Mining China

By John S. DeMott

Chairman Hammer's Venture

Armand Hammer seems to go on forever. Last week he formally teamed up with a people who have gone on forever, the Chinese. The 85-year-old chairman of Occidental Petroleum signed an agreement with the People's Republic for the largest Sino-U.S. deal yet: a $580 million venture to mine coal from a huge pit at Antaibao, 310 miles west of Peking.

Hammer is an old hand at working with governments nervous about outsiders. In the 1920s he struck business deals with the fledgling Soviet state, and to this day Moscow holds Hammer in the highest trust. Two weeks ago, Hammer asked the Kremlin for permission to make a short cut across the Soviet Union to Peking from London, where he had been dining with Prince Charles. The unusual request was swiftly granted.

Once in China, Hammer received equally good treatment. The signing was toasted at a sumptuous banquet at Peking's Great Hall of the People. Hammer had timed the event to coincide with President Reagan's trip, but the President was sightseeing in Xian that day. So the confident Hammer spoke for him: "I know he's very pleased that I've done this."

Occidental and its American partner in the mining project, Omaha contractor Peter Kiewit Sons, will contribute about $340 million to the operation, chiefly in the form of equipment and engineering talent. China will put up another $240 million. The 30-year agreement calls for the Chinese eventually to take over management. Antaibao's 1.4 billion tons of proven reserves could make it the world's largest open-pit mine after production starts in 1987. Its high-grade coal will be sold to Pacific-basin countries, but low-quality coal will go to the domestic market.

Hammer is not concerned about the recent weak price of coal, which dropped from $52 to $40 a ton in the important Japanese market last year. He believes oil prices are on the rebound and that the price of coal will go up. In the Chinese deal, the price will be allowed to float with world supply and demand, but the miners' wages still have to be worked out. At one point, the Chinese insisted that their miners be paid $12 an hour, nearly what U.S. miners get on average. Occidental thought that was unreasonable.

The Chinese are still uneasy about the role of foreign capital in their economy, which was opened up to Western investment in 1979. Hammer's deal almost fell apart a number of times, only to be saved by the personal intervention of Deng Xiaoping, China's top man. When he and Hammer met before the signing, they were seen bear-hugging each other. Said Hammer: "I never doubted it would happen as long as Deng was behind me. He never failed me."

The Chinese still have a long way to go before they inspire widespread confidence in Western businessmen. China's legal system, for example, makes it difficult to reach agreements. But progress is being made. A new national patent law, which will help protect Western technology imported into China, is now in effect. Other new laws help resolve disputes between China and foreign companies. Those reforms should make it easier for others to follow Chairman Hammer's lead.

--By John S. DeMott.

Reported by Jaime FlorCruz/Peking

With reporting by Jaime FlorCruz/Peking