China Businessman Paid Malaysia Politicians To Receive Honourable Title

By KEITH BRADSHER. Published on 19 Nov 2014 by The New York Times.

CAA Resources has been at the center of the push here, reopening Malaysia’s most famous mine. Discovered in the jungles of eastern Peninsular Malaysia in 1916 by a Japanese geologist, Bukit Besi became one of the world’s largest mines as it supplied the Japanese steel industry through World War II.

The British seized the mine as war spoils after Japan’s surrender and handed it over to a British company. The British mining company initially struggled with Communist insurgency attacks on its rail lines, including bombings that destroyed three train stations, but nonetheless became a big supplier of ore for Japan’s postwar industrial revival.

Then, in 1971, the mine closed because of what a historic marker here describes as bureaucracy and labor union troubles. The site sat idle for most of the next four decades.

Learning from the mistakes of his predecessors, Mr. Li, the 27-year-old CAA chief and scion of a Chinese family that had grown wealthy in the mainland iron ore industry, immediately worked to build ties with local and national political leaders, as well as with Malaysian royalty.

“If you’ve got these two to support you, then you can do anything you want, because the natural resources are all controlled by them,” Mr. Li said.

Mr. Li, who owns 56 percent of CAA, said that he had paid for each of the ruling party politicians with indirect stakes in the mine to receive the royally granted title of “dato,” which roughly translates as “the honorable.” It costs about $100,000 to arrange each royal grant, he said.

Although anti-corruption groups have campaigned against such arrangements, particularly indirect stakes, Mr. Li said he was simply following common practices in Malaysia. A government-linked industry group in Beijing announced plans on Oct. 24 to introduce standards for Chinese companies in areas like labor rights, environmental protection and community relations.

To avoid potential labor issues, Mr. Li has largely imported workers, who are not unionized. CAA Resources brought in about 40 mining engineers, accountants and other professionals from China, and filled the rest of its work force with laborers from low-wage countries like Cambodia, Myanmar and Vietnam. The workers are on 12-hour shifts, up to seven days a week, and are paid based mostly on how much iron ore each shift can produce, Mr. Li said.

Pacing across the jungle mine, Mr. Li described his recruitment pitch to potential hires. “You can save a lot of money, there is nothing to do here,” he said, “I say, ‘Each of you will be a hero, you will take back 100 percent of your savings, your wife will be happier, your children will be happier.' ”

He has avoided filing an environmental-impact statement by erecting an eight-foot-high, blue corrugated-steel fence across the middle of the site with a gate, and calling it two mines, each less than 500 acres. Only mines over 500 acres require environmental approval.

Now, CAA’s biggest challenges are from outside forces.

For one, Bukit Besi’s ore is less rich in iron than what rivals produce in Australia or Brazil, although better than most Chinese ore. Less concentrated iron ore needs to go through a costly extra step, known as beneficiation, before it can be sold. That eats into CAA’s profit.

Transportation, too, is a costly proposition. Australian and Brazilian iron ore mines are connected by rail lines to deepwater ports that can handle some of the world’s largest bulk freighters. That limits their shipping costs to China at around $8 a ton. By contrast, it costs $16 a ton to ship Malaysian iron ore to China because Malaysian ports are shallower — although a deeper port is scheduled to open by the end of next year.

But CAA benefits from a home-field advantage of sorts.

The Chinese steel industry — and the Chinese government, which guides purchasing policies — has been reluctant to rely exclusively on Australia and Brazil, given its past difficulties. In the years before the global financial crisis, such players sharply increased ore export prices.

“There is a strategic imperative — China does not want to be solely dependent on Australia and Brazil,” said Tim Huxley, chief executive of Wah Kwong Maritime Transport Holdings, a big Hong Kong shipping company active in carrying iron ore to China. “They’ve done that before, and it cost them a lot of money.”

With migrant workers, CAA’s labor costs are tiny compared with those of mines elsewhere. The company has brought in Chinese mining equipment at less than half the cost of American or Japanese equipment — and has the connections with manufacturers to get broken parts fixed quickly.

So Mr. Li insists that his company’s Malaysian mines could still cover their costs and show a modest profit shipping ore back to China at prices close to $80 a ton.

“We’re still positive by this time,” he said. “The open pit process has low costs.”

Read more here: http://www.nytimes.com/2014/11/20/business/international/chinese-interests-look-to-malaysia-for-cheap-iron-ore-and-profits.html