Identifier
Created
Classification
Origin
06LIBREVILLE382
2006-06-08 13:09:00
CONFIDENTIAL
Embassy Libreville
Cable title:  

CHINESE BEAT OUT BRAZILIANS; GABONESE LOSE

Tags:  EMIN EINV ECON PREL CH GB 
pdf how-to read a cable
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RUEHBR/AMEMBASSY BRASILIA PRIORITY 0031
RUEHFR/AMEMBASSY PARIS PRIORITY 0801
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RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
C O N F I D E N T I A L LIBREVILLE 000382 

SIPDIS

SIPDIS

PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 06/08/2016
TAGS: EMIN EINV ECON PREL CH GB
SUBJECT: CHINESE BEAT OUT BRAZILIANS; GABONESE LOSE

REF: A. 05 LIBREVILLE 911

B. LIBREVILLE 20

C. LIBREVILLE 127

D. LIBREVILLE 301

E. LIBREVILLE 337

Classified By: Michael Garcia, Economic Officer, for reasons
1.4B and D

C O N F I D E N T I A L LIBREVILLE 000382

SIPDIS

SIPDIS

PARIS FOR AFRICA WATCHER

E.O. 12958: DECL: 06/08/2016
TAGS: EMIN EINV ECON PREL CH GB
SUBJECT: CHINESE BEAT OUT BRAZILIANS; GABONESE LOSE

REF: A. 05 LIBREVILLE 911

B. LIBREVILLE 20

C. LIBREVILLE 127

D. LIBREVILLE 301

E. LIBREVILLE 337

Classified By: Michael Garcia, Economic Officer, for reasons
1.4B and D


1. (C) Summary: After a nearly six-month battle over the
rights to one of the largest untapped iron deposits in the
world between Brazilian mining company CVRD and the Chinese
engineering company CMEC, the GoG awarded the project to the
Chinese. Although most observers believed investment by CVRD
would provide more benefits for Gabonese development, the
Chinese victory was widely anticipated because Gabon finds it
strangely difficult to say no to China. This case provides
additional evidence of a deteriorating investment climate in
Gabon, at a time when the country should be preparing for a
post-oil economy.

--------------
The Project
--------------


2. (C) The Belinga iron deposit is thought to hold as much as
1 billion tons of reserves, and could provide 20 million tons
of iron per year for 20-25 years. Although this is one of
the largest untapped iron deposits in the world, the site is
so remote (some 300 miles east of Libreville in the Gabonese
rainforest) that infrastructure costs have inhibited
development. Establishment of a mine at Belinga requires
construction of a railway line, a new deep water port north
of Libreville, and a hydro-electric dam to power the mine.
Total development costs have been estimated anywhere from
$600 million to $3 billion.


3. (C) Growing demand for commodities, particularly from
China, has changed the cost benefit analysis in favor of
development of Belinga. In April 2005, the Gabonese
government awarded rights to develop Belinga to a consortium
of companies, including Brazil's Vale de Rio Doce (CVRD) and
China's National Machinery and Equipment Import and Export
Company (CMEC). CVRD (one of the leading iron producers in

the world) was given exploration and production rights, while

CMEC (an engineering contractor with no apparent mining
experience) was awarded responsibility for infrastructure
construction.

--------------
The Competitors
--------------


4. (C) The consortium deal, however, did not satisfy the
Chinese. In late 2005 CMEC went back to the GoG with a
proposal to solely manage the Belinga project. CVRD's
Gabonese manager Paul Antaki told Econoff that the GoG
requested a counter offer from the Brazilians, who then
matched the Chinese proposal in every respect, including
offering the GoG a 5% share in the project. Both President
Lula of Brazil and President Hu of China are thought to have
actively lobbied Gabonese President Bongo on behalf of their
companies.


5. (C) The strongest selling point for the Brazilian proposal
was CVRD's track record, which included responsible
environmental stewardship as well as proven mining
competency. In addition, most outside observers believed
Brazilian investment would better stimulate Gabonese economic
growth, since CMEC was expected to import thousands of
Chinese laborers and use few local suppliers. Despite these
arguments in favor of the Brazilians, however, China was
widely considered the favorite to win, because it seems the
Gabonese find it very difficult to say no to China.
Political ties between China and Gabon are strong; President
Bongo has met every Chinese leader since Mao Zedong.
Although Gabonese Minister of Natural Resources Richard
Onouviet was widely thought to favor CVRD, Minister of
Foreign Affairs Jean Ping was generally thought to support
the Chinese. As the GoG procrastinated over its decision, it
was thought unlikely that CVRD's technical superiority could
defeat China's political strength.


6. (C) Although France's commercial attache in Libreville
claimed to support the CVRD bid (Ref D),some press reports
indicate France acted otherwise. These accounts suggest that
French interest in selling Airbus planes and high speed
trains to China led it to quietly support the Chinese bid.
CVRD manager Antaki shared this view. Antaki said Minister
of Finance Paul Toungui (considered close to the French)
favored CMEC for this reason. According to Antaki, when
asked about the implications of imported Chinese labor,
Toungui replied, "who cares, Gabonese don't want to work
anyway."

--------------
...and the Winner Is
--------------


7. (C) Finally in May, the GoG asked each side when they
would begin infrastructure construction. CVRD's Antaki told
Econoff his company pledged to begin work in the third or
fourth quarter of 2007, after completing further geological
studies. The Chinese committed to start construction before
the end of 2006. Antaki said he is curious about how the
Chinese will accomplish this, since it is unclear how work
can begin on the transportation infrastructure when the
quantity and quality of the product is not yet known.


8. (C) On June 1, 2006, Gabon's Council of Ministers awarded
the Belinga mining project to the Chinese. Antaki reports
that CVRD is deciding how to proceed. Since it was awarded
the mining permit for Belinga in 2005, CVRD could pursue its
claim to the mine through Gabon's legal system. However,
Ataki thinks it more likely the company will acquiesce and
return the permit in exchange for other mining permits and
more favorable financial terms on CVRD's existing manganese
project in southwest Gabon.

--------------
Another Negative Signal
--------------

9. (C) Comment: In the face of falling oil production, the
GoG has stated it seeks to diversify its economy and attract
foreign investment. Its recent record will make this
difficult. Three times in just the last nine months, the
GoG's treatment of existing foreign investors has sent
negative messages to potential new investors. In November
2005, cellular telephone companies were forced to renegotiate
their contracts just before the presidential elections (Ref
A). In April 2006, Canadian aviation investors were forced
out by alleged corruption and cronyism (Ref E). Now CVRD is
expected to give up the mining permit it was issued in 2005.
With the exception of the Chinese and perhaps the French,
investors who doubt that the GoG will keep its word will stay
away from Gabon unless projects offer truly exceptional
returns.

--------------
How Do the Chinese Do It?
--------------


10. (C)Comment continued: It is not readily apparent why Gabon
grants China so much power. Bongo, who has survived almost
40 years in power by building coalitions and avoiding
confrontation, undoubtedly urged the Chinese to share the
project with CVRD. That CMEC insisted on an all-or-nothing
decision suggests the Chinese were supremely confident they
would win. China offers Gabon the symbols of respect with
high level visits and provides the GoG cheap financial credit
for public works projects constructed by Chinese companies.
This hardly seems enough to convince the GoG to entrust a
critically important project for Gabon's future development
to a company with no apparent mining experience.
WALKLEY