Chinese involvement in DRC

By Claude Kabemba | October 04th, 2012
Win win partnership? China, Southern Africa and Extractive Industries

Chinese investment in the mining sector in the DRC can be divided into three phases: the phase of artisanal mining, of smelters or semi-industrial mining, and of industrial mining.

The first phase of Chinese economic activity was dominated by Chinese traders. These were individual Chinese who came either on their own account, or were sent by Chinese companies to buy ore and export it to China. They bought the ore directly from artisanal miners. They had no offices, but briefcases full of cash. With the collapse of the mining sector in the late 1990s, the formal sector was quickly replaced by artisanal mining in the DRC, which was responsible for most production. When the Chinese came to do business in the late 90s, just after the 1996 war, they were not mining but bought most of the ore. Chinese funding which came into the country did not come through the banking system – it was poured into the economy through informal channels. It thus came in illegally and was spent without government knowledge. Most of the Chinese mineral traders were not registered with the provincial division of labour until late 2007.They entered the country with a tourist visa and remained in the country illegally. For most of these first arrivals, investing in mining was too expensive. Buying from artisanal miners was far more beneficial. They avoided all the problems associated with mining.

Formal Chinese investment in the mining sector is very recent, starting at the end of the second republic. During the first republic, the Chinese investment in Mobutu’s DRC was government-to-government, and was concentrated in the infrastructure sector. The first semi-industrial Chinese company to mine in the DRC was FEZA Mining, an extension of the Chinese defence industry – mineral resources which FEZA buys in the DRC are sent directly to the Chinese armaments industry. FEZA and other Chinese companies which came into the country when the Alliance des Forces Démocratiques pour la Libération du Congo (AFDL), led by Laurent Desire Kabila, overthrew Mobutu in 1997, were mainly interested in buying the ore directly from artisanal miners for export to China.

This situation remained until after the 2006 elections which brought Joseph Kabila to power. With a democratic government in place, the possibility for increased political stability also increased Chinese interest in the country. The influx of Chinese into the Congolese mining sector (particularly in Katanga) is due to the favourable environment created by Congolese natural resources management, and in particular the liberalisation of mining that came in with the mining code of 2002. The Chinese were also motivated by the rise in metal prices on international markets, as well as the high demand of their industries for copper and cobalt.

After the 2006 elections, we see the emergence of many larger private Chinese companies interested in buying ore. However, their modus operandi did not initially differ from the first phase – they continued to buy ore from artisanal miners, with no investment in mining itself. They also operated in many instances without proper registration. The only difference with the first phase is that a level of rudimentary organisation started to emerge in Chinese investment. This change was not voluntary – the Chinese were forced to improve on their operations and refrain from clandestine business practices. The slow transformation from traders to semi-industrial operations was forced upon them by the governor of Katanga, Moise Katumbi Chapwe. In 2007,  he prohibited the export of raw ore without first transforming it within the country. The ban on exports of raw cobalt forced Chinese firms that had previously bought concentrate to quickly move and to set up plants to produce cobalt alloy.

Chinese companies were not the only ones affected by this measure – many Congolese, Western, Lebanese, Indian and Pakistani companies had to adapt and establish smelters. Of the 79 processing units listed at the provincial Division of Mines, 22 belonged to Chinese owners. In view of the prohibition on exporting rough products, the foundries created a monopoly on the sale or export of minerals originating from artisanal mining sites. According to DRC’s small-scale-mining technical assistance and training service, (SAESSCAM), artisanal mining supplied 70 percent of the processing units, the remaining 30 percent originating from SMEs. Chinese plants exported about 28 percent of the artisanal production from Katanga. Based on these figures (and unless proven otherwise), it could be said that Chinese investment in the mining sector was insignificant. However, it is difficult to rely on SAESSCAM statistics, as this technical service was still in its set-up phase. Also, SAESSCAM was going through a delicate period of non-acceptance by the mining operators of the artisanal sector, and was encountering heavy resistance from the lobbyists who controlled the sector and who saw SAESSCAM as an intruder.

This value addition policy of the provincial government encouraged most Chinese who had some money to open smelters. In the initial stage most were of very low quality, but the Chinese dominated the smelter business. This change prompted Barry Sautmann and Yan Hairong to argue that the Chinese companies in the DRC had demonstrated the ability to adapt, and that they had shown the will to contribute to development. They further argue that Chinese companies are often flexible in responding to African development plans.

During this period Chinese operators were also forced to formalise their businesses. This formalisation could be seen in the efforts made by Chinese businesses to certify their products when the DRC’s regulatory mining body, Centre d'Evaluation, d'Expertise et de Certification (CEEC), set-up its laboratory in Katanga province. The CEEC receives applications from Chinese companies for the certification of mining products. Many Chinese companies certified their products before the financial crisis, in particular CDM, OTA Mining, FEZA Mining, JACKISSING and HOUSHIM. The certification cost was US$125 per batch (25 to 30 tonnes). The revenue was distributed among government offices as follows: US$10 for the governor’s offices, US$10 for the mining division, and US$105 for CEEC, of which a part is allocated to operations.

Unfortunately, when the financial crisis hit the mining sector, most Chinese stopped certifying their product when the national minister of mines produced a circular requesting relief measures for economic operators. But the total withdrawal observed was reinforced by the CEEC staff’s practice of issuing unreliable certificates and receiving payment for no services rendered. The financial crisis directly affected Chinese businesses in the DRC. Before it, there were 77 processing units, of which 35 were Chinese. After the crisis, only 23 Chinese processing plants survived.

The Chinese continued to buy minerals from artisanal miners and did not invest in mining, but the mining law forbids smelting plants to buy directly from the diggers – they must go through a marketing agent or broker. The relations between the marketing agents and Chinese business caused many problems, which often ended up in court or at the chief prosecutor’s office. In order to avoid collaborating with the traders, the Chinese gave their marketing agents the responsibility of buying from the diggers directly. These agents were very powerful because they paid for the products and transport costs. It is surprising to note that no Chinese business had buying counters, despite the fact that they had injected a lot of capital into the artisanal trade.

In the beginning, they exported rough products. Restrictions forced the mining operators to install foundries and concentrators in order to be able to export finished products. During this period, we see an interest by these Chinese companies in applying for mining concessions. The nature of mining also started to change with the decrease of artisanal mining output from 80 percent to 10 percent with the appearance on the market of companies such as Compagnie Minière du Sud Katanga (CMSK), DRC copper and Cobalt Project (DCP), First Quantum, Frontier, Kamoto Copper Company  (KCC), Mutanda Mining (MUMI) and Tenke Fungurume Mining (TFM) Other large companies involved in mining at the time included AMCK, ANVIL Mining Congo, BOSS Mining, Chemical of Africa (CHEMAF), Compagnie Minière de Sakanya (COMISA), Générale des Carrières et des Mines (GCM) , KALUMINES, KCC, KISANFU, Minière de Musoshi and Kinsenda (MMK),  and RWASHI Mining, The early group of Chinese traders either went back to China, or moved to other African countries, or transformed themselves into semi-industrial businesses. The artisanal and smelter phases, it could be argued, were an incubation period for the Chinese presence in the DRC. China was observing the progress the country was making, considering that the DRC was still a fragile post-conflict state.

Applying for concessions did not mean that the Chinese wanted to get involved in mining. Their intention had never been a long-term investment with a real impact on the lives of the people (in terms of employment and economic development). This was clear when the financial crisis hit the Congolese mining sector in 2008 – most Chinese companies closed immediately, without any discussion with the authorities or their employees, and the owners disappeared. Among Chinese companies that remained after the financial crisis, we can mention FEZA Mining, Congo Dong Mining (CDM), and Linda Mining. The first two represent the worst and the best cases of the Chinese investments in the DRC.

FEZA Mining was established in 1997. It is situated in the central region of the DRC, in Likasi, just opposite the installation of Gecamines. CDM is situated in the Jolie area, 20 kilometres out of Lubumbashi town (now transformed into MIKAS. MIKAS is still putting in place its infrastructure). Despite the fact that we see some form of organisation and offices, these Chinese companies differ very little from the previous phase in terms of behaviour. The industrial installations of most Chinese companies are provisional and erected to satisfy only short-term objectives. FEZA Mining, one of the largest Chinese foundries that we visited, deserves special attention. Whoever visits the installations of this foundry will question its future. The investors give the impression that they are in a hurry. The administrative building is not well maintained, the walls are dirty and badly painted, the offices have very little (and very poor quality) furniture.

The Chinese role moved well beyond mining in 2006, when the government of Joseph Kabila invited China to help rebuild the DRC, prompting an agreement in which China committed to investing heavily in infrastructure in exchange for mineral resources (see Chapter 3). Two Chinese companies Congo International Mining Cooperation (CIMCO) et Compagnie Minière de Luisha (COMILU), situated in Luisha, have already invested in real mining In 2010, the value of the China-DRC joint venture, in terms of minerals, was released. The bank guarantees have also been finalised. After the transfer within the framework of partnerships, publicly owned mining company Gécamines’ reserves are currently evaluated at 40 million tonnes of copper, with a potential for twenty years of mining. Of these reserves, Gécamines is ceding 10,6 million tonnes of copper and 626 619 tonnes of cobalt in the Dima mining complex, a collection of three open-pit copper mines in Kamoya (in the central group), Dikuluwe and Mashamba (in the western group) region of Kolwezi  to the joint venture, Sicomine.

Public-private projects are being implemented as part of the joint agreement. Chinese assistance is expected in the form both of grants and interest-free loans. Beijing will build or rehabilitate some 3500 km of roads and 3200 km of railroads, 32 hospitals, 145 health centres and 2 universities. The contract also has immediate implications for the power sector, as the list of projects proposed by Beijing includes the construction of two hydropower dams (at Katende in Western Kasai and Kakobola in Bandundu province), and the rehabilitation and extension of the Kinshasa and Lubumbashi distribution networks. The expansion of the power grid is important if China wants to guarantee the smooth extraction of copper in Katanga and its export to China. Equally, roads and railway networks are critical for China to move products in and out of this vast country, the size of Eastern Europe.

In the infrastructure development (from the Sicomine funds, the result of a joint venture between Gecamines and a Chinese consortium), the first disbursement was agreed at US$350 million for the first year. The Chinese banks released money for four projects: the central hospital in Kinshasa, the south-west highway from Ndjili airport to town (which will be a two-lane road), the N1 from the border with Zambia to Lubumbashi, and the N4 in Pedi (Kisangani). All these projects have started and are nearing completion. The N1 has already been completed (although the quality is questionable). One project that posed a problem was the building of the hospital (see Chapter 3). The infrastructure development is already proving to be a success story of China-DRC trade relations, and could have contributed to more people, especially in Kinshasa, voting  for President Kabila in the disputed 2011 general elections.The extent of construction of roads in Kinshasa has not been seen since the Belgians left the country.

Not all infrastructure projects being implemented by Chinese companies are part of the Sicomines deal. According to the Congolese Ministry of Public Works, Chinese contracts are divided into two categories: projects linked to the main Chinese contract, and private ones executed by Chinese companies (either with Congolese government funding or funded by Chinese companies in the mining sector, sometimes in partnership with Congolese public mining companies). Some projects are funded directly by the Congolese government and carried out by Chinese companies outside the joint agreement. These include: Libération Avenue (Kinshasa), Lumumba Boulevard, Erosion of Kindele, Rout Kamituga-Kasongo, Erosion de Mataba, Place de la gare, and Bridge Mponzo (being pre-financed by Chinese companies). Congolese government funding for these projects comes mostly from the National Fund for Road Maintenance (FONER), and the money comes mostly from oil payments (from oil extracted in the Bas-Congo). In the past two financial years (2010 and 2011) oil contributes more to the Congolese national budget than mining.

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