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China’s epic fail in Afghanistan

Archeological excavation underway at Mes Aynak. ( Photo: Afghan government )

It’s hard to mine copper without railroads or electricity

The conventional wisdom on how the long war in Afghanistan—and perhaps other U.S. foreign adventures—has played out is that while the United States has spent its blood and treasure toppling governments and then restoring a measure of security, other less scrupulous countries like China are moving in to exploit the natural resources. The idea is that Americans are getting played: we pay the price to open up a country to international capital and global markets but we don’t actually reap any of the rewards, and the peculiar combination of militarism and idealism in our national character ends up creating opportunities for our rivals. 

However, the story of the Mes Aynak copper mine located 25 miles southeast of Kabul, Afghanistan, suggests that we should revise this narrative. Mes Aynak is a site in a mountainous, barren region, home to an ancient Buddhist monastery complex that sits atop an even older Bronze Age copper smelter. In November 2007, a 30 year lease worth $3B was granted to the China Metallurgical Group Corporation (MCC) and Jiangxi Copper, Ltd, (JCL) to develop the site, extract and smelt copper, and transport it by rail to the capital city Kabul and then out of the country. The Mes Aynak ore deposit is estimated to hold reserves worth $88B: the mining lease is China’s largest investment in Afghanistan, and Afghanistan’s largest foreign investment in the country’s history. The Mes Aynak ore is supposed to be high grade, at 2.3% copper, at a time when the average purity of copper ore being mined is less than 1%. According to a document produced in 2011 by the National and Regional Resources Corridors Program, the Afghan government hoped to generate $1B in revenue from its mining sector by 2017, with the Mes Aynak development helping lead the way with $350M in revenue.

A little more than ten years later, exactly zero copper has been mined by China at Mes Aynak, and the 2017 revenues reported by the Ministry of Mines and Petroleum amounted to only $86M, 8.6% of its target. In the meantime, the two Chinese companies have formed a partnership called MJAM (MCC-JCL Aynak Minerals), and the story of MJAM’s struggles at Mes Aynak has given us a valuable lesson in the limits of Chinese economic ambitions and the logistical difficulties of developing mineral resources in remote, unstable regions lacking basic infrastructure. 

There are two sides to the Mes Aynak story: on the one hand, China’s overweening economic and trade ambitions have led it to make massive infrastructure investments all over the developing world, from wind turbines in sub-Saharan Africa to a vast rail network connecting China to Western Europe through Kazakhstan and Russia. China is exploring shipping routes in the Arctic and building railways in Kenya, drilling hundreds of tunnels in Laotian mountains, financing nuclear power plants in England and building deepwater ports in Pakistan

China’s new strategy is encapsulated in its Belt and Road Initiative, a multi-trillion dollar vision integrating 65% of the world’s population and 1/3 of the world’s GDP that China hopes will remake global trade on its terms. Chinese infrastructure projects are supposed to help get Chinese exports to new markets efficiently and allow Chinese state-sponsored corporations to extract natural resources, creating two-way trade flows to China’s advantage. FreightWaves has reported before on the intensive use of copper by electric vehicles; as the world’s leading producer of electric vehicles—not to mention its consumer electronics manufacturing sector—it’s very much in China’s interest to corner the global copper market so that it can ensure price stability. The Mes Aynak concession was a clear part of that metals strategy.

On the other hand, Afghanistan is an extremely undeveloped country and is actually quite unattractive as a home for foreign direct investment. The country has made huge progress in access to electricity—in 2002, less than 15% of the residents of Kabul had power, but by 2015 that figure had increased to 70% of Kabul residents. Still, Kabul regularly experiences 15 hour long load-shedding brownouts, and imports more electricity from Uzbekistan than it can produce on its own. Railroad construction has been another challenge: Afghanistan’s neighbors use three different gauges (to the west, Iran uses the standard gauge of 4 ft 8.5 in, to the east and south Pakistan uses the 5 ft 6 in Indian gauge, and the three northern neighbors, Turkmenistan, Uzbekistan, and Tajikistan use the 4 ft 11 27/32 in Russian gauge). There were about 15 miles of railway in all of Afghanistan until the 21st century, by 2014 there were 42 miles. Today there are basically only three lines: one line across the northern border with Uzbekistan and two short lines from Turkmenistan. 

How did MJAM plan to reconcile those two opposing sides of the coin, Chinese ambition and Afghanistan’s deficient infrastructure? The Afghan government and MJAM developed a comprehensive contract that covered various aspects of Afghanistan’s infrastructure challenges and economic needs. Afghanistan wanted the copper to be smelted and processed in country to maximize jobs; MJAM agreed to build a new railroad connecting Mes Aynak to Kabul and then east to Pakistan, as well as constructing and operating a new 400MW coal-fired power plant at Ishpushta to provide electricity for the smelting and processing operations and put the excess 200MW into the national power grid. The contract stipulated that copper production was to begin 5 years into the lease—at this point, MAJM is 5 years past its deadline. 

Why has the project stalled? Sure, there were some security issues, but minor ones for Afghanistan, really: in 2008, a remote controlled bomb destroyed a vehicle and killed three security guards, and in 2012, insurgents attacked workers who were removing Soviet-era landmines from the mining camp. Other than some scattered rocket fire from unknown sources, Mes Aynak hasn’t come under direct attack, and the Taliban even reached an agreement promising not to interfere with the mine. The Buddhist archeological site that was supposedly threatened by the mining concession got some attention in the form of a documentary film, but it’s generally agreed that thousands of artifacts were excavated properly and removed safely by an international team of experts. 

The real challenges were supply-chain problems: there was not enough coal, or even roads to transport a sufficient amount of coal, to supply the proposed power plant. The same was true of the phosphates needed for the copper smelting process—the phosphate supply was insufficient and the infrastructure to move it onsite simply did not exist. In 2013, on the eve of the 5 year deadline to begin extracting copper, MJAM requested major changes to its contract: the Chinese wanted to remove any language stipulating the construction of the coal power plant, providing excess energy to Afghanistan’s national grid, and constructing railways to stimulate the country’s mining sector. MJAM argued that if smelting and processing was going to be impossible in Afghanistan, then the 400MW coal plant was no longer necessary.

Afghanistan’s government balked at the requested changes and still insists on the mine going forward under the terms already negotiated. Neither former President Hamid Karzai or current President Ashraf Ghani, the technocrat supposedly modernizing the Afghan government, have been able to strike a deal with Beijing. So today, in 2018, one of the world’s largest copper deposits sits under a barren moonscape occupied only by Taliban insurgents and crumbling Buddhist ruins, with no progress in sight. 

In recent years the United States has poured $500M into Afghanistan’s mining industry, with little return for its investment. Afghanistan’s fabled mineral resources were reportedly the only thing convincing President Trump to keep U.S. forces in Afghanistan—maybe copper, gold, silver, platinum, and uranium could finally pay for America’s longest war. But “there is no low-hanging fruit that could trigger rapid growth and foster self-sustaining development,” said the Afghan’s government’s own National Peace and Development Framework document, presented at last year’s donor conference in Brussels. In the long run, we may be better off learning from the Mes Aynak boondoggle and steering clear from further risky, expensive investments in Afghanistan.

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.