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

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.