Vancouver City Council Says No to Coal

he Province reported that Tuesday night Vancouver’s city council voted to ban the storage, handling and trans-shipment of coal at the city’s marine terminals and berths. The move is being described as symbolic due to the fact that no coal facilities currently exist in Vancouver and because the city does not have any power over Port Metro Vancouver, North America’s second-largest coal exporter.

As quoted in the market news:

The Vision Vancouver-dominated council voted 9-2 for the zoning and development bylaw amendment that a staff report said was in line with the Greenest City 2020 Plan, which aims to curb greenhouse gas emissions and set the air quality target to “breathe the cleanest air of any major city in the world.”

No coal facilities exist within Vancouver’s jurisdiction, but staff said the motion to ban any future shipments of coal was partly prompted by industry inquiring about the possibility of shipping coal out of private lands on the city’s northeastern waterfront.

China Souring on Indonesia?

Gandaria City is the largest retail mall amid the growing high rises of south Jakarta, but for many years it stood as a half-finished skeleton. Its Indonesian-Chinese developer, Pakuwon Group, racked up huge debts during the Asian Financial Crisis of 1997 and was unable to complete the project. 

Yet soon after making forays into China during the mid-2000s, the firm suddenly found itself in a position to finish the massive complex—supported, it is widely believed, by deep-pocketed Chinese investors. 

Such informal flows of money into Indonesian property, as well as natural resources, agriculture, retail and trading businesses, underpin China's economic clout in Southeast Asia's largest economy. 

Gandaria City shows how Chinese investment has benefited Indonesia. But at a more macro level, many ambitious Chinese investment promises never materialize or disappoint in delivery. In part this is due to the two countries' sharply contrasting legal frameworks and a mutual lack of familiarity: having only re-established diplomatic relations in 1990, distrust still lingers below the surface. More important, the relationship lacks strong foundations. 

There is little integration of manufacturing supply chains and, apart from oil and gas, most Chinese investment is limited to short-term resource deals or equipment contracting. Unless Chinese companies establish deeper roots in Indonesia, China's influence there is likely to wane as international competition heats up, notably from a rejuvenated Japan.

The lure of the tropicsWhen the Asian financial crisis brought economic turmoil to Indonesia in 1997, most foreign investors fled—except for Chinese companies, which won infrastructure tenders on a wave of cheap financing. Under Indonesia's chaotic transition from dictatorship to democracy, independence was granted to nearly 500 sub-regional governments. 

Local governors sought to exploit resource-rich lands by issuing lucrative mining and land-use licenses to Chinese investors. As commodity demand started to take off, Chinese companies entered in droves. The numbers mushroomed in 2009-10, when laws on foreign ownership were relaxed. By 2011, Indonesia had issued over 10,000 mining licenses, compared to 500 just a decade earlier.

Since the late 1990s, Chinese investments have grown in both size and scope. They run the gamut from transport to finance, shipping to light manufacturing (mainly textiles and air-conditioners). There have been some genuine success stories—notably Huawei, which manages a large chunk of Indonesia's telecoms market in a partnership with mobile operator XL Axiata; Haier, which acquired Sanyo's Indonesian household goods businesses in 2012; and China Harbour Engineering, which built Indonesia's longest bridge, linking the islands of Java and Madura. 

Still, the focus of China's economic interest in Indonesia remains skewed heavily towards raw materials extraction and power-plant contracting. Over the past decade, state-owned power companies China Huadian, Dongfang Electric and Sinohydro won major contracts to build coal-fired power stations and hydro plants. China Power International (CPI) and China International Corporation (CIC), China's sovereign wealth fund, were given significant stakes in coal mines in turn. 

Yet many investments have disappointed. Take the Cilacap plant in south Java, built by China Huadian and Shanghai Electric, which opened two years late, operates at 60%-70% capacity, and requires frequent maintenance. Critics accuse Chinese companies of importing thousands of Chinese workers to build plants, and blame their poor management for faulty machinery. 

Tensions over Chinese resource acquisitions and have spilled over into central government, notably over China's reluctance to revise a major natural gas delivery contract. In 2002, BPMigas, Indonesia's oil and gas regulator, signed a deal with China National Offshore Oil Corp (Cnooc) to deliver an annual 2.6 mt of liquefied natural gas from Papua's Tangguh field to Fujian. The deal was based on a global oil price of US$25 a barrel, but when delivery began in 2009 the oil price had risen above US$100. Cnooc refused to renegotiate the price with BPMigas, partly in a tit-for-tat response to Indonesian complaints about faulty Chinese machinery in other projects. This was a major contributing factor to the decision by Indonesia's Constitutional Court to dissolve BPMigas and hand over its responsibilities to the energy ministry.

Greasing oily palmsOpposition to the infrastructure-for-resources model extends far beyond minerals. In 2005, President Yudhoyono announced the "Kalimantan Border Palm Oil Megaproject," an 1.8m hectare plan that would destroy extensive areas of forest along the Malaysian border. Under the plan, several Chinese companies including state-owned investment company Citic Group would acquire one-third of the area in return for building roads and railways. 

But critics viewed Kalimantan as a crony deal to clear land for lucrative timber, and popular opposition forced the government to scrap the project. The Chinese companies involved became tarred with the brush of corruption. Since then, a number of other investments in Indonesian agriculture have never materialized, including Cnooc's US$5.5 bn plan to convert 1m hectares of land in West Kalimantan into palm oil and biodiesel facilities.

Other firms have had to scale down their ambition. One is China Sonangol, a controversial Hong Kong-Angolan oil dealer with murky links to the Chinese state. Seeking new markets outside Africa, it tried—and failed—to use its political connections to get a foothold in large integrated mining and infrastructure projects in Sumatra. Instead it settled for a modest stake in the Cepu oil block, one of Indonesia's most prom\ ising recent oil discoveries, and a chunk of Jakarta real estate. This was not such a bad outcome, but it was much less than China Sonangal had hoped for. 

In addition, many ambitious Chinese railway investments in Sumatra and Kalimantan have failed to materialize. Many resource-based investments by China's state-owned enterprises (SOEs) have been scuppered by unrealistic targets or political backlash. Yet an even bigger obstacle for all Chinese firms is their inability to get to grips with Indonesia's institutions. Indonesia's legal framework is highly arbitrary and convoluted—allowing contrasting interpretations at central, provincial and sub-provincial levels, and between Dutch civil, Islamic shariah and traditional adat law. Social, ethnic and religious tensions add further complexity in Indonesia's resource-rich hinterlands. 

Chinese companies have found that investment security is not guaranteed, and that contracts are often renegotiated or canceled whenever a governor is replaced. Under Indonesian law, a regional authority can revoke a mining license even if it is at fault for any mismanagement! 

Legal uncertainties are responsible for a long list of failed investment pledges. Constant changes to regulations in mining and other resource industries have deterred would-be investors. Between 2005 and 2010, scores of Chinese provincial government delegations signed agreements directly with local governments, yet they have little to show for it. "Part of the problem is that, because China's investments in Indonesia are often highly opportunistic, many companies rely on brokering deals with the government through their links with Indonesian Chinese businessmen," says Julian Hill, a consultant at Deloitte. "Chinese companies often believe these middlemen can help them weave through Indonesia's bureaucratic web, but in fact they wield much less real political power than counterparts elsewhere in Southeast Asia." 

Where's the cash?Yet a handful of other companies have had more success. Petrochemicals conglomerate Sinochem—which claims to be the largest direct supplier of Indonesian rubber to China—owns huge plantations across the country. Even smaller Chinese agribusinesses such as Mazhongdu International and Hainan Baisha own tens of thousands of hectares. Nor have Chinese SOEs scaled back their ambitions to win infrastructure tenders. 

Sinohydro is repowering dams in West Java; Gezhouba Group, China Huadian and its subsidiaries are still pushing ahead with various coal and hydro power plants; and Shanghai Construction and China Harbour Engineering are building toll roads in Java with financing from state policy lender China Eximbank.

There is no shortage of ambitious infrastructure plans. China Harbour Engineering and China Railway Construction want to build railway systems, including a Jakarta airport express train and a double track railway from Jakarta to Solo. Chinese companies are still actively bidding for a US$3bn Central Kalimantan coal railway. In Sumatra, China Development Bank (CDB) wants to finance a US$1.3 bn, 300-km coal railway line and a US$1.5 bn, 1,200MW coal-powered plant. Most ambitious of all is China Railway Construction's plan to build a US$11 bn suspension bridge connecting the main islands of Java and Sumatra.

The biggest issue for these projects is financing. The cost of capital in China is rising, and most Chinese lenders now refuse to lend to Indonesian projects that do not come with some form of sovereign guarantee.

Yet a large chunk of Indonesia's US$100 bn of foreign exchange reserves is already being used as collateral for existing projects. And neither Chinese lenders nor Indonesia's Ministry of Finance are willing to assume increased levels of financial risk.

As Chinese lenders reduce their exposure to non-sovereign-backed projects, opportunities are growing for international competitors. Japanese and South Korean companies have re-entered Indonesia, competing in a wide range of construction tenders under the Indonesian government's "Master plan for Economic Development." 

Japan has embarked on a multi-pronged charm offensive, in part to secure crucial gas supplies to replace its shuttered nuclear facilities. 

Japanese and Korean companies are often more willing than their Chinese competitors to assume operational risks in project finance schemes such as build-operate-transfer deals. And they enjoy easy access to record low costs of capital—an advantage traditionally enjoyed by Chinese state-owned players.

Japan's five biggest trading houses—Mitsui, Mitsubishi, Sumitomo, Marubeni and Itochu—already have over US$9 bn in current Indonesian lending exposure. This is continuing to grow rapidly, with Itochu developing major geothermal and coal power plants in Java and Sumatra, while Mitsui recently bagged a contract to expand Indonesia's largest port. Japanese lending institutions are committed to financing a wide range of projects, such as the Jakarta monorail and a Jakarta-Bandung express train. And small Japanese manufacturers are flocking to Jakarta's industrial estates.

Uncertain times aheadLooking ahead, Chinese investment in Indonesia will shift away from coal mining and palm oil. Sinochem and ZTE Energy, an agribusiness arm of the Shenzhen-based telecoms manufacturer, both bid for 150,000 hectares of palm-oil plantations in 2012, but were promptly rejected. Indonesia plans to restrict new plantations to a maximum 100,000 hectares and extend forest moratoriums. Oil and gas look a better bet. China is a significant player in Indonesia: CNPC is its seventh largest oil producer, Cnooc has several major oilfield stakes, and Sinopec has various exploration contracts and storage facilities. Indonesia's existing oilfields are maturing and urgently need new investment. 

Finally, there is considerable potential to boost investment in agriculture beyond palm oil. Indonesia has huge swathes of uncultivated arable land and sorely needs to increase rice production and productivity, while China is keen to supplement its own diminishing reserve of farmland.

If Indonesia's leaders have their way, they will steer foreign investment away from resources and into manufacturing. Unfortunately for them, most Chinese companies view Indonesia as an export market rather than as a competitive production base. Passengers on planes from China to Indonesia are filled with small traders from Guangdong and Anhui carrying boxes of basic consumer goods destined for markets in Jakarta or Surabaya. There are few integrated supply chains between China and Indonesia to compare to those with Malaysia and Singapore. Indonesia's trade deficit exceeded US$1bn during 2012, and remains at risk of widening. That would not be good for increased economic engagement.

For the moment, Chinese investors are also nervously awaiting 2014's presidential elections. Some worry that potential frontrunner Prabowo Subianto—a son-in-law of President Suharto, who is known for his strong nationalist sentiments—harbors a deep anti-Chinese grudge. Rumor has that he was complicit in 1997's riots which targeted the local Chinese community, killing hundreds. 

These fears may well be exaggerated, as Prabowo has begun to fade, but it would not be hard for politicians to exploit Indonesia's undercurrent of economic nationalism and sensitivity over the trade balance. Until these political uncertainties are resolved, many Chinese investments will remain off the table.

Gabon makes rare challenge to China over oil practices

Gabon has taken the exceptional step of withdrawing the right of Addax Petroleum, a subsidiary of Chinese oil giant Sinopec, to exploit an oilfield, raising concerns over possible repercussions on the business climate.

Production at the southwestern Obangue oilfield, totalling 9,000 barrels per day, has been transferred since the end of last year from Addax to the new state-run Gabon Oil Company (GOC), set up in 2011.

Officially, the Chinese firm is being sanctioned for failing to meet "contractual obligations".

The state's complaints against Addax include "bad management", "instances of corruption," "shortfalls in the respect of the environment" and dodging taxes on oil exports.

"After several months of fruitless negotiations ... we decided definitively to withdraw the Obangue field from Addax Petroleum," Oil Minister Etienne Ngoubou recently told AFP.

The incident is the first of its kind in Gabon and such measures against well-established firms such as Addax, which has operated in the central African country since 1996 and is the fourth oil producer there, are rare worldwide.

Since it was bought by Sinopec in 2009, Addax has been exploiting five oil deposits on a basis of shared production with the Gabonese state, amounting to 23,000 barrels per day.

Ngoubou also accused Addax of "unilaterally shutting down" the Obangue field after its rights were withdrawn, forcing the state to get facilities working again. The GOC has been pumping oil since January 1.

The Sinopec subsidiary has responded by accusing Gabon of undue harassment and has taken the dispute to the International Chamber of Commerce in Paris. No date has been set for the court ruling.

"We challenge the requisition and reject all the accusations levelled against us," said Hugues-Gastien Matsahanga, communications director of Addax Gabon.

"Addax Petroleum has never been the object of a conviction for the slightest failing in its fiscal, technical and environmental obligations."

Addax states that it wants to go on working in Gabon, which accounts for between 15 and 20 percent of its global production, although the oil minister has threatened to withdraw a second permit for the Tsiengui oilfield, also in the southwest, "if they (the firm) don't make any efforts" within 15 months.

Gabon's inflexible position has raised concerns among oil sector experts that the climate may become more hostile for a country where production has declined by 30 percent since a peak in 1997 and now oscillates between 220,000 and 240,000 barrels a day.

"We should never have reached this point, above all with an operator like China, which invests so much here, which builds roads," an oil industry analyst told AFP. "What message does this send to investors?"

The dispute over the Obangue oilfield coincides with a reform of the petroleum sector aimed particularly at giving the new national company more direct control of resources and reinforcing the role played by Gabonese sub-contractors.

President Ali Bongo Ondimba has himself announced that the GOC should enable the state "to have mastery over the whole chain in the oil industry, from prospection to production, even to marketing."

"Via the GOC, the state means to become more involved in the oil sector," one oil company executive said.

"And it is certain that it plans to issue a certain number of messages that break with the past," he added, referring to the days when the authorities turned a blind eye to unorthodox fiscal and environmental measures.

"We're not saying that contracts are too favourable to oil companies, but that unfortunately the benefit to the Gabonese economy is too slim and that (the rules) have rarely been applied," minister Ngoubou said.

With no major oil discoveries in recent years, the Gabonese state plans to issue this month a series of licences for deep and very deep offshore exploration, counting on major finds in the Atlantic Ocean.

Illegal mineral processing to blame for Hejiang River pollution

The illegal processing of minerals and discharge of sewage by a mining company is to blame for the water pollution in the Hejiang River in the Guangxi Zhuang Autonomous Region, a local official confirmed to the Global Times Monday.

A press officer from the city government of Hezhou said the Huiwei Mineral Processing Plant, one of the 112 mining companies along the river, is responsible for the excessive levels of thallium and cadmium found in the river.

The plant's owner, surnamed Gong, has also been detained, said the official, adding that the plant was also found to be secretly processing indium, a soft metal found in zinc, which has produced waste, including thallium and cadmium that was discharged in the river.

In neighboring Guangdong Province, the local government of downstream Fengkai county expressed concerns over the tainted water Saturday, the Nandu Daily reported, adding that the county has stopped using the river as its main drinking water source and regularly tested samples. 

The official from Hezhou also said the pollution would be cleared within two weeks and other mining companies along the river should be checked.

As of Sunday, 112 enterprises along the river had been ordered to suspend operations for investigation after dead fish have been found in a section of the river since July 1, the Xinhua News Agency reported.

Bi Haidong, deputy mayor of Hezhou, said some small mining companies frequently conduct illegal mineral exploitation and washing, and discharge waste without treatment, which can result in pollution.

Hezhou has huge reserves of minerals, including manganese, tungsten, rare earths, cadmium and thallium.

By Sunday evening, the cadmium density in the section of the river between Guangxi and Guangdong had fallen below standard, while that of thallium remained beyond the allowed maximum level, according to the local environmental protection department.

"The monitoring data was not good, but the situation is under control," said Bi.

Hungry for Waterberg infrastructure

Developing coal miners in the Waterberg are not the only players dependent on rail and water infrastructure to start mining and moving product, writes Laura Cornish.

Fortunately, the schedule for iron ore and steel-driven company, Ferrum Crescent’s Moonlight project in the area fits in neatly with the proposed infrastructure upgrade and expansion time frame.

The necessity for rail, water, energy and transmission infrastructure has been identified by the government’sNational Development Plan as one of 18 strategic integrated projects (SIP 1) to “transform South Africa’s economic landscape” and unlock the northern mineral belt, the Waterberg region being the catalyst. South Africa’s future coal and energy demands are dependent on this project.

Rail capacity – first and foremost

It is a well-known fact that Lephalale’s Waterberg region will emerge as the next generation coal fields asMpumalanga’s coal resources approach depletion. The reality is that this is less than 10 years away. Coal, however, is not the only mineral in the Waterberg region – platinum and iron ore are ‘hot’ minerals within the area – further driving the necessity for the approval and construction of the SIP 1 project.

ASX/AIM/JSE-listed iron ore junior Ferrum Crescent is one such company keen to take its Moonlight magnetite iron ore Limpopo-based project up the value chain and into production. Strategically, its development path has been well thought out as it anticipates production start-up around the same time a number of new rail upgrades and expansions are completed and capacity constraints alleviated – scheduled for completion around 2018.

The company is aiming to reach production start-up in 2018. “And this is no small project for a junior,” saysFerrum Crescent’s COO, Vernon Harvey. “We need to complete a bankable feasibility study (BFS) and raise capital – about US$1 billion (R9.09 billion) for the development of the entire project. A pelletising plant located atThabazimbi is most suitable to our beneficiation needs, which will take about three years to complete. This means we need to start construction in 2015. If we achieve all our goals, our project will come on-stream around the time the necessary infrastructure is completed.”

The current active line from Lephalale (solely used by Exxaro’s Grootegeluk coal mine [1.5 Mtpa]) joinsThabazimbi where approximately 2 Mtpa of iron ore is transported to Vanderbijlpark (about 2 Mtpa). “This entire system is due for upgrade by Transnet to cope with future coal demands from Waterberg. The first upgrade, in various phases, will expand the rail line’s capacity to 23 Mtpa. The Phase 2 upgrade will entail an entirely new heavy haul line from Thabazimbi to Ermelo, which starts at 40 Mtpa. We are banking on acquiring capacity for rail transport of the product to be exported  through  Richard’s Bay from Transnet as iron ore capacity becomes available on the existing line. There is currently some  spare capacity on the existing line from Thabazimbi toRustenburg and beyond,” explains Harvey.

The Lothair/Swaziland rail line connection and upgrade will also take some capacity off the coal line to Richards Bay. The upgrades involve construction of bypassing loops and also electrification of line between Thabazimbiand Lephalale once Medupi power is available. The Richards Bay port is also being upgraded for additional iron ore capacity.

The Moonlight project

The Moonlight deposit (or farm) is not a new discovery, Harvey outlines. It was drilled by Iscor in the 1980′s and 1990′s and forms part of a larger property across two contiguous farms – Gouda Fontein and Julietta. Ferrum Crescent acquired its new order mining rights for all three farms in October 2012.

“Between 2008 and 2011, we undertook an infill drilling programme on the Moonlight farm and determinedIscor’s historical data to be accurate,” says Harvey, who describes the project as a “unique” magnetite banded iron ore deposit containing material capable of producing a high quality metallurgical pellet feed concentrate.

Its JORC code-compliant resource, 308 Mt, has an average grade of 26.9% (16% cut-off) iron. It comprises a coarse grain product that can be easily upgraded – to about 70% iron content. Coupled with its low phosphorous, silica and alumina content, the opencast project becomes increasingly attractive. There are several mineral zones at or near surface with a low strip ratio that equates to low mining cost benefits. Based on beneficiated grades and quantities, the project has a minimum 20-year lifespan.

Sidebar: The Moonlight mineral resource categories

• 172 Mt inferred at a grade of 25.3% iron
• 83 Mt indicated at a grade of 27.4% iron
• 52 Mt measured at a grade of 31.3% iron

For a junior company, Ferrum’s development plan for the project is substantial. “Our plan is to produce 6 Mtpa of direct reduction (DR) and possibly blast furnace grade pellets for use in the steelmaking industry. We already have a signed agreement with Switzerland-based Duferco SA for 4.5 Mtpa, with first rights to an additional 1.5 Mtpa if not sold domestically,” Harvey explains. Duferco is a leading private company in the trading, and end use of iron and steel products. This would require a large-scale opencast operation, mining approximately 42 Mtpa.

“Because the majority of our product is for export, we will require three trains every day, with 100 wagons each per day for 330 days of the year. This equates to 18 600 t of iron ore pellets transported to the port every day.”

Duferco suggested the production of DR pellets from this particular ore body type, which is suited for use in electric arc furnaces (as opposed to blast furnaces). This method of steelmaking is quickly becoming a preferred  modern ironmaking methodology. It is far more environment-friendly, requiring any local energy source instead of coal and is more cost effective.

Additional infrastructure necessities

A bankable feasibility study (BFS) is currently underway in respect of a dual water/slurry pipeline pelletising plant.

“We need 80 MW of power and a 240 km pipeline, which links to Thabazimbi – both we will have to invest in and build ourselves. For power, this entails a 132 kV power line connecting the site to Lephalale. Eskom has indicated it may be able to provide power in 2017.”

Italy’s steel giant Danieli, which ranks among the three largest suppliers of plant and equipment to the metals industry worldwide, is undertaking the process design for the BFS and will design and oversee the plant’s construction. According to Harvey, this will be the largest iron ore pelletising plant in South Africa once built and requires an international expert to facilitate its development.

The future

Moonlight is only the beginning of the road. The farms Gouda Fontein and Julietta, which along with Moonlightfarm are covered by the company’s granted New Order Mining Right, have yet to be properly explored, andFerrum Crescent has further applied for prospecting rights on an additional two contiguous properties – Good Hope and Karnemelksfontein. “From the results of historical drilling by Iscor in the 1980′s and 1990′s, it is known that there is large additional tonnage of iron ore mineralisation, and Ferrum commissioned a high resolution aeromagnetic survey of Moonlight and surroundings in 2012 which confirmed the potential for significant additional mineralisation. The company’s plan is to confirm these additional iron ore areas by drilling and other mine exploration once it is in production.  The existing JORC compliant mineral resources giveMoonlight in excess of 20 years’ production based on the 6 Mtpa profile,” Harvey concludes.

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Nigeria: Great News for Lagos Ports

The Lagos Channels Management Company Ltd (LCM) announced that it has dredged most of the ports in Lagos to between 13 and 13.5 metre depth, reports leadership.ng.

Regarding this cleanup programs, Prince Falade Oyekan, the LCM’s head of human resources, stated that the company has removed 29 shipwrecks out of 31 shipwrecks identified along the channel on which it is operating.

“Until November 2012, we have removed 27 shipwrecks and currently working on two other wrecks that we identified as those that pose risk to the channel. The statutory duty to remove wrecks is with the Nigeria Maritime Administration and Safety Agency (NIMASA) but based on agreement between NPA and the agency, we are meant to remove wrecks on our contracted channels as recommended by the NPA,” said Oyekan.

LCM Ltd is a partnership venture with the Nigeria Ports Authority (NPA), in which the latter is the parent company with 60 pct stake, according to leadership.ng.

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