China's copper deal back in the melt

By Peter Lee

The International Monetary Fund (IMF) and the People's Republic of China do not make for an easy fit. The most conspicuous clash between the IMF and China is going on today in the Democratic Republic of Congo, with copper the big issue at stake.

In 2007, as Congo emerged from civil war, a Chinese consortium concluded a US$9 billion agreement with the government. The Chinese investors would develop mines and infrastructure - including $3 billion in projects over the next four years - and obtain the right to mine 10 million tonnes of copper and 600,000 tonnes of cobalt in return (quantities that are undoubtedly subject toadjustment based on changes in market price for these commodities).

The IMF is working to obstruct it.

Congo's President Joseph Kabila, who was slotted into his office after a less-than-exemplary election and with no little legerdemain by the Western powers, has shown clear signs of pursuing an independent course by playing off the Chinese against the West.

In response, vociferous Western concern over the Chinese deal has extended from the IMF to the US government and even to Rwanda-backed rebel leader and wannabe US asset Laurent Nkunda.

Nkunda included examination of the Chinese deal (but not of a contract involving a copper project by Freeport MacMoRan of the United States) as one of the eight demands he made to the UN special envoy last year, when his insurrection was at its height. AFP reported:

A Kinshasa-based expert, speaking on condition of anonymity, said Nkunda's tactics had the added advantage of being music to Western ears. The expert recalled that Washington's top Africa diplomat, Jendayi Frazer, discussed the issue of Chinese contracts with President Joseph Kabila for 45 minutes when she visited Kinshasa.

"Nkunda is trying to put the West in his pocket," the expert said, speaking on condition of anonymity. "He is especially trying to please the Americans."

Nkunda is now staying in Rwanda under mysterious circumstances and ready to return to the fray when his backers consider the moment opportune.

How much the DRC government is intimidated by the possibility that Nkunda and his selective brand of economic nationalism will be unleashed from the eastern haven to do battle against the Kabila regime on behalf of the West and against Chinese influence is, for now, a matter of conjecture.

The most pressing threat to Kibala's freedom of movement for the time being is the colossal $11 billion debt incurred and embezzled during the reign of his predecessor, Mbuto Sese Seko. The IMF is mediating between the DRC and the Paris Club of creditors concerning resolution of the debt.

The IMF is also openly calling for the Chinese deal to be renegotiated. The stated reason is that the IMF is concerned that the Chinese deal increases government indebtedness at the same time that the Congo is executing an agreement to write down its external debt on concessionary terms.

This is despite the fact that the China's Congolese loans - like the Beijing's loans to Angola, where China secured a concession with the help of a pre-emptive $2 billion infrastructure credit - will be secured, not by cash

, but by commodity produced by the project, in this case copper.

China was not amused, according to a March 3 report by Bloomberg:

The IMF's demands are "blackmail", Wu Zexian, China's ambassador to the country, said in a February 25 interview in the eastern Congolese city of Goma. "The contract will not change."

IMF managing director Dominique Strauss-Kahn was in Kinshasa on May 26, 2009, and announced the carrot - relief for the debts incurred by the previous regime - while he brandished the stick:

IMF staff are finalizing negotiations on a new program under the Poverty Reduction and Growth Facility, pending an outcome, consistent with debt sustainability, to the mining and infrastructure cooperation agreement between DRC and China. ... Before the IMF Executive Board can consider a new program for the DRC, a positive solution to the issue of the Sino-Congolese agreement and financing assurances of the Paris Club are needed.

In a classic illustration of Western reporting on China and the developing world, the actual story - IMF threatens to withhold debt relief unless the Chinese deal is renegotiated - got a bit of a twist - as in Voice of America's "Chinese Mineral Deal Blocking Congo's IMF Debt Relief." [1]

A Chinese outlet recast the AFP report with a more accurate headline: "DR Congo needs China contracts and debt relief: IMF" [2], and provided this quote from Strauss-Kahn indicating that the importance of giving some lip service to China is recognized inside the IMF, if not in the Western media:

It was absurd for the country to have to choose between lightening its burden or taking the Chinese contract, [Strauss-Kahn] added. "What we need is both the contract and the debt relief, the DRC needs both," said Strauss-Kahn.

Beneath all the huffing and puffing about the parlous state of Congo's financial house, there are some facts on the ground:

First, the Congo economy is growing, at a rate of at least 2.5% per annum this year, even in the midst of the global recession.

Second, the budget shortfall created by the collapse of copper and oil prices is, as a matter of magnitude, not very large. Congo, like Angola, is out of cash because it has no rainy day money after years of civil strife. It needs a bridge loan of about $420 million (representing about six months of imports) to keep the doors open. [3]

Benchmark world prices for copper, Congo's primary mineral export, on the London Metal Exchange traded at around $4,600 per tonne at the end of May, down from a record high of almost $9,000 per tonne last July, according to Reuters. International oil prices tumbled from above $147 to below $40 before recovering to around $70 at present.

The IMF already provided half of the $420 million bridge loan amount in early March, giving the Congolese government enough cash to make it through June - by a remarkable coincidence, the time when the IMF's review of the Chinese contract and a DRC review of the Freeport contract are expected to be completed.

Third, Congo's infrastructure is devastated by war and neglect. The government wants the Chinese in there building things, not the IMF taking advantage of the country's cash flow problems to lecture about the $11 billion in bad debts incurred by a previous regime.

There is another factor in the China-IMF-Congo equation: Western concern over the Congolese government's stated desire to renegotiate the Freeport contract.

The Western owners of the Tenke Fungurume project are upset that the Congolese government, after a review of contracts concluded by the previous regime, demanded that the government's stake in the project be increased to 45% from 17.5% (which would presumably go a long way toward alleviating IMF concern about the country's ability to service its debt).

They are also worried that the DRC might reallocate an undeveloped portion of the Tenke Fungurume reserves to the Chinese project, according to Bloomberg:

Freeport has explored less than half of its Tenke Fungurume concession area, which spans an area of about 600 square miles [960 square kilometers], the company said on its Website. The risk to Freeport is that the government tries to gain control of part of the property that would only be developed in decades' time, said Charl Malan, a mining hedge-fund manager at Van Eck Associates Corp in New York. The government's joint venture with the Chinese companies is a likely beneficiary of any property that may be taken from the Tenke lease, he said. [4]

It appears possible that, once Freeport's contract for Tenke Fungurume is affirmed (something that the company expects will happen in the second quarter of 2009), the Chinese contract and the IMF loan will proceed.

For the time being, the Chinese do not appear to be persuaded by IMF rhetoric, or interested in backing down.

Bloomberg interviewed China's ambassador to the Democratic Republic of the Congo, Wu Zexian (who made the "blackmail" comment cited above) after Strauss-Kahn's visit:

Wu said the agreement creates no new debt for Congo because the Export-Import Bank of China, which is funding the deal, is taking the risk.
The IMF says "it's a problem and I say it's not a problem", he said, adding that China may consider adapting the deal if the IMF provides a "good" reason to do so.
"I think what Mr Strauss-Kahn said isn't new," Wu said. "The discussion hasn't changed."

In a separate interview with Reuters, Wu said:

"We have avoided from the very beginning a situation that would eventually lead to further debt. And so there is no discussion possible," Wu Zexian, China's ambassador to Congo, said.

Grumbling aside, it looks like China's ox may be gored on the matter of the interest rate

for the loan. The original agreement was on commercial terms, but IMF pressure (happily seconded by the grateful Congo government) will perhaps get interest rates dialed back to something like what Angola got from China: the benchmark London Interbank Offered Rate plus 1.75%.

Published reports also indicate that the IMF is calling for the project total to be capped at $6 billion instead of $9 billion. [5]

This might mean that the Congo government is being encouraged to shrink the Chinese project in response to the current decline in copper prices - instead of allocating undeveloped reserves from Freeport's mine to give China rights to more copper than the original 10 million tonnes meant to cover the $9 billion deal.

The idea that the Congo should make do with fewer roads, hospitals, and airports so that Freeport's property rights are properly respected may excite some dissatisfaction inside the DRC with the IMF approach.

As to the idea that Congo would not pledge copper resources to guarantee billions of dollars in expenditures - and either let Beijing stand in line together with the Western powers that witlessly shoveled $10 billion of unsecured cash into former president Mobutu Sese-Seko's regime or see China walk away from the deal - that probably won't fly either with the Chinese or the Congolese.

The fact that the IMF is engineering the renegotiation of one of China's most important overseas resource deals - perhaps as part of an effort to get the Congo to accept its true role as a Western client - is unlikely to endear the organization to Beijing.