Afghan wealth tempts India, China but hurdles remain

SINGAPORE Wed Jun 23, 2010 11:31am IST

A man walks with his cow along a road during a dust storm in Ghazni province, southwest of Kabul, in this April 7, 2005 file photo. REUTERS/Stringer

A man walks with his cow along a road during a dust storm in Ghazni province, southwest of Kabul, in this April 7, 2005 file photo.

Credit: Reuters/Stringer

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SINGAPORE (Reuters) - For all the lure of the mineral wealth believed to be lying untapped beneath war-ravaged Afghanistan, Asia's two major economies, India and China, are not rushing in with pick axes and shovels just yet.

Both resource-hungry nations, jockeying for influence in Afghanistan as the United States prepares to pull out its troops next year, are hungrily eyeing the deposits of iron ore, copper and key industrial metals such as lithium, estimated to be worth more than $1 trillion.

But while this bounty is enough to transform Afghanistan's bedraggled $11 billion economy, the security and logistical challenges involved in extracting the minerals and bringing them to the global market from the landlocked nation are just as daunting for the Indians and the Chinese as they are for Western investors, officials and analysts say.

"China and India are not going to walk away from this. There is a huge opportunity here and they are going to position themselves for it, but I just don't see this taking off in the immediate future," said Kamran Bokhari, Regional Director, Middle East and South Asia at global intelligence firm STRATFOR.

"We tend to often underestimate the sheer amount of limitations any power faces operating in another country, in terms of logistics, even a rising power such as China."

Even with the best of infrastructure, mining minerals is very expensive and time-consuming compared to drilling for oil.

Gold, silver, copper and other minerals are usually locked in ore that must be tunneled down to, blasted out by the ton, carried to the surface, and ground into powder for processing.

Digging the shafts and building elevators, processing plants, railroads and tarmac roads can cost up to several billion dollars for a single mining operation.

In mountainous, undeveloped Afghanistan, which has no railroad link to the world or adequate electric power infrastructure, these problems multiply ten-fold.

For a graphic on the location of the reserves click here

Indian and Chinese companies are expected to lead the pack at a roadshow the Afghan government has organised in London on Friday to drum up investor interest in its mining sector.

With the United States planning to begin a military withdrawal from July 2011, India and China along with Afghanistan's other neighbours such as Pakistan and Iran have stepped up efforts to increase influence in the unstable region.

India has spent $1.2 billion building roads, power transmission lines and even the parliament building, hoping to win goodwill. The Chinese have focused on deepening commercial links, investing in the resources sector as well as producing many of the goods sold in Afghanistan.

At the roadshow, officials will provide details of the Hajigak iron ore deposits in central Afghanistan that will open for bidding later this year. The area is said to hold the largest unmined iron deposits in Asia.

Several Indian companies reached the last stages of the tender process for the mine estimated to hold 1.8 billion tonnes of high quality ore. These included Essar Minerals Ltd, Rashtriya Ispat Nigam Ltd and Ispat Industries Ltd.

China's Metallurgical Group Corp, which along with Jiangxi Copper Co(0358.HK) won the contract for the Aynak copper deposits in 2007 in the largest non-military foreign investment in the country, was also a bidder for the Hajigak deal. But it pulled out following allegations it had won the Aynak contract by giving bribes. The firm denied the charges.

"Investors are concerned about President Karzai's tenuous domestic and international standing, Kabul's weak control of the provinces, the government's lack of capacity to implement the new 2005 Mining Law and lack of credible investment law and framework, and wide-scale corruption across institutions," Maria Kuusisto, analyst at Eurasia Group wrote in a research note.

Having won the Aynak concession, the Chinese are having to build local road connections, transnational railway lines and other infrastructure in an investment that is expected to hit $4 billion. The project is already 18 months behind schedule.

BIGGER PROBLEM FOR INDIANS

Kabul is keen on a greater Indian role in the mining sector and last week Afghan Mines Minister Wahidullah Shahrani flew into New Delhi for talks with his Indian counterpart.

But the Indians have a bigger problem than the Chinese.

Even if they were able to set up the mining infrastructure inside Afghanistan, they have to transport the products through rival Pakistan.

India and Afghanistan have been trying to persuade Pakistan to allow limited movement of trucks carrying fruits and vegetables through its territory. Islamabad, which is strongly opposed to a deepening Indian role in Afghanistan, has shown little sign of flexibility.

"India has Pakistan standing between it and Afghanistan, and Pakistan will do everything possible to prevent it getting a deeper stake. In fact they will align themselves with the Chinese in the mineral race, if only to stop the Indians," Bokhari said.

New Delhi has been trying to access Afghanistan using Iran as a corridor and has built road networks in the area as an alternative to Pakistan.

But experts say using the Iran route to ship out mined products may not be a feasible option, given the deposits are concentrated in southern and eastern Afghanistan near the border with Pakistan and also because dealing with Iran itself is a complicated issue because of the sanctions imposed on it.

"Security is a real issue for Indian companies. Indians have been attacked. The big question will be how do you ensure the security of the people working there," said Shanthie Mariet D'Souza, an expert at the National University of Singapore.

(Additional reporting by David Fox in KABUL and Krittivas Mukherjee in NEW DELHI; Editing by Miral Fahmy)

(For more business news on Reuters India click in.reuters.com)

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