Chinese investors cut a secret deal with Congolese officials increasing their profit share of mining revenues while falling behind on promised infrastructure agreements.
Chinese investors cut a secret deal with DRCF officials increasing their profit share of mining revenues while falling behind on promised infrastructure agreements.
– President Tshisekedi of the Democratic Republic of the Congo could limit Chinese mining and investment in the country as part of a larger anti-corruption platform
– Cobalt is a critical resource for batteries—specifically electric vehicle batteries; it is fueling China’s electric vehicle and consumer electronics market revolution
– Electric vehicles represent a major part of China’s ecological transition, and a supply chain failure could seriously endanger China’s international reputation
AN EYE-OPENING REPORT
A draft report from a global anti-corruption agency risks endangering China’s strategy in Sub-Saharan Africa, its electric vehicle (EV) production and its position as a leader against climate change. The report concerns a 2008 mining deal between the Democratic Republic of the Congo (DRC) and Chinese firms and disclosed a previously discrete amendment that increased the share of profits Chinese shareholders would receive, overturning an original deal in which all mining profits would have been reinvested into local infrastructure.
The eye-opening report came after previous infrastructure delays totaling $1 billion in promised but uninvested money by Sicomines, a Chinese consortium. Last September, DRC President Tshisekedi reported that only $825 million in financing had been spent on projects such as roads, bridges and a stadium.
European NGOs and whistleblower groups have suspected that Sicomines redirected profits to enrich Congolese officials close to former President Joseph Kabila. Between 2013 and 2018, the consortium sent $65 million to a Congolese intermediary, owned by a Kabila ally, which was redistributed to professional and family contacts of the then-president. Chinese businessmen also withdrew millions from the firm. To date, over $40 million of the project’s funds remain unaccounted for.
The report’s revelations may have adverse consequences for China’s EV market, geoeconomic ambitions and climate commitments. Presently, the DRC is the heart of global cobalt mining, accounting for over 70% of the world’s supply. Furthermore, cobalt is a key mineral in building effective batteries. The DRC is an important player in China’s budding EV industry. More than three-quarters of Chinese cobalt consumption go to the DRC’s rechargeable battery and EV market. As part of its Dual Circulation Strategy, China is seeking to increase domestic consumption and production to adapt to a less global and China-friendly international economy. Rechargeable consumer electronics and electric vehicles are key to this goal. Also at stake are China’s climate commitments—a crucial element of the country’s global standing and international strategy.
THE DRC – A VITAL PIECE OF CHINA’S HIGH-TECH PUZZLE
The Sicomines consortium is a critical piece of China’s technology sector, especially as it relates to its domestic battery production. The Sicomines Copper-Cobalt Mine is the third-largest cobalt mine in the world and was responsible for producing nearly 17,000 tons of cobalt in 2020. Cobalt is particularly important as it plays an important role in the production of lithium-ion batteries, the component within many portable appliances that provides a lasting charge.
Furthermore, the production and global flow of batteries are important to China’s geoeconomic strategy. Beijing’s ‘Made in China 2025’ represents a ten-year blueprint for building Chinese manufacturing in 10 high-tech sectors. Two of these sectors — “energy-saving cars and new energy cars” and “electrical equipment” directly explain China’s interest in cobalt and global battery production. In particular, the EV market is a dual-headed project: it is a geoeconomic strategy to compete with the United States and the European Union and a marker for international cooperation against climate change.
EV production is key to changing the Chinese economy from an export and investment-driven model to a demand and innovation model. In May 2020, Chinese President Xi Jinping announced his Dual Circulation Strategy in the midst of the COVID-19 pandemic and collapsing international markets. This strategy aims to increase domestic consumption and production to shield China from changing supply chains and any anti-Chinese global trading order. According to some estimations, the global EV market will reach a total market value of $7 trillion by 2030 and $46 trillion by 2050. Economic strategic independence is the goal of Chinese efforts to capitalize on this emerging market.
In the EV market, China is also attempting to become a leader in the fight against climate change. Responsible for 27% of global emissions, China is the largest greenhouse gas polluter on the planet. The International Energy Agency estimates that in 2018, China avoided 30 megatons of carbon dioxide emissions thanks to its EV market development.
This result stems from policy actions that mandated 10% EV production among Chinese auto manufacturers, offered tax exemptions and supported charging infrastructure. In a time of diminishing global trust, making strong commitments on global policy issues sends powerful signals of confidence. China has already committed itself to the Paris Climate Accords and carbon neutrality before 2060. Making good on these promises will be key to maintaining a lifeline in the international community.
To reach these ambitious goals, China’s EV market will need DRC cobalt. Currently, 70% of the DRC’s mining industry is owned by Chinese investors. China is a world leader in cobalt consumption, of which 80% is sent to the rechargeable battery industry.
Domestic Chinese upstream manufacturing and resource extraction of cobalt, however, make up only 23% of the global electric vehicle supply chain. This can be contrasted with China’s domination over one downstream and two mid-stream manufacturing phases. China makes up 80% of chemical refining, 66% of cathode and anode production and 73% of lithium-ion battery cell production in the global EV supply chain. Thus, China is dependent upon Congolese cobalt to corner this global market.
The connection among cobalt, batteries, EVs and global politics is the reason why the DRC and the draft report’s implications are so important. The DRC holds over 70% of the world’s cobalt reserves. The eight largest cobalt mines in the world are all located in the DRC. Without this good, Chinese battery producers will have a difficult time fueling the country’s growing electric vehicle industry and the government’s geoeconomic ambitions. The threat of Congolese regulators revisiting the Sicomines investment deal could send shock waves through global markets. As one of the world’s poorest countries, the DRC is in a critical position within a major high-tech supply chain.
If China can secure cobalt in DRC, it will dominate the global supply chains of a very geographically-concentrated mineral. This will lend to Chinese domination over re-usable battery materials and the electric vehicle market. With the revelations of this new draft report, China’s Dual Circulation plan and international climate strategy risk significant setbacks.
A ROCKY BUT STEADY FUTURE
The Sino-Congolese relationship will likely be reassessed but not endangered. The COVID-19 pandemic saw a breaking down of Sino-African relations across many countries. However, the economic conditions that attracted Chinese investment to the DRC still remain as well as the opportunity for investment.
Despite the corruption of Chinese businesses and Congolese officials tied to the former president, both countries need each other for economic reasons. What is most likely to shift, given the recent Congolese draft report, is a relational change in tone to one that is composed of mutual respect.
The revelations of Chinese abuse have stirred up some attention and followed similar international scandals and recent global agreements. The Congolese President has already announced that Chinese mining contracts would be renegotiated, citing the imbalance between profiteering investors and the country’s poverty-stricken populace.
In neighboring Zambia, worker-manager relations deteriorated for similar reasons to such an extent that Chinese managers shot at protestors outside of coal mines and workers murdered their factory owners. At the recent Forum on China-Africa Cooperation, Chinese and African partners released an action plan that specifically targeted corruption as a factor to work on in future investment agreements.
Moreover, the DRC needs infrastructure. The economic heartland of the country lies between three cities—Kinshasa, Lubumbashi, and Kisangani—that remain unconnected by adequate transportation infrastructure. Much of the infrastructure that exists often runs maintenance costs that the DRC cannot afford. Similarly, Eastern provincial capitals, like Bukavu, Goma, or Bunia, are also mostly inaccessible by road or rail when traveling from western regions of the DRC.
Outside of transportation infrastructure, other forms of infrastructure—or their absence—have had staggering economic consequences. A World Bank study found that telecommunications assisted the country’s rapid economic growth in the early part of this century. It also found that the lack of electric power facilities was the biggest economic hindrance restraining per capita growth by a quarter percentage point each year.
China, on the other hand, needs to spur domestic consumption. The Chinese annual GDP growth rate dropped from 15% in 2006 to under 5% in 2021. Much of this is due to the fragility of international markets. From 2006 to 2019, China’s trade to GDP ratio dropped from around 65% to only 35%.
To maintain stable economic growth, China is looking inward. As a percentage of GDP, private consumption during the same time period hovered under 40%. In the US and other developed economies, this number approaches 70%. Cobalt from Sicomines and the DRC may be an accelerator for domestic consumption. Selling EVs, laptops, smartphones, tablets and other consumer goods could be a key to feeding China’s rising middle class.
A likely change that will result from this scandal will be the culture of negotiations between African countries and Chinese investors. According to a global monitoring NGO focused on resource extraction, the Sicomines facility gave the DRC access to $1.16 billion in Chinese loans from 2010 to 2014. They report that $1.014 billion of these loans were spent on infrastructure, but the Congolese agency on Chinese mining and investment has stated otherwise. Only $500 million has been invested during this time period by Sicomines. At a cornerstone of global industry, the DRC can demand greater accountability and less corruption from China.
Chinese investors’ siphoning off money from Congolese infrastructure does not look good. But both actors need each other for critical economic reasons. Is cancellation of the investment deal on the table? Not likely. The Congolese minister of infrastructure has already made policy recommendations to move talks forward. Voicing concern that the DRC was reduced to a “consultative voice,” DRC authorities will likely demand that China make good on its infrastructure promises. Not a breakup, but a renewed respect between partners is the most likely result of this conflict.
IMPLICATIONS FOR CHINA’S GLOBAL PROJECTS
China and the DRC look poised to continue economic development. Brought into the Belt and Road Initiative in 2021, the DRC is too valuable for the Chinese to ignore. In a December 2021 state-media daily, China lauded the investment and shared projects between the two countries and highlighted Chinese infrastructure achievements.
As such, the DRC is not seeking to burn bridges with Beijing. In reviewing the Sicomines agreement, the Congolese finance minister recently reassured investors that the review was not a threat. Furthermore, he asserted that the review was being conducted “in close partnership with the Chinese.” The chairman of a neighboring Chinese-owned mine expressed confidence that the Chinese and Congolese could resolve any government investigation.
The ripples of Sicomines review will not touch China’s Belt and Road ambitions in Africa. During the COVID-19 pandemic, Beijing threw a lifeline to the continent: it began construction on a Cultural and Artistic Center for Central Africa in Kinshasa, along with a series of Centers for Disease Control and Prevention across the continent.
China also suspended debt payments with 12 African countries and reduced or waived the interest-free loans of 15 African nations. Of a survey of 500 African executives, over 60% expressed satisfaction with the BRI and willingness to consider future projects with the program. It is highly unlikely that friction between the DRC3 and China will upset wider investment patterns.
The scandal around Sicomines is an example of China’s need to strike a balance between internalizing supply chains and leading foreign investment. The Dual Circulation Strategy attempts to do this by keeping one foot in the global system while putting the other firmly within China. Sicomines is an important pillar of this strategy.
By importing raw materials, like cobalt, China can develop its EV market and a domestic consumer culture that gives the country freedom from inconsistent international tides. The production of electric vehicles can also build Beijing’s international reputation as a proactive country combatting climate change. The Congolese government’s review of Sicomines will presumably not endanger China’s geoeconomic ambitions, but it lends insight into China’s critical industries, economic strategy and the issues that China will face as it attempts to lock down strategic supply chains.