Hierro Peru: China’s footprint in the Andes

One of China’s largest steel makers is causing controversy in Peru. Lucien Chauvin reports on an iron mine that has drawn protests from environmentalists and labour activists.

Last week the Peruvian government hosted a delegation of Chinese businesspeople with the hope of attracting investment in this Andean country. But one topic that both the hosts and guests would have preferred to avoid is that of the town of San Juan de Marcona, in Ica Region, 525 kilometres south of the capital, Lima, where China’s Beijing Shougang Group has operated an iron ore mine since 1993.

Shougang is China’s fourth-largest steel maker, and has been widely criticised within China for its contribution to Beijing’s air pollution. In 2001, the Chinese government ordered Shougang to move its dirtiest plants out of the capital’s western suburbs – part of an effort to tackle Beijing’s notorious smog in the run-up to the 2008 Olympic Games. Shougang has since announced it will move all of its polluting plants out to neighbouring provinces by 2010.

Shougang’s purchase of Hierro Peru, the Peruvian state-owned mine and steel mill, for US$311 million remains the largest Chinese investment of its kind in South America, but critics say it is not a model to follow. In its nearly 14 years of operations in Peru, Shougang has been criticised by the regional and congressional government, NGOs and its own workers’ union for repeated violations of environmental standards, disregard of labour rights and breach of contract.

Shougang has received four fines for environmental infractions. The most serious of these, according to local activists, is Shougang’s pumping of waste water into the nearby San Nicolas Bay, where its deepwater port is located. In March 2006, the Ica regional government declared a state of “environmental emergency” in San Juan de Marcona, a largely-symbolic measure enacted to protest Shougang’s activities.

Carlos Chavez, a regional council member, said the decision to declare the environmental emergency did not come as a surprise. He said there was not only ample evidence of environmental pollution, but also Shougang showed a complete disregard for the problem.

“The Ica Regional Council has repeatedly addressed the social and environmental impact of Shougang, calling to their attention problems that needed to be resolved. Nothing ever happened,” said Chavez.

Shougang appealed the council’s declaration of a “state of emergency”, but in April the regional council upheld the company’s appeal. Shougang have since announced they would pursue the matter in Peru’s court system. The company was unavailable to comment, despite repeated attempts to contact them.

Jorge Silva, an engineer who works for the Research Centre for Development and Participation, who prepared a report on extractive industries operating in Ica, said: “Shougang is undoubtedly important to the economic wellbeing of the Ica region, but it has to be held accountable to its original commitments and additional agreements it has reached over the years. Beginning next year, the regional government will hopefully be able to enforce norms the central government has not been interested in enforcing.

Silva said Shougang’s approach to the environment is mirrored in its relations with workers and the local community, to which the company has very few ties.          

“Shougang is a Chinese enclave that has no relationship with its social or physical environment,” said Silva.

As a result of the company’s approach, Shougang’s 720-member labour union has called several strikes in the past few years, as have contracted workers. There have been four strikes so far this year, each of which forced the company to close operations but did not hurt the bottom line too much because of Shougang’s huge inventories. Although they extracted some concessions, Shougang’s workers are still among the lowest paid in Peru’s mining sector.

The labour union’s eight-day strike in June, which cost the company US$4 million in losses, was called to demand a daily wage increase of US$1.70. The company countered with an offer of US$0.58 daily. The two sides settled on US$1 and a US$300 one-time bonus. Shougang workers now earn US$14 for a 12 hour shift, although the company points out when all benefits are included, Shougang workers receive the equivalent of US$28 a day.

Union leader Julio Ortiz said the situation remains tense because the company’s profit margins continue to increase, while workers continue to receive little in terms of better wages and benefits.

Production in the first six months of this year was 2,520 fine tonnes, which is near full capacity. While production has remained more or less steady, international prices have risen. A fine tonne fetched an average of US$27.70 in the first six months of 2005, and US$35.70 in the same period this year. Export earnings in 2005 were US$215.5 million, up 249.4% over the 2004 figure. A similar trend is expected this year.

According to government sources, Shougang’s reserves are around 830 million tonnes, and the company is exploring additional sites. It has identified copper and gold deposits, and other international companies are prospecting for similar metals around San Juan de Marcona.

Apart from their partiallysatisfied salary demands, the union also received a promise from the company to carry out environmental remediation projects, particularly cleaning up oxidation ponds; although this has yet to be carried out.

While politicians at the local level and in Peru’s unicameral congress have expressed concern about environmental and labour problems, they have focused much more of their attention on legal issues, specifically Shougang’s failure to meet its original contract.

Shougang won the bid for Hierro Peru in September 1992, and began operating in January of the following year. In addition to the US$118 million it paid to acquire the company, it also promised to invest US$150 million in the next three years, or by the end of 1995. That did not happen and Shougang was fined US$14 million, less than 10% of what it initially promised to invest.  Overall, Shougang has invested around US$130 million since moving into Marcona, most of it on improving its facilities to raise production.

A special congressional commission investigated the sale and Shougang’s failure to meet its commitments throughout most of 2003, but nothing came of the investigation and voluminous report, which concluded that the company had failed to abide by its contract.

Jorge Silva holds that Shougang’s investment needs to be analysed more closely, because there is evidence that even this investment may be better on paper than it is in reality.

“Part of the investment was to purchase machinery, but all they did was bring in second-hand machinery from the parent company in China that pollutes just as much as the old machines. They have done whatever necessary to make a profit while not complying with environmental or labour standards,” said Silva.


Lucien O. Chauvin is a freelance journalist based in Lima