when the security guard wasn't looking.
Someone complained that I didn’t explain the research I’m conducting in Peru. Well, you asked for it. I’m trying to figure out if the environmental, social, and economic impacts of Chinese mining companies in Peru are different from those of other foreign mining companies.
Perhaps more interesting than the topic itself has been my research methodology. I put this project together by interviewing all kinds of government, mining company, NGO, and union officials. When I got to Peru I tried calling these organizations. They put me on hold to listen to Incan panpipes and then asked me to write formal letters of introduction. I spent days crafting gems like “The present [letter] has as its object to greet you and to inform you that…” but I never received any replies. Time for Plan B. I emailed friends, professors, and fellow college and grad school alumni. Within days they put me in touch with a Chinese mining company's union leaders, former Peruvian Ministers of Mining and of the Economy, and the executives of five major mining companies in Peru. Another contact invited me to a poolside party at his mansion in a triple-gated community where I met the Minister of Immigration, who introduced me to a Chinese mining company CEO. A grad school alum who runs a Peruvian mining investment firm was so excited to help me that he chaperoned my visit to the Ministry of Mining. He waltzed past security and the reception area (Hey, Monica! How are you doing, beautiful? My life has been so empty without you!), marched up to the Minister’s office, and marched back down with a letter handwritten by the Minister himself stating his full support of my research project. As you can imagine, these personal contacts have been slightly more effective than my painstakingly starched-collar letters of introduction.
Back to the topic itself. You’ve probably already forgotten it, so you should go back and read the fourth sentence again. Sounds like a great topic, right? The problem is that only one Chinese mining company, Shougang Hierro Peru, has actually been operating in the country, and everyone agrees that it’s been a total disaster. Even the other Chinese mining companies complain about Shougang. You know a company is struggling when its public relations manager opens every interview with the line, “We know our company isn’t perfect, but…”
I could have packed up my bags and left for Mongolia. Instead, I’m doing what they taught me in grad school-- take a crystal-clear conclusion that everyone agrees on and cloud it with unnecessary complications.
First, Shougang’s failure is largely the Peruvian government’s fault. We Americans owned the mine in the 1960s, and back then it was profitable, productive, and good to its workers and its community (“the environment” didn’t exist until the 1970s, right?).
Liberals reading this will be mortified at the suggestion that an American company actually did something good in a developing country in the 1960s. But the facilities they built here were so good that nobody has bothered to replace them in 50 years-- you can see for yourselves that the squat, dumpy company houses are obviously the best efforts of 1960s American architects.
The Peruvian military government nationalized the mine in 1975, and over the next 15 years it managed to reduce iron production by 75% while tripling the number of “company officials” on its payroll and hemorrhaging tens of millions of dollars a year. Eager to get this train wreck off its balance sheets, President Fujimori fired half the workers and sold it to Shougang's Zhou Beifang in 1992 for five times the asking price-- $120 million plus $190 million in investment commitments. While the newspapers speculated about the ludicrously high price, the Peruvians arrested Fujimori and the Chinese sentenced Zhou to death, both for corruption. It seems that Fujimori's administration had agreed to funnel part of the $120 million back to Zhou's personal account in exchange for the astronomical offer. After their old boss was shipped off to Death Row, Shougang realized that it had paid a ton of money for a failing mine it didn’t really want in a town half-filled with angry unemployed miners in a country it knew nothing about. It shouldn't be too big a surprise that they subsequently tried to go back on their promises. Peruvians have all but forgotten that most of the problems actually began while the mine was state-owned, preferring to blame Shougang for the unemployment, shoddy equipment, and unfulfilled promises.
Meanwhile, the Peruvian administrations throughout the 1990s were clueless about how to properly regulate private mining companies. They let Shougang violate its promises of investment and expansion, along with worker safety, union privileges, and environmental standards. In Peru, half a mining company's income tax gets delivered to the regional and municipal governments for local infrastructure. The local politicians squandered this mining revenue and then blamed the company for not providing infrastructure for the whole town.
While Shougang shirks its investment duties with secondhand equipment, the local government hasn't built a new hospital, paved a road, or planted a tree in half a century.
For the last nineteen years, the company’s greatest crime has been breaking its commitment to invest $190 million in the mine and its workers in the first three years. Shougang itself admits that it only invested $63 million, claiming that a small number of second-hand equipment purchases were more than sufficient for the mine's maintenance and expansion. Like the state-owned company before it, Shougang chose to patch up the outdated and collapsing machinery rather than buy anything new.
Remember how the mine fired half its workers before the privatization? Shougang boarded up their old apartments and left them to rot. Marcona, the town adjacent to the mine, is literally a half-ghost town.
In other words, Shougang manages the mine like my parents maintain their car. Congratulations Mom, you’ve made it into my last two blog posts!
Shougang’s second great failing is its inability to communicate. Even after 18 years in Peru, Shougang’s executives still don’t speak Spanish well enough to talk directly to the press, the mayor, the federal government, or its own workers. They speak a little bit through interpreters, but mostly they just lean on their Peruvian public relations officers. The real problem isn’t the language barrier, though. Shougang simply doesn’t communicate with the press. They used to send letters to the newspapers defending their company against written attacks, but they gave up after five years and have stayed silent for the last thirteen. They fill a local TV channel and glossy company newsletter with rosy stories of worker-company harmony, but they don’t bother with public opinion outside Marcona. They refused to grant me interviews or provide basic information, forcing me to rely on the unions and the government for my numbers. In typical Chinese state company style, they are perfectly transparent to the Peruvian government and perfectly opaque to everyone else (luckily, with the right connections the Peruvian government gave me everything I wanted). Shougang refuses to negotiate with the unions, preferring a strike that costs them millions of dollars to worker benefits that would cost them hundreds of thousands. They haven’t learned to tolerate unions or a free press in their eighteen years outside China.
Strangely, Shougang doesn’t look too bad on paper. Though they suffer strikes like annual clockwork, they’ve had only slightly more accidents, safety fines and environmental standard violations than the best foreign firms. They’re doing significantly better than a company from Colorado called Doe Run. And you may be surprised to hear that they are worlds better than the large Peruvian-owned mining companies. If you have any offspring looking for work in the Peruvian mining sector, try to dissuade them from working for the Peruvian company Volcan. This company has been killing off a worker every two months for the last decade. Anyways, the point is that despite its terrible reputation, Shougang seems to be changing just enough to keep ahead of Peru's regulations. Since the state has its hands full with the Peruvian companies, this hasn't been too difficult. Shougang only lags behind critically-acclaimed foreign firms like Antamina and Yanacocha when you look at international standards from the World Bank, United Nations, etc.
Another complication is that Shougang doesn’t fit the usual Chinese foreign investment pattern that researchers and journalists have been complaining about recently in Africa. Many Chinese oil and mining companies in Africa import Chinese workers and then buy all their tools and supplies from other Chinese firms. This way, they provide neither local employment nor support for other local industries. By contrast, Shougang employs exclusively Peruvian workers and avoids importing low-quality Chinese mining tools. They even hire local food service contractors, while other foreign mining companies bring in Sodexo Peru and other food industry giants from Lima. However, the benefits this local sourcing should generate for the region’s economy seem to be offset by Shougang’s low pay and general stinginess. By the look of the downtown Marcona market, the employees must not be making enough to buy much of anything. Maybe they spend it all on meals-- food in this desert has to be trucked from Lima, so it's frightfully expensive (about $3.00 for a decent meal).
Shougang has given Chinese mining companies an abysmal reputation in Peru. But this may change soon. Chinese state-owned mining giant Chinalco just bought a mountain made of copper in northern Peru. They rolled out a new community relations strategy: hire Canadians, use them to win over the local community, and then fire them. The jury is still very much out as to whether Chinalco Peru will be the knight in shining armor that Shougang appeared to be in the early 1990s, only with more durable armor. But I’m optimistic. It looks like the Peruvian government, foreign NGOs, and local communities have gotten much better at watchdogging mining companies, and the companies know this. The new leftist government led by Ollanta Humala will not suck up to the mining companies, a fact that my private sector friends have been bemoaning tirelessly since the election. Then again, few voters would support mining regulations if they started to put the brakes on Peru's breathless economic growth.
So what's the verdict on Chinese mining companies in Peru? We haven't seen enough Chinese mining projects to make any blanket statements, and even Shougang Hierro Peru, which seems like a worst-case scenario for everyone involved, is mostly complying with Peruvian law. American news outlets should back off of the "China threat" and look at our own involvement. The worst environmental offender in Peru is an American mining company, Doe Run (RENCO). American institutions are key players in Peru's regulatory and tax systems. The mining companies contract American consulting firms to write their environmental impact evaluations, and then the Peruvian Ministry of Energy and Mines contracts the same firms to inspect the companies' labor and environmental standards. Even the Chinese companies employ American finance managers and hire American auditors to check their books and confirm that they're paying the right amount of taxes. The World Bank supervises the redistribution of these taxes. Most of these systems were designed by privatization gurus from the World Bank and other American-led institutions. We have no qualms about the American linchpins of the Peruvian system, but we're quick to jump all over a troubled Chinese mining company. These Americans may be just as impartial, even-handed, and knowledgeable as we'd like to believe, but they're raking in billions of dollars from Peruvian mining. As they say: Shougang me the money!
What country am I in now? Surprise! I took a few days off my mine visit to go sandboarding in nearby Huacachina. Back when I thought Chinese mafia dons would be lurking at the Shougang mine, I planned a cover story—I was an innocent tourist who got lost while sandboarding.
The most exciting part was the dune buggy ride to the sand slopes. We were driven by a generation of Peruvian delinquents clearly raised on Grand Theft Auto 4. I had never understood the need for roll bars before.
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