Afghanistan's plan to jumpstart economy with Chinese mining investment under threat

Plan to base country's future growth on mining may have struck a dead-end as China moves to renegotiate multi billion-dollar deal

PUBLISHED : Friday, 20 September, 2013, 12:00am
UPDATED : Friday, 20 September, 2013, 3:29am

Afghanistan's dream of using profits from its vast mineral resources to fund post-war development is fading after China signalled its intention to undo a multi billion-dollar agreement that had been underpinning Kabul's plans for creating a mining industry.

Fifteen months before the international presence in Afghanistan is reduced, Kabul may have to scale back plans for attracting mining companies to exploit its mineral reserves, including copper, gold, iron ore and rare earths, worth US$1 trillion.

A combination of related factors are working against Afghanistan. As the commodities cycle turns, prices drop, mining firms scale back on new projects, and China's economy slows, experts said that Afghanistan appears to have missed out on the resources boom for now.

And the country has yet to pass its new Mining Law, which some say could be delayed further by concerns about such issues as community compensation and environment protection, industry sources said. Ministry officials, however, are confident it will pass within weeks.

"Until global demand recovers and there is a sense of optimism about growth and mineral prices that will eventually re-trigger big mining interest in new green-fields projects, I think Afghanistan will struggle to develop its minerals assets over the next five years," said Peter Hickson, of London-based Global Materials Advisors.

China's wish to alter the terms of its contract to mine Afghan copper clearly took the government by surprise last month. "We did not think the commitments were conditional," Wahidullah Shahrani, the Minister for Mines, told local Tolo News recently.

The 2007 deal with state-controlled China Metallurgical Group (MCC) is worth $3 billion over 30 years to mine copper at Mes Aynak, 40 kilomteres southeast of Kabul. It is the world's second biggest deposit with 5.5 million tonnes. MCC officials met Shahrani in Kabul this month to discuss new terms, a source in the ministry said.

MCC is bound to build a power plant and a railway to the northern border, and to pay the Afghan government a bonus of US$800 million, all of which the company is now seeking to cut or reduce, the ministry official said. MCC also wishes to cut its royalty payment from the 19.5 per cent specified in the contract.

There was no comment from the Chinese Embassy in Kabul and MCC's office in Beijing.

The uncertainty over the deal comes at a delicate time for Afghanistan, ahead of elections next April that should see a transfer of power, as President Hamid Karzai is barred from seeking a third term. On December 31, 2014, international combat troops withdraw, reducing the Western footprint in a country still struggling to control a Taliban-led insurgency.

Mining has been seen as the main support for Afghanistan's economy after 2014. As Afghanistan lacks infrastructure, the government views mining as the best way to develop the country on many levels.

"If we had invested some of the international money into roads, bridges, railways, Afghanistan would not have such problems as we do today, trying to attract investment," said Rahim Samim, technical adviser to the Ministry of Mines.

"If the government and the international community could build railways, start investing in transportation routes through trade hubs, we could solve a lot of problems in the mining sector."

As it is, he said, "we have to start the Aynak book again. The minister will go to China to find out their position on Aynak - do they want to continue, or do they want to leave? After that we will take a decision, which will be based on new conditions. We expect to renegotiate the contract.

"For the ministry, it is not a problem because we want to make easy conditions for the Chinese, because we need investment in mining, we need to produce copper from our mines. We still do not know all the Chinese proposals. If their proposals are not acceptable for us, then we can terminate the contract. Other companies will come to invest because Aynak is the only mine in Afghanistan that is completely explored," Samim said.

Shahrani's decision to go to Beijing has been criticised as possibly jeopardising Afghanistan's interests by signalling a willingness to accommodate MCC's demands.

"It was a strategic contract, and the decision to send the Minister of Mines to China is already a gesture of appeasement which may seal our fate for the next generations," said Javed Noorani, of Integrity Watch Afghanistan.