Marcona is a small town located on the south-west shore of Peru. There sits the only operating iron mine in Peru, and one of China’s earliest overseas mining projects. Around 20 Chinese managers live there, running a mine that employs most of the town’s population. Although the Chinese staff here eat in their own separate dining room, when I visited the Marcona office of Shougang Hierro Peru, the Chinese seemed to get along well with their Peruvian colleagues. But appearances can be deceiving — in fact, this mining company has had a tortured relationship with its workers, not to mention the Peruvian Ministry of Labor.
“We have to sue [the Ministry]. Law is our last weapon to protect ourselves against the illegal actions of the Ministry of Labor,” said Aimin Kong, General Manager of Shougang Hierro Peru, in an interview with Tea Leaf Nation in his Lima office.
The history of a troubled company
In 1992, even before China officially launched its “Going Out” strategy to engage in outbound foreign direct investment, one of China’s largest state-owned steel companies, Shougang (首钢), completed one of the first overseas acquisitions by a Chinese company when it bought the poorly-run Marcona Iron Mining from the Peruvian government and made it the first Chinese mining project in South America. Shougang turned Marcona’s mine into a profitable business, but has done so amidst 20 years of continuous labor conflicts with its workers’ union, making it one of the most notorious mining companies in Peru.
“Shougang is famous for poor labor rights and working conditions. As far as I know, it is the only mining company in Peru that has failed to reach agreement with its union for decade. The gap between the company’s offer and the union’s demand is huge,” a consultant in the conflict resolution office of the Ministry of Labor, told Tea Leaf Nation.
According to the consultant, who asked to remain nameless, any agreement about wage and working conditions must be negotiated and agreed upon between a company and its union. But Shougang has refused to negotiate with its union in most of the conditions that the latter has raised — like working conditions — and stood firm on the few conditions that it is willing to talk about, mostly basic wages.
The cost of conflict
The failure, or unwillingness, to negotiate has a price. According to a recent comparative study by Tufts University, Shougang’s conditions are acceptable when compared to its Peruvian peers. However, Shougang suffers an unusually high number of strikes, costing the company approximately half a million U.S. dollars for every day that a legal strike shuts down production. Some years, the number of strike days at Shougang exceeds 40.
“I do not understand why Shougang has such an attitude against its union. It seems to be much cheaper if they satisfy the union’s demands” for benefits unrelated to wages, said Amos Irwin, the American researcher who conducted the Tufts study.
Shougang professes to be frustrated with its status quo. Kong insists, “It is not we who do not want to negotiate. It is the union who does not want to negotiate.” He and most of the Chinese managers in Shougang have privately portrayed union leaders as “ungrateful” and “using endless fights to score political points” on Shougang’s dime. In their eyes, because the union is never satisfied and has asked for impossible concessions, there can be no real agreement.
Kong recalled one recent Saturday evening negotiating session, which appeared to end with agreement between the union and the company. Kong says he was so tired afterward that he wanted to head home, but at midnight, union representatives returned to ask for more conditions. “I was very angry — we had already finished our negotiation, hadn’t we?” Kong said.
According to Irwin’s research, Shougang tried its best to satisfy its union until 1996, when the company realized it was more beneficial to say no. Sources within Shougang who have asked to remain anonymous say that the change since 1996 reflects a natural learning process: when Shougang realized the union would never be satisfied, management determined that the Peruvian people have a different mindset and work ethic than Chinese, and began a policy of intransigence in the face of union demands.
The blame game
“This problem should be blamed on our strong union and on the Peruvian social system. In the foreseeable future, I do not see any solution to our problem. Shougang is still going to suffer many strikes and the costs will be shared between the company and its workers,” said a high- ranking Shougang manager who was not willing to disclose his name.
Kong also blames Peruvian authorities for failing to establish clear regulations to provide a baseline against which both Shougang and union proposals can be judged. “If the Ministry of Labor sets up clear standards about wage increases and so on, we would be happy to follow,” he said.
But the Ministry of Labor is not willing to set the wage bar, and it believes it lacks the right to do so. The consultant who spoke with TLN argues, “This is not government’s role. We believe such a negotiation should be conducted between the company and its union.” He said he believes the back and forth of negotiation is common, and that Shougang, as a foreign company, has to learn and adapt.
But the Ministry of Labor has been adjusting as well as it strives to deal with entrenched and long-lasting problems such as Shougang’s. In the past, following failed private negotiations, the government could only try to intervene on issues like basic wages and wage increases, not working conditions or other detailed union demands. However, since 2011, the Ministry of Labor has been trying to impose more powerful regulations on big companies like Shougang, giving the Ministry the ability to force arbitration if it determines a party is not negotiating in good faith.
The new regulation was issued in the midst of yet another Shougang-union conflict. The company triggered the statute, and Shougang had to face its first arbitration last year. However, Shougang filed suit against the Ministry of Labor, protesting the new law. The result of the forced arbitration is thus in limbo, pending resolution of Shougang’s suit. According to the Ministry of Labor, sending unfavorable outcomes into legal limbo has been Shougang’s onging strategy.
Chinese investment in Peru is expected to reach US$10 billion in the coming five years. Mining will be the focus of that investment, and it will include Shougang’s new expansion, projected to cost around US$1.2 billion, according to the Peruvian Times. As Chinese mining investment floods into Peru, Aimin Kong argues that Shougang has become a model for Chinese companies. Chinese-owned Chinalco, which just started project in Peru, seems to have learned from its forerunner’s troubles — it hires mostly Peruvian and international managers. Before any mining operation, Chinalco invests around US$300 million to build living and waste water treatment facilities, and its relationship with the Ministry of Mining is good. Perhaps the future for Chinese mining in Peru will be a more positive one, but Shougang will continue to serve less as a model, and more as a cautionary tale.