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Re-examining "Japan incorporated" : Japanese coal procurement and western Canadian coal Gibb, Heather 1984

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RE-EXAMINING "JAPAN INCORPORATED": JAPANESE COAL PROCUREMENT AND WESTERN CANADIAN COAL by HEATHER R. GIBB B.A. M c G i l l U n i v e r s i t y , 1971 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in THE FACULTY OF GRADUATE STUDIES (Department of P o l i t i c a l Science)  We accept t h i s t h e s i s as conforming to the required standard  THE UNIVERSITY OF BRITISH COLUMBIA October 1984 0  Heather R. Gibb, 1984  In p r e s e n t i n g  t h i s t h e s i s i n p a r t i a l f u l f i l m e n t of  requirements f o r an advanced degree at the  the  University  of B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make it  f r e e l y a v a i l a b l e f o r reference  and  study.  I  further  agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may department or by h i s or her  be granted by the head o f representatives.  my  It is  understood t h a t copying or p u b l i c a t i o n of t h i s t h e s i s f o r f i n a n c i a l gain  s h a l l not be  allowed without my  permission.  Department o f The U n i v e r s i t y of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date  DE-6  (3/81)  written  - ii -  Abstract In the current s i t u a t i o n of oversupply i n world coal markets, Japanese" coal buyers are accused i n some quarters of having d e l i b e r a t e l y over-stimulated  the supply by o f f e r i n g loans and extending long-term  contracts to more coal mine operations than has been warranted by market conditions.  Contained i n the accusation i s the charge that the  Japanese government and s t e e l industry have collaborated to set the conditions f o r oversupply.  The t h e s i s f i n d s a t the root of t h i s assumption  remnants of the "Japan Incorporated"  stereotype.  Examining the case of  the s t e e l industry,.the study demonstrates the inaccuracy of the e l i t i s t model of Japan from which the stereotype derives.  The purchase of thermal  c o a l by Japanese i n t e r e s t s i s discussed to introduce f u r t h e r evidence of the d i v e r s i t y of i n t e r e s t s which p a r t i c i p a t e i n p o l i c y decisions i n Japan. An examination of the s t e e l industry's approaches to acquiring coal reveals that a major concern of the industry has been to f i n d ways to assure that i t w i l l have r e l i a b l e supplies of reasonably-priced  material.  The industry's actions are best understood as ad hoc arrangements which have developed i n response to domestic and i n t e r n a t i o n a l market conditions. To achieve i t s goals, the industry has pursued a strategy of d i v e r s i f i c a t i o n of s u p p l i e r .  The case of Western Canadian c o a l i s presented to  i l l u s t r a t e some of the main features of the implementation of the strategy. To enhance the s e c u r i t y of t h e i r coal c o n t r a c t s , Japanese buyers increasi n g l y have chosen to invest d i r e c t l y i n the coal mine.  - iii -  Table of Contents Page Abstract  i i  Acknowledgements  v  Introduction  1  Footnotes Chapter 1:  4  The Japanese Setting  6  1.  Introduction  6  2.  "Japan Incorporated"  8  3.  Adjusting the G r i s t m i l l  9  4.  Securing Stable Supplies of Coal  12  5.  Options f o r a New Entrant  14  6.  The I n s t i t u t i o n s of Government  17  7.  The Z a i k a i  21  8.  Summary and Conclusions  22  Footnotes Chapter 2:  27  Western Canadian Coal  33  1.  Introduction  33  2.  The Place of Western Canadian Coal i n Japan's O v e r a l l M e t a l l u r g i c a l and Thermal Coal Requirements  34  ( i ) M e t a l l u r g i c a l Coal ( i i ) Thermal Coal  34 35  - iv Page 3.  4.  5.  H i s t o r y of Japanese P a r t i c i p a t i o n i n Western Canadian Coal Mine Development ( i ) Coal mine "groups"  36  ( i i ) J o i n t ventures  37  Buying and S e l l i n g Coal  39  ( i i ) The "coordinators": the s t e e l industry buying group  40  The Western Canadian Mines: (  i ) The old mines  Chapter 3:  3.  41 41  ( i i ) The new mines, Southeast B.C. and A l b e r t a  43  ( i i i ) The new mines, Northeast B.C.  44  Footnotes  2.  39  ( i ) The trading companies  A H i s t o r y of Japanese Investment  1.  35  Summary and Conclusions  47 51  "Japan Inc." Re-examined: The Changing Role of MITI  51  The "Conspiracy Theory" and Japanese Coal Procurement  53  What P r i c e D i v e r s i f i c a t i o n : Lessons from the Case of Western Canadian Coal  56  Footnotes  59  Bibliography  61  Appendices  67  - v -  Ac knowled g ement s I am indebted to many people who have attempted  to i n s t r u c t me i n  the mysteries of the coal industry: Geoffrey C a r t e r , Midland Doherty L t d . ; N.H.  Halvorson,.H.N. Halvorson Consultants L t d . ; Don Morgan, Placer  Development L t d .  To the sho-in of M i t s u b i s h i Canada L t d . and Sumitomo  Canada L t d . , my thanks for answering my questions about t h e i r shosha. am g r a t e f u l to Nippon Kokan K.K.  I  for providing m a t e r i a l on the Japanese  s t e e l industry. Hugh Courtenay, Westar Mining I n t e r n a t i o n a l L t d . , and Yoshida Takeshi, Nissho Iwai Coal Development (Canada) L t d . , were p a r t i c u l a r l y generous with t h e i r time.  Matsukura K o j i , Consul, Consulate-General  of Japan at Vancouver, and Yamakoshi A t s u s h i , Keidanren, p a t i e n t l y answered my many questions and provided research m a t e r i a l . I am g r a t e f u l to members of my committee, Kal H o l s t i , Frank Langdon and George P e r l i n , for t h e i r cooperation and a s s i s t a n c e . To Frank, my supervisor, I owe p a r t i c u l a r thanks f o r sharing h i s time and m a t e r i a l so freely. The assistance of the Department of P o l i t i c a l Science with funding and t e c h n i c a l arrangements i s acknowledged with sincere a p p r e c i a t i o n . F i n a l l y , I wish to express my a p p r e c i a t i o n to Bob Milko f o r h i s c r i t i c i s m and suggestions and, most important, support and encouragement throughout  t h i s venture.  - 1 -  INTRODUCTION In FY 1983, Japanese s t e e l m i l l s were contracted to take 12.55 m i l l i o n metric tonnes of coal from Western Canadian mines.  Squeezed by the r e -  cession and depressed markets for s t e e l , the s t e e l m i l l s ' demand f o r coking c o a l continued a downward s l i d e which had begun two years before.  Agreements  with s u p p l i e r s around the world were re-negotiated, and a l l were forced to accept p r i c e r o l l b a c k s and volume reductions averaging about 15%. * 2 Canadian shipments a c t u a l l y declined to about 76% of contracted tonnages. Output from three major new mines i n B r i t i s h Columbia and A l b e r t a i s scheduled  to reach f u l l volume i n 1984, b r i n g i n g the Japanese s t e e l m i l l s '  contract commitments for Canadian c o a l i n FY 84 to 19.28 m i l l i o n metric 3 tonnes and to 16.30 m i l l i o n metric tonnes i n FY 85.  The increase i n  production corresponds with f u r t h e r gloomy forecasts f o r demand and 4 pressure from Japanese purchasers f o r f u r t h e r cuts i n p r i c e and volume. Some observers foresee the investment of upwards of $2.9 b i l l i o n i n p u b l i c funds the Northeast development represents culminating i n pro6 j e c t s that w i l l operate i n the red, or with marginal p r o f i t s at best. Unprofitable mines and u n p r o f i t a b l e operations of s u r v i v i n g mines have been, and w i l l continue to be shut down, causing severe unemployment i n regions already s u f f e r i n g from the boom or bust cycles which accompany resource-based  economies.  Others claim that older mines i n the Southeast  of B r i t i s h Columbia w i l l s u f f e r as a r e s u l t of the development of unnecessary capacity i n the North. ^ In such a h i g h l y charged environment, suggestions are made that Japanese buyers have d e l i b e r a t e l y encouraged overexpansion  of coal production to create t h i s g l u t , thus g achieving considerable cost savings f o r themselves.  - 2 The a l l e g a t i o n appears to disregard the f a c t that s i m i l a r r e s u l t s have occurred i n the development of other resources i n which Japanese 9 buyers have not led the market.  To claim that there has been a  d e l i b e r a t e "strategy" by the Japanese to depress world coal p r i c e s overstates and o v e r s i m p l i f i e s the case.  I f we understand by "strategy" merely  "the d i s p l a y or exercise of s k i l l and forethought plans"  i n c a r r y i n g out of one's  a study of the Japanese s t e e l industry's response to the  challenges presented by both domestic and i n t e r n a t i o n a l conditions to the a c q u i s i t i o n of supplies of c o a l which are both reasonable i n p r i c e , and, to the greatest extent p o s s i b l e , secure from d i s r u p t i o n , does indeed r e v e a l a "strategy":  diversification.  Japanese i n t e r e s t i n Western  Canadian c o a l derives from that o b j e c t i v e , and t h i s t h e s i s looks at the case to i l l u s t r a t e the advantages of d i v e r s i f i c a t i o n Canadian coal o f f e r s . C r i t i c s suggest, however, that the "Japanese strategy" involves both the Japanese government and industry c o l l a b o r a t i n g to create the conditions for oversupply.  This argument has a f a i n t r i n g of f a m i l i a r i t y about i t :  "Japan Incorporated" has been resurrected.  ^  At the heart of the designation i s a perspective of Japan as a monolith; a "concept of t r i p a r t i t e power e l i t e composed of the leaders of the L i b e r a l Democratic Party, senior bureaucrats and b i g business"  who  comprise a "regular and e f f e c t i v e a l l i a n c e and c o n t r o l decision-making -, . . • „ 12 on major p o l i c y issues. The e l i t e model of the Japanese decision-making apparatus r e s t s on three basic p r i n c i p l e s : that the groups are normally united i n purpose and a c t i o n ; that they p a r t i c i p a t e i n most, i f not a l l , important p o l i c y d e c i s i o n s , and that i n d i v i d u a l s and groups other than those included i n the e l i t e categories are r e g u l a r l y excluded from decision-making processes  - 3 on important p o l i c y issues. on the e l i t i s t perspective.  13  Case studies, however, tend to cast doubt  Among the most v i s i b l e examples i s the f i e r c e 14  f a c t i o n a l i s m which i s the trademark of the LDP.  Gerald C u r t i s '  study of i n t e r a c t i o n between business and government stresses the importance of changes i n the economy and s o c i a l structure which have made the business community " i n c r e a s i n g l y p l u r a l i s t i c " .  ^  This t h e s i s uses the case of c o a l to h i g h l i g h t the d i v e r s e , and often competing i n t e r e s t s which f a c t o r i n the Japanese c o a l buying "strategy". By looking at the evolution of the r o l e s of the major a c t o r s , the a n a l y s i s i l l u s t r a t e s the dynamic nature of Japanese society which the "Japan Inc." l a b e l tends to mask.  The study shows that i t i s i n c o r r e c t to assume  that e l i t e groups are "normally united i n purpose and a c t i o n " ; that a growing number of groups p a r t i c i p a t e s i n most important p o l i c y d e c i s i o n s , and that the " b i g three" e l i t e groups cannot " r e g u l a r l y exclude" other groups from the decision-making process. . Chapter 1 presents the Japanese s e t t i n g , Chapter 2 the development of Western Canadian coal operations, and chapter 3 summarizes the conclusions drawn from the study.  - 4 -  Introduction Footnotes  1.  The s t e e l m i l l s held contracts f o r 62.573. m i l l i o n metric tonnes but took 54.23 m i l l i o n . "The Steel I n d u s t r y of Japan 1984", Japan Iron and S t e e l Federation, n.p., p. 12.  2.  Ibid.  3.  Horie H i r o y u k i , Coal Manual, 1984 E d i t i o n (Tokyo: The Tex Report L t d . , 1984), pp. 300-302. The FY 85 f i g u r e assumes that neither the Balmer nor the Smoky River contracts are renewed.  4.  "The S t e e l Industry of Japan 1984", p. 12. One forecast estimates that the Japanese s t e e l industry's 8 m i l l i o n tonne surplus of 1983 could grow to 17-21 m i l l i o n tonnes by.1987. See Ken E. B a y l i s and Simon D. Handelsman, " I n t e r n a t i o n a l Trade i n Coal" (Paper presented to the 113th Annual Meeting of the Society of Mining Engineers of AIME, Los Angeles, February 1984), pp. 2, 8.  5.  This i s a conservative estimate. See Geoffrey S. C a r t e r , " M e t a l l u r g i c a l Coal: B r i t i s h Columbia's Panacea or A c h i l l e s Heel" (Toronto: Midland Doherty L t d . , December 1983), p. 21.  6.  I b i d , p. 3.  7.  H.N. Halvorson, "The Dubious Economics of Developing Northeast Coal", Vancouver Sun, A p r i l 21, 1983; H.N. Halvorson Consultants L t d . , "New Coal Production from Southeastern B.C. Compared w i t h Proposed Northeastern B.C. Development" (Study prepared f o r the Council of Mayors of Southeastern B.C., J u l y 1980); Jacqueline K. Maund, "The Implications of the Japanese Resource Procurement Strategy f o r Staple Resource Regions: An Examination of Coal Mining i n Southeastern B.C." (M.A. Thesis, Department of Geography, U n i v e r s i t y of B r i t i s h Columbia, A p r i l , 1984).  8.  This argument w i l l be taken up i n Chapter 3. See B a y l i s and Handelsman, p. 2; Maund, p. i i i ; Peter Nemetz and I l a n Vertinsky, "Japan and the I n t e r n a t i o n a l Market f o r LNG" (Canada and the Changing Economy of the P a c i f i c Basin, Working Paper No. 19, Preliminary D r a f t , Vancouver: I n s t i t u t e f o r Asian Research, U n i v e r s i t y of B r i t i s h Columbia, February, 1984), p. 11.  9.  See, f o r example, Dani Rodik, "Managing Resource Dependency: The United States and Japan i n the Markets f o r Copper, Iron Ore and Bauxite", World Development, V o l . 10, No. 7 (1982), p. 551. Rodrik r e j e c t s "the complaint that Japan was d e l i b e r a t e l y attempting to maintain excess supply i n the i r o n ore market by financing more capacity than was warranted by the incremental growth i n demand", noting that the t o t a l volume of Japanese finance was "quite l i m i t e d " , and that the s t e e l m i l l s , u n t i l the e a r l y 1970's, "generally kept to the upper c e i l i n g s of the contracted volumes from the mines they had helped finance."  - 5 -  Haglund c i t e s the case of nickel., i n which over-expansion of g l o b a l productive capacity has produced depressed p r i c e s . T.P. Mohide, C.L. Warden, J.D. Mason, "Towards a N i c k e l P o l i c y f o r the Province of Ontario" (Mineral P o l i c y Background Paper No. 4, Toronto: M i n i s t r y of Natural Resources, D i v i s i o n of Mines, 1977), pp. 12-13, c i t e d i n David Haglund, "The West^SE Dependence on Imported S t r a t e g i c M i n e r a l s : Implications for Canada" (Paper presented to the CPSA, Vancouver, June, 1983), p. 10. 10.  Funk and Wagnells New Standard D i c t i o n a r y of the E n g l i s h Language, 1959, s.v. "strategy".  11.  The expression has d i f f e r e n t meanings f o r d i f f e r e n t users, but generally i s meant to suggest that Japan behaves l i k e one l a r g e corporation. Some w r i t e r s suggest by i t the domination.of government by b i g business, others, business d o c i l i t y i n the face of government d i r e c t i o n . Other w r i t e r s mean by the expression c o l l u s i o n between the two, w i t h , o c c a s i o n a l l y , the added i m p l i c a t i o n that "close cooperation between government and business i s i l l i c i t " . Ezra F. Vogel, "Towards More Accurate Concepts", i n Modern Japanese Organization and Decision-making, Ezra F. Vogel, ed. (Berkeley: U n i v e r s i t y of C a l i f o r n i a Press, 1975), p. x v i .  12.  Fukui Haruhiro, "Studies i n Policymaking: A Review of the L i t e r a t u r e " , i n Policymaking i n Contemporary Japan, T.J. Pempel, ed. (Ithaca and London: C o r n e l l U n i v e r s i t y Press, 1977), pp. 22, 23.  13.  I b i d , p. 35.  14.  See Fukui, op_. c i t . , f o r a d e s c r i p t i o n of the l i t e r a t u r e on Japanese parliamentary and party p o l i t i c s , pp. 35-37.  15.  Gerald L. C u r t i s , "Big Business and P o l i t i c a l Influence" i n Modern Japanese Organization and Decision-making, op. c i t . , p. 60; c i t e d by Fukui, op. c i t . , p. 39.  - 6 -  CHAPTER 1: 1.  The Japanese Setting  Introduction Among the myths that continue to cloud our understanding of the  i n t e r a c t i o n between government and industry i n Japan i s the  misleading,  but enduring, stereotype represented by the expression "Japan Inc." * This chapter w i l l introduce the major Japanese actors involved i n c o a l purchasing.  They do not comprise a homogeneous group, nor are t h e i r  s p e c i f i c i n t e r e s t s always i n harmony. 2 Recent analyses of Japan's i n d u s t r i a l r e - s t r u c t u r i n g  and energy  3 policies  a t t r i b u t e the p o l i c y outcome more to the e f f e c t s of market  forces and a c e r t a i n measure of luck than to concerted advance planning. Japan's response to the problem of securing s u f f i c i e n t q u a n t i t i e s of c o a l has been determined l a r g e l y by the s t e e l industry.  It i s a central  argument of t h i s t h e s i s that the industry's coal purchasing a c t i v i t i e s are l a r g e l y an ad_ hoc response to domestic and i n t e r n a t i o n a l economic c o n d i t i o n s , not the product of a government-industry strategy to c o n t r o l the i n t e r n a t i o n a l coal market. The s t e e l industry i s not the only user of c o a l i n Japan and, i n the wake of the o i l c r i s e s i n 1972 and 1979,  the Japanese government has  encouraged the e l e c t r i c power u t i l i t i e s and cement industry to s u b s t i t u t e thermal c o a l f o r o i l .  This section discusses some of the l i m i t s to the  government's, s p e c i f i c a l l y , to the M i n i s t r y of I n t e r n a t i o n a l Trade and Industry's  (MITI), a u t h o r i t y to impose i t s preferences.  F i n a l l y , the chapter takes note of changes that have taken place over time i n the balance of influence among the a c t o r s , changes which r e f l e c t the changing economic and s o c i a l conditions i n the country i n the postwar  - 7 -  period under examination. Japan's recent h i s t o r y can be divided roughly into three periods:  a period of recovery, from 1945-55; the period of  high-speed growth, from the l a t e 1950s through the 1960s, when the annual economic growth rate reached 10%. The t h i r d period, from 1971 u n t i l the present, has been marked by dramatic changes to world economic and f i n a n c i a l structures.  Japan's growth rate has slowed and the engines of rapid growth 4  i n the 1960s are now experiencing the e f f e c t s of the world wide recession. As the economy has expanded and become more complex, so has the chorus of voices claiming to be heard.  - 8 -  2.  "Japan Incorporated" The l a b e l "Japan Inc." was Eugene Kaplan's summation of Japanese  government-industry connections i n the wake of the 1970 merger of the country's No. 1 and No. 2 s t e e l companies, Yawata S t e e l Co. and F u j i Steel Co., to form the Japan Steel Corp. (Nippon S t e e l ) . T h e merger was promoted by MITI as an important element i n i t s i n d u s t r i a l p o l i c y of strengthening the  i n t e r n a t i o n a l competitiveness of the s t e e l industry.  In theory, there  was a good p o s s i b i l i t y that i t would be blocked by the Japan F a i r Trade Commission (JFTC) on the grounds that the merger would create a strong oligopoly.  I t was the JFTC's f i r s t merger case, and, a f t e r three months  of d e l i b e r a t i o n , the commission accepted i t , based on a memorandum exchanged between MITI. and the JFTC i n 1966 on the f l e x i b l e a d m i n i s t r a t i o n of the antimonopoly law (AML) with respect to measures f o r i n d u s t r i a l reorganization. ^  Tor the outside^world and an important body of Japanese opinion,  the merger epitomized the essence of a pattern of under-the-table "arrangements" by which a small, powerful e l i t e w i t h i n MITI and industry ran  the country. The merger can be viewed as a symbolic event which l e d to widespread  d i s c u s s i o n on the enforcement of the AML.  The p u b l i c i t y and c r i t i c a l  examination the case generated pushed the close MITI-industry leaders' t i e s onto centre stage at a time when b i g business and b i g government were being subjected to growing consumer group and opposition party c r i t i c i s m over the s o c i a l costs of p o l i c y which placed emphasis on rapid economic growth: services. the  p o l l u t i o n , urban b l i g h t , inadequate housing and s o c i a l  The Nippon Steel merger prompted more vigorous enforcement by  JFTC of the AML during the 1970, notably i n p r i c e - f i x i n g charges i t  brought against the o i l r e f i n e r i e s i n 1974.  - 9 -  MITI has assumed a c e n t r a l coordinating r o l e i n o v e r a l l energy policymaking,  but i n other sectors, i t takes a more r e a c t i v e stance.  I t s t r a d i t i o n a l c l i e n t s , are the older i n d u s t r i e s : t e x t i l e s ,  petrochemicals,  paper and pulp, s t e e l ; i n d u s t r i e s which b e n e f i t t e d from MITl's "guidance", vast information base and broad n a t i o n a l overview.  They also enjoyed  p r o t e c t i o n MITI could provide, through t a r i f f and other regulatory c o n t r o l s , from f o r e i g n competition.  In the period of s t r u c t u r a l readjustment which  has followed the two o i l c r i s e s , many of MITl's c l i e n t s have gone i n t o decline.  National p r i o r i t i e s have s h i f t e d to high technologies, the fiefdom  of other m i n i s t r i e s , notably Science and Technology, and Posts and Telecommunications.  A recent a n a l y s i s suggests that the f l o o d of MITI budget  requests f o r high technology-related a c t i v i t i e s derives as much from bureaucratic motives to restore the m i n i s t r y ' s d e c l i n i n g p o s i t i o n as from 9 a genuine commitment to promote high 3.  technology.  Adjusting the G r i s t m i l l The r e l a t i o n s h i p between business and government i n Japan has been  likened to that between water and a g r i s t m i l l :  to ensure a smoothly running  wheel, i t must be placed i n the water at the proper depth. sectors require d i f f e r e n t adjustments. ^  Different  An examination of the h i s t o r y  of r e l a t i o n s between the s t e e l industry and MITI shows that the p o s i t i o n of the wheel has changed as the Japanese economy and the industry have strengthened.  I n c r e a s i n g l y , i t appears that the mover of the wheel i s  industry, not government. The s t e e l industry has a h i s t o r y of close l i n k s with the government bureaucracy, yet i t has maintained  considerable independence, and i t s  "cooperation" has not always been 100%.  A "designated  industry", invest-  - 10 ment by the s t e e l m i l l s was c l o s e l y c o n t r o l l e d from the period immediately a f t e r WW  I I u n t i l approximately 1960  Council and the Foreign C a p i t a l Law. s t e e l industry law i n 1960 as an exception to the AML, coordination. overcapacity  By 1965,  through the I n d u s t r i a l R a t i o n a l i z a t i o n MITI V i c e - M i n i s t e r Matsuo proposed a  to e s t a b l i s h an investment coordination c a r t e l but the industry rejected i t i n favour of s e l f -  the attempt at s e l f - r e g u l a t i o n had broken down, and  i n the industry, combined with a recession, threatened to  bankrupt several firms.  The s t e e l companies, among themselves, were unable  to reach agreement on production cuts, and MITI attempted to bring about a reduction through "administrative guidance". ^  One of the s t e e l companies, 12  Sumitomo Kinzoku Kogyo, rejected the plan and MITI backed down.  The  case provides an example of the comparable influence of an industry and MITl's regulatory a u t h o r i t y .  MITI could restrict'Sumitomo's  coking c o a l imports to  an amount necessary to produce the proposed quota, but y i e l d e d . obtained  Information  from interviews with industry representatives revealed a s i m i l a r  a t t i t u d e among industry leaders to MITl's powers to " c o n t r o l " f o r e i g n exchange during the 1960s.  Growing companies acquired t h e i r own  exchange and the s t e e l companies seem to have had t h e i r way, 13 r e g u l a t i o n s , a f t e r "under the surface" discussions.  The  a f f a i r " , as the Sumitomo incident was c a l l e d , exposed the  foreign  regardless "Sumikin  industry's  i n a b i l i t y to regulate i t s e l f and, f e a r i n g the r e s u l t s of excessive  intra-  f i r m competition, the presidents of Yawata and F u j i proposed the merger 14 which eventually created Nippon S t e e l . The extent to which Nippon Steel e f f e c t i v e l y d i c t a t e s c o a l p r i c e s i s a question of considerable  i n t e r e s t today.  Because of i t s s i z e , i t can  strongly influence the so-called "Western P a c i f i c " p r i c e . ^ p r i c e Nippon S t e e l negotiated  of  The drop i n  i n 1983 with P i t t s t o n , the l a r g e s t s i n g l e  U.S.  s u p p l i e r , f o r example, set a benchmark f o r other U.S.  16  suppliers.  Nippon S t e e l , which acts as s t e e l industry "coordinator" f o r A u s t r a l i a (and, e f f e c t i v e l y , f o r the U.S.), and Nippon Kokan K.K.,  the coordinator for  Canada, are the main protagonists i n the annual coal contract negotiations. While "vigorous" discussions among the m i l l s are reported to take place, i t i s d i f f i c u l t to know to what extent the two leading m i l l s dominate.  The  b l a s t furnace m i l l s have not been unanimous i n t h e i r support of expensive Canadian c o a l p r o j e c t s :  Kawasaki S t e e l , f o r example, was r e l u c t a n t to take  out equity i n the Quintette project because of concerns about soaring costs.^ D'Cruz, i n h i s a n a l y s i s of the s t e e l industry's buyers' group, states that the s t e e l companies seek the "informal approval" of Nippon S t e e l before making any major d e c i s i o n s .  ^  The uproar over the Nippon S t e e l merger was one force among several that contributed to the weakening of MITl's prestige and a u t h o r i t y . charges against the o i l r e f i n e r i e s i n 1974 challenged  The JFTC's  the l e g a l i t y of  19 MITl's "administrative guidance".  Results were a draw:  the Tokyo High  Court found the r e f i n e r i e s ' a c t i o n i l l e g a l despite a d m i n i s t r a t i v e guidance, but acquitted-the defendants on the grounds that there was a reasonable p o s s i b i l i t y the defendants thought t h e i r a c t i o n was acceptable, since i t 20 had been endorsed by MITI. The merger also prompted widespread d i s c u s s i o n of the merits of a n t i monopoly enforcement and l e d , eventually, to the 1977 AML.  strengthening  of the  The amendments can be viewed as a " p o l i t i c a l phenomenon", a c t i o n  taken by the governing LDP  i n an attempt to shore up an image badly 21 tarnished by the 1974 Lockheed b r i b e r y scandal. There i s , accordingly, some concern that the AML w i l l be undermined again at the f i r s t p o l i t i c a l 22  opportunity.  Keidanren, the i n f l u e n t i a l Federation of Economic  - 12 Organizations of Japan, i s v i g o r o u s l y promoting r e l a x a t i o n of c a r t e l regulations and has picked up some support i n the D i e t .  S t i l l , the LDP,  having experienced renewed setbacks i n the 1983 Lower House e l e c t i o n s , may be r e l u c t a n t to y i e l d to b i g business i n opposition to strong consumer group and small- and medium-business group expectations of s t r i c t enforcement. 4.  Securing Stable Supplies of Coal The problem of resource procurement f o r Japan, a country of l i m i t e d  n a t u r a l resources, i s acute.  Coal i s both a key component i n i r o n and  s t e e l making and an important a l t e r n a t i v e to o i l as a f u e l .  Domestic  supplies of m e t a l l u r g i c a l c o a l are both i n s u f f i c i e n t to meet requirements and expensive (because of q u a l i t y l i m i t a t i o n s and d e l i v e r y c o s t s ) , thus the Japanese s t e e l industry r e l i e s on imports f o r approximately 94% of i t s requirements.  The use of thermal c o a l f o r e l e c t r i c power generation  became more a t t r a c t i v e when o i l p r i c e s soared f o l l o w i n g the two o i l c r i s e s . Imports of thermal c o a l rose from 383,000 metric tonnes i n 1975 to 23 1,677,000 metric tonnes i n 1979. 48% of i t s thermal coal requirements.  In 1982, Japan imported approximately Coal i n that year met 7% of the  country's e l e c t r i c i t y demand, and i s f o r e c a s t to increase i n importance to 10% i n 1992.  2 4  In d e a l i n g with the problem of resource s e c u r i t y , Japan has adopted a multi-point (i)  approach: d i v e r s i f y source of supply and, i n the case of energy resources, s u b s t i t u t e f u e l s , as a means of assuring adequate and r e l i a b l e flows at reasonable, p r e d i c t a b l e prices;  - 13 -  (ii) (iii) (iv) (v)  e x p l o i t domestic deposits and c a p a b i l i t i e s ; stockpile; invest i n offshore resource development p r o j e c t s ; extend l o w - i n t e r e s t loans to producers.  The relevance of each o p t i o n , and the i d e n t i t y of the major promoter, w i l l vary  according to commodity.  Deposits of c o a l are broadly d i s t r i b u t e d  across the globe, thus d i v e r s i f i c a t i o n of supplier i s a l o g i c a l step, whereas s t o c k p i l i n g , given Japan's space l i m i t a t i o n s and the u n a t t r a c t i v e p h y s i c a l p r o p e r t i e s of c o a l , i s not, and developing domestic deposits 25 offers limited benefits. In assessing the nature of v u l n e r a b i l i t y , there are both economic and p o l i t i c a l f a c t o r s to consider. Among the economic:  the p o s s i b i l i t y of  future shortages, either as a r e s u l t of depleted supplies, or as a r e s u l t of a l a c k of timely investment i n resource development to ensure s u f f i c i e n t q u a n t i t i e s w i l l be a v a i l a b l e to meet a n t i c i p a t e d demand some time i n the future.  Investment may not be forthcoming as a r e s u l t of s e v e r a l f a c t o r s ,  i n c l u d i n g the i n a b i l i t y , or u n w i l l i n g n e s s , of the host government to develop the resource f o r f o r e i g n markets.  P o l i t i c a l aspects include the p o s s i b i l i t y  of a "resource war" i n which one side blocks the other's access to supplies. E x i s t i n g or p o t e n t i a l i n t e r n a l p o l i t i c a l i n s t a b i l i t y i n major pro26 ducing areas are a l s o important considerations. The termination of trade r e l a t i o n s with the People's Republic of China i n 1958 cut o f f 27 supplies of Chinese c o a l to the Japanese s t e e l m i l l s .  One e f f e c t of  the 1973.oil c r i s i s and the scramble f o r a l t e r n a t i v e s to o i l was to send p r i c e s f o r coal on the U.S.  spot market, where Japanese buyers made  - 14 -  s u b s t a n t i a l purchases, soaring 250% i n 1974 over the previous year's 28 prxces. 5.  Options f o r a New Entrant In attempting to enter i n t e r n a t i o n a l markets, Japanese buyers faced a  common obstacle:  other i n v e s t o r s , u s u a l l y American, had got there f i r s t ,  blocking access to the lowest-priced,, most r e l i a b l e , supplies.  In the case  of o i l , f o r instance, the p r i n c i p a l i n t e r n a t i o n a l o i l companies, had, by 1929, developed a network of a l l i a n c e s through which they e f f e c t i v e l y c o n t r o l l e d world trade.  Standard O i l Co. and M o b i l , together, c o n t r o l l e d 29  the p r i n c i p a l sources of crude o i l and the p r i n c i p a l r e f i n e r i e s i n A s i a . Having f a i l e d i n WW I I to secure c o n t r o l of o i l f i e l d s and r e f i n e r i e s i n Sumatra and Singapore, Occupation-Japan decided to concentrate on obtaining cheap energy, r e l y i n g p r i m a r i l y on foreign-owned o i l companies f o r supply. The push instead was to "Japanize" domestic o i l r e f i n i n g capacity, a goal that was achieved w i t h notable success.  The share of t o t a l r e f i n i n g  capacity owned by a f f i l i a t e s of f o r e i g n companies declined from 70% i n the 30 mid-'60s to 40% by 1978. The p r i o r i t y consideration i n the case of c o a l was s i m i l a r :  price.  In  the 1960s, Japanese firms lacked the c a p i t a l resources necessary f o r i n t e g r a t i v e arrangements, which, from the example provided by the o i l majors, offered the best s o l u t i o n to the problem of obtaining r e l i a b l e 31 supplies at the lowest p r i c e .  The country's l i m i t e d reserves of f o r e i g n  exchange were d i r e c t e d by the government to the requirements of the designated sectors.  Foreign investment was not a government p r i o r i t y :  the government's c e i l i n g s on f o r e i g n investment were not l i f t e d u n t i l 1971.  As a r e s u l t , Japanese buyers obtained most of t h e i r requirements on  the spot market, or from developing countries on short-term contracts.  The h i s t o r y of Japanese coal procurement p a r a l l e l s that f o r i r o n ore: the buyer i s the same.  To improve t h e i r bargaining leverage, the l a r g e s t  s t e e l companies formed a "buying c a r t e l " , the "Committee of Ten",  in  32 1964,  to coordinate purchases as a s i n g l e u n i t , while A u s t r a l i a n mining  companies and states competed against each other.  As a r e s u l t , Japanese  buyers were able to negotiate contract p r i c e s F.G.B., not C.I.F., securing for Japanese b e n e f i t s that would accrue from future declines i n transporta33 t i o n costs.  Japanese were able to obtain A u s t r a l i a n ore, at landed cost 34  i n Japan, at about 20% l e s s than imports from A s i a , A f r i c a and America. In the long run, Japanese buying p r a c t i c e s paid o f f better than did American i n t e g r a t i v e p r a c t i c e s :  according to Rodrik, i n 1960, U.S.  steel  m i l l s had a 16% cost advantage over Japan i n i r o n ore input; by 1976, 35  the  advantage had swung to a 43% disadvantage. Not locked i n t o i n t e g r a t i v e arrangements i n other c o u n t r i e s , Japanese s t e e l m i l l s could take advantage of the discovery of i r o n ore i n A u s t r a l i a and p a r t i c i p a t e i n development by o f f e r i n g long-term contracts and  loans.  American companies, on the other hand, suffered heavy losses from n a t i o n a l i z a t i o n of mines by i n c r e a s i n g l y n a t i o n a l i s t i c developing  countries.  The s t e e l industry encouraged development of coking c o a l mining capacity i n A u s t r a l i a i n the 1960s by o f f e r i n g to provide c a p i t a l assistance to projects.  Long-term contracts negotiated with new projects helped begin  large scale development of A u s t r a l i a n c o a l .  Long term contracts and  promises of f i n a n c i a l assistance were o f f e r e d , to p o t e n t i a l Canadian suppliers i n the same period, but were not r e a l i z e d u n t i l the f o l l o w i n g A  A  new  3  6  decade. A monopsonist buyer, the s t e e l m i l l s are able to play one s u p p l i e r against another.  In the current s i t u a t i o n of an oversupply of c o a l ,  Japanese buyers can make p r i c e cuts and volume reductions  negotiated  - 16 -  with South A f r i c a the basis f o r negotiations f o r supplies from other countries.  The 5-10% p r i c e cut agreed to by South A f r i c a n mines i n 37  January, 1984, "set the tone" of the market.  In May, A u s t r a l i a n hard  coking c o a l p r i c e s f e l l by U.S.$1.50-2.50 a tonne, below those previously 38 agreed upon by the A u s t r a l i a n government and c o a l mining industry.  In  Canada, Byron Creek C o l l i e r i e s L t d . , which supplies the Japanese cement industry with thermal c o a l , cut i t s p r i c e s by 22%, and Marketing V i c e President Arthur Wilson indicated that the competition from South A f r i c a 39 was a key f a c t o r i n the d e c i s i o n . Long-term contracts entered into by the Japanese s t e e l m i l l s reduced r i s k associated with resource shortages and p o l i t i c a l or economic upheaval and, i n periods of perhaps temporary g l u t , may help prevent the premature closure of uneconomic mines.  They are not, however, f a i l s a f e .  of s c a r c i t y , the Japanese buyers lose t h e i r leverage.  In times  Neither do contracts,  which are open to re-negotiation and, i n any event, are almost impossible to enforce, o f f e r as much s t a b i l i t y as the Japanese buyers wish. A u s t r a l i a n i r o n ore contracts had barely been signed i n 1966 when the 40 A u s t r a l i a n side c a l l e d f o r r e - n e g o t i a t i o n . The s o l u t i o n f o r Japanese companies has been to enter i n t o equity p a r t i c i p a t i o n i n f o r e i g n mining operations, f i r s t i n A u s t r a l i a i n the l a t e 1960s then, with the l i f t i n g of f o r e i g n exchange c o n t r o l s , i n Canada i n the Balmer mine i n B r i t i s h Columbia, i n 1973.  Industry has been aided  by government, which has, e s p e c i a l l y since 1980, provided loans and guarantees, but has been served as w e l l by the Japanese trading companies, the  sogo shosha, which have i n i t i a t e d major overseas projects and co-  ordinated the needs of buyers and s e l l e r s .  - 17 -  The emergence of buyers' groups i n Japan can be seen as a pragmatic and h i g h l y e f f e c t i v e response to the challenge posed by the problem of obtaining raw materials i n a h i g h l y The existence of such " c a r t e l s " may  competitive  grate against the p h i l o s o p h i c a l  framework of some suppliers and competitors, more relaxed approach to a n t i - t r u s t i n Japan. 6.  i n t e r n a t i o n a l market.  but f i t s i n e a s i l y with the ^  The I n s t i t u t i o n s of Government At the heart of the Japanese policymaking system l i e s a network of  c o u n c i l s and mechanisms for exchange of views and information between government and business o f f i c i a l s .  The source of MITl's a u t h o r i t y r e s t s  on the f a c t that the m i n i s t r y operates from a s o l i d data base, data c o l l e c t e d , f o r the most p a r t , from the i n d u s t r i e s i t advises and whose a c t i v i t i e s i t helps to coordinate.  Despite the continuous process of  two-  way dialogue, however, communications problems are not uncommon, and  reflect  the very d i f f e r e n t perspectives of industry and government. Higashi  Chikara,  a former M i n i s t r y of Finance o f f i c i a l , a t t r i b u t e s a major p o r t i o n of the problem to a lack of two-way flow of personnel between the two sectors at 42 a working l e v e l .  Bureaucrats, he claims, seldom have much understanding  of the needs of i n d i v i d u a l businesses when they are negotiating w i t h , f o r example, the United States on export quotas. Consequently, agreements MITI reaches with trading partners may  be extremely d i f f i c u l t to e f f e c t with an 43  antagonistic Japanese p r i v a t e sector. The m i n i s t r y i s not always successful i n i t s e f f o r t s to guide industry, as the d i s c u s s i o n on the s t e e l industry has shown. Despite the ongoing dialogue at both upper l e v e l s (between top business leaders and  senior  bureaucrats) and lower l e v e l s (between s p e c i f i c industry associations  and  - 18 t h e i r respective d i v i s i o n s w i t h i n MITI), i n t e r n a t i o n a l and domestic market forces can overtake the most c a r e f u l of plans.  Samuels' d e s c r i p t i o n of  the "de-structuring" of the aluminum industry i n Japan i n the l a t e 1970s and e a r l y 1980s reveals that market conditions forced the shutdown of domestic capacity much f a s t e r than the " r e s t r u c t u r i n g " plans of the m i n i s t r y and aluminum subcommittee of the I n d u s t r i a l Structure Council had  anti-  cipated, f o r c i n g c o s t l y emergency measures to cushion the impact on workers  44 and r e g i o n a l economies. MITI i s advised by c o u n c i l s which i n v e s t i g a t e and d e l i b e r a t e on future p o l i c i e s i n t h e i r respective a d m i n i s t r a t i v e areas.  Membership on the  c o u n c i l s i s broadly based, drawing from top l e v e l s of business, academia and the government.  While t h e i r reports do not have the force of  law,  because they represent the consensus achieved f o l l o w i n g an extensive process of c o n s u l t a t i o n , t h e i r recommendations w i l l often be acted upon by both  45 government and industry.  I t i s d i f f i c u l t to conclude, though, whether  the c o u n c i l s serve more as f o r a to give advice to MITI, or to endorse p o l i c y which MITI has already drafted and f o r which i t seeks broad acceptance. Samuels' a n a l y s i s i n d i c a t e s i t i s a two-way s t r e e t . MITI has both v e r t i c a l and h o r i z o n t a l d i v i s i o n s . V e r t i c a l d i v i s i o n s handle a p a r t i c u l a r sector of industry and aim at e l i m i n a t i n g obstacles to the development of that industry.  H o r i z o n t a l d i v i s i o n s are concerned  with issues common to a l l i n d u s t r i e s :  business trends, long-term  d i r e c t i o n of the economy as a whole, trade, i n d u s t r i a l l o c a t i o n as a  46 whole, and p o l l u t i o n . V e r t i c a l d i v i s i o n s which l i a i s e c l o s e l y with t h e i r c l i e n t s i n the i r o n and s t e e l industry are the Iron and S t e e l Administration D i v i s i o n and Iron and S t e e l Products D i v i s i o n .  the  Within the Agency of Natural Resources  - 19 (which forms part of MITI) - the Planning D i v i s i o n of the Coal Mining Department i s concerned with planning and formulation of coal p o l i c y and c o a l supply and demand plans, and mine r a t i o n a l i z a t i o n w i t h respect to the domestic industry.  The d i v i s i o n i s p a r t i c u l a r l y concerned w i t h coping with  employment d i s l o c a t i o n r e s u l t i n g from mine closures.  MITl's p o l i c y i s to  maintain a program to produce 20 m i l l i o n tonnes of domestic c o a l a year; smooth the importation of c o a l , and promote research and development of c o a l u t i l i z a t i o n techniques. The d i v i s i o n c o n t r o l s the l i c e n s i n g of import quotas f o r ordinary c o a l . The i n t e r e s t s of the industry d i v i s i o n s can be contradictory.  The m i l l s  are required to purchase a minimum amount of domestic c o a l and, a f t e r domestic supplies have been a l l o c a t e d , imports may make up the balance of coal requirements. i s high.  The cost of t h i s p r o t e c t i o n f o r the domestic c o a l mines  1981 domestic s o f t coking c o a l averaged $100.16 a tonne, compared  with $72.93 (average of soft and hard imported c o a l ) , and the 1982 p r i c e 48 spread was $95.24, compared with $74.50 f o r imported c o a l .  Consequently,  domestic consumers are attempting to reduce t h e i r requirements f o r the type a v a i l a b l e i n Japan.  Both the u t i l i t i e s and the cement makers are  converting to a l t e r n a t e cheaper f u e l s such as a n t h r a c i t e and petroleum 49 coke, which are free from compulsory purchases of l o c a l c o a l .  The  m i n i s t r y has abandoned i t s 1981 target of 20 m i l l i o n tonnes p.a. production, lowering i t s goal to 17 m i l l i o n tonnes. A Coal Import P o l i c y O f f i c e i s charged w i t h planning r e s p o n s i b i l i t i e s , i n c l u d i n g short-term and long-term import plans, i n t e r n a t i o n a l cooperation with the I n t e r n a t i o n a l Energy Agency and p r i v a t e sector organizations, and research, on overseas markets. dissemination to industry.  I t emphasizes.information c o l l e c t i o n and  - 20 The Japanese government, more s p e c i f i c a l l y , MITI, i s involved i n the development and i n t r o d u c t i o n of a l t e r n a t i v e energy sources through governmental bodies such as the New Energy Development Organization (NEDO, establ i s h e d i n 1980), the E l e c t r i c Power Development Co. , .Ltd..(EPDC, established i n 1952),.the Japan Coal Development Co., L t d . (JCDC, established i n 1980), and the New Energy Foundation (NEF, established i n 1980).  NEDO and EPDC  are  j o i n t l y funded by government and the p r i v a t e sector; the JCDC by the  ten  e l e c t r i c power companies (including the EPDC).  The NEF r e l i e s on the  p r i v a t e sector alone f o r funding. NEDO's'functions are: ( i ) the development of new energy technology, ( i i ) assistance measures f o r the development of geothermal resources and overseas c o a l , ( i i i ) surveying a c t i v i t i e s , and (iv) r a t i o n a l i z a t i o n of the  domestic c o a l industry.  Within i t s mandate to a i d i n the development  of overseas coal., NEDO. provides subsidies f o r surveying, market research and development of new resources.  In the case of development of Canadian  c o a l mines, NEDO's guarantees f o r a p o r t i o n of Japanese i n v e s t o r s ' loans f a l l w i t h i n i t s mandate to provide loans and guarantees to p r i v a t e companies engaged i n the development and import of overseas c o a l .  NEDO w i l l guarantee  bank loans f o r the development of overseas c o a l , i n c l u d i n g associated i n f r a s t r u c t u r e c o s t s , to the extent of 50% of the Export-Import Bank of Japan loans and/or up to 100% of the other bank loans a t a low r a t e of interest.  Funds are made a v a i l a b l e i n the form of low i n t e r e s t loans.  While overseas development loans are o r d i n a r i l y divided 60% from the Export-Import Bank and 40% from the domestic commercial banks, those f o r energy p r o j e c t s are divided 70/30. The Japan Coal Development Co., L t d . was established to survey, prospect, develop, import and s e l l thermal c o a l f o r generating e l e c t r i c  - 21 power and to construct and manage storage and d i s t r i b u t i o n f a c i l i t i e s f o r 52 coal.  While the JCDC has formal a u t h o r i t y for import management, a  recent study conducted f o r the (U.S.) Western Coal Export Board found that as the i n d i v i d u a l u t i l i t i e s learned more about the c o a l business, they 53 "appear(ed) to be f o l l o w i n g p a r a l l e l but independent courses", conducting t h e i r own negotiations or r e l y i n g on the trading companies. 7. The Z a i k a i The h i g h - l e v e l actors involved i n policymaking i n Japan include the top bureaucrats and LDP p o l i t i c i a n s , and the z a i k a i , the leadership of the business management a s s o c i a t i o n s : Keidanren, the l a r g e s t and most i n f l u e n t i a l ; the more progressive K e i z a i Doyukai (Committee f o r Economic Development); the Nihon Shoko Kaigaisho (Nissho, the Chamber of Commerce and Industry, which speaks f o r small business), and N i k k e i r e n (the Japanese Federation of Employers A s s o c i a t i o n s . I t s membership i s the same as that of Keidanren), which attempts to develop common labour p o l i c y f o r b i g business. The i r o n and s t e e l industry and the u t i l i t i e s are w e l l represented i n the upper echelons of Keidanren.  Following i t s general meeting i n May,  1984, the s t e e l industry had two representatives on the board:  Inayama  Y o s h i h i r o , of Nippon S t e e l i s Honourary Chairman, and the Vice-Chairman i s 54 Saito E i s h i r o , Chairman of Nippon S t e e l . Keidanren's i n f l u e n c e with government r e s t s i n i t s a b i l i t y to forge a consensus among p r i v a t e sector groups, through i t s study committees, which p a r a l l e l the government's advisory c o u n c i l s .  The Executive Committee on  Coal Development, e s t a b l i s h e d i n January, 1980, deals mainly with domestic c o a l and with Japan-Australia c o a l matters.  Keidanren a l s o l i a i s e s w i t h  the Japan-China A s s o c i a t i o n on Economy and. Trade and w i t h the Japan-China  - 22 Long-Term Trade Committee to f a c i l i t a t e arrangements f o r Japanese coal imports from the PRC.  Canada-Japan c o a l matters are discussed  within  the energy sector of the Japan-Canada Businessmen's Cooperation Committee (Japanese p a r t i c i p a t i o n on t h i s committee i s sponsored by Keidanren). Keidanren's hierarchy r e f l e c t s . t h e old guard i n Japan, "^and high-tech  i n d u s t r i e s have l i t t l e say i n i t s policy-making.  emerging  L i k e MITI,  i t s major c l i e n t s are the older i n d u s t r i e s , and the organization i s concerned about l o s i n g some of i t s a u t h o r i t y , as maturing i n d u s t r i e s abandon i t s umbrella and operate on t h e i r own.  In recent years, Keidanren has  carved out a s p e c i a l r o l e for i t s e l f i n promoting the development of a l t e r native forms of energy. either:  The organization i s not immune from d i v i s i o n s  i n the 1982 debate over extending government assistance to the  aluminum industry under the S t r u c t u r a l l y Depressed Industries Law,  for  example, Keidanren was divided between having to j u s t i f y assistance f o r i t s g r o u p - a f f i l i a t e d aluminum r e f i n i n g f i r m members while  "maintaining  both an i d e o l o g i c a l r e s i s t a n c e to state i n t e r v e n t i o n i n the economy and a p o l i t i c a l commitment to 'administrative reform' through f i s c a l  ...  ,.58 austerity. 8.  Summary and Conclusions The a n a l y s i s of the progression of s t r a t e g i e s Japan has adopted  to secure r e l i a b l e f o r e i g n supplies of low-cost m e t a l l u r g i c a l coal i n d i c a t e s that i t i s government which has responded to the needs of what has become a s e l f - r e g u l a t i n g industry.  S t e e l industry d e s i r e to invest  i n c o a l and i r o n ore development i n A u s t r a l i a provided  strong domestic  pressure f o r the Japanese government's d e c i s i o n to r e l a x f o r e i g n i n v e s t ment r e s t r i c t i o n s i n 1971.  MITl's attempts to r a t i o n a l i z e investment i n  .  - 23 i n new  s t e e l plant have not been noticeably e f f e c t i v e : the b l a s t  furnaces today, as a r e s u l t of f i e r c e i n t e r - f i r m competition to r e t a i n market shares i n the 1970s  are operating at 54.6%  of capacity.  ^  When government p r i o r i t i e s c o n f l i c t with those of the p r i v a t e sector, government cannot impose i t s preference without a p r i c e . the s t e e l m i l l s to cooperate with "G-G" tracted volumes of c o a l from the PRC, aid  To encourage  (government-to-government) conf o r example, government must provide  to the industry to make up the d i f f e r e n c e i n cost and to insure against  the added r i s k involved. The s t e e l industry cannot always win over broader, n a t i o n a l i n t e r e s t s : attempts by the industry to have MITI c o n t r o l s t e e l imports from the strongly competitive South Korean company Pohang Iron and Steel Co., to bring anti-dumping cases against South Korea have f a i l e d .  and  ^  The case f o r thermal coal i s somewhat d i f f e r e n t , f o r MITI has taken on a widely accepted r o l e as c e n t r a l "coordinator of energy p o l i c y , and used i t s regulatory a u t h o r i t y to encourage industry compliance with o v e r a l l p o l i c y goals.  Cooperation i s a two-way s t r e e t , however.  The enthusiasm  of MITI i n 1980 for promotion of i n t e r - f u e l s u b s t i t u t i o n and development of f o r e i g n thermal c o a l supplies was not shared by the e l e c t r i c power utilities.  An a n a l y s i s of the r o l e played by the Tokyo E l e c t r i c Power Co.  i n shaping Japan's coal and LNG p o l i c y reveals that the u t i l i t i e s are very r e l u c t a n t to switch to coal f o r both t e c h n i c a l reasons (coal i s d i r t y , needs to be stored, and large s i t e s are required f o r c o a l - f i r e d plants) and cost f a c t o r s (ocean f r e i g h t charges, cost of port i n f r a s t r u c t u r e ) . The u t i l i t i e s favoured conversion to nuclear power and LNG,  and were  reluctant to increase t h e i r dependence on American and A u s t r a l i a n 62 coal.  They have also been r e l u c t a n t to d i v e r s i f y t h e i r sources away  - 24 from c a p i t a l i s t countries and have balked at government-to-government deals w i t h the PRC and USSR promoted by MITI and the M i n i s t r y of Foreign 63 Affairs.  I t was only a f t e r MITI indicated i t would help the EPDC  finance a c q u i s i t i o n of reserves i n A u s t r a l i a and encourage i t to secure minority shareholdings i n a number of companies that the u t i l i t i e s banded 64 together to form the JCDC. Interviews with Japanese industry spokesmen revealed a uniform antagonism toward what was viewed as government meddling i n a s t r i c t l y commercial a c t i v i t y :  the buying and s e l l i n g of c o a l .  Industry representa-  t i v e s indicated r e s i s t a n c e to government e f f o r t s to expand commercial t i e s with the PRC and USSR at the expense of the industry's f l e x i b i l i t y to decide where and how much c o a l to purchase.  The a t t i t u d e of industry  o f f i c i a l s r e f l e c t e d a widespread view i n Japan that the p r i v a t e sector i s more e f f i c i e n t than government.  The K e i z a i Doyukai-recommended i n 1981  that government should handle only matters that are beyond corporate control.  As Japan's economy becomes i n c r e a s i n g l y i n t e r n a t i o n a l i z e d , govern-  ment, i n the view of the o r g a n i z a t i o n , should support business by  promoting  r i s k insurance for overseas business ventures and providing f i n a n c i a l 65 assistance for. c r e a t i v e t e c h n o l o g i c a l development.  Keidanren, too, i s  strongly committed to "minimal" government, and urges a reduction i n the d e f i c i t and an end to tax hikes.  ^  The p o l i t i c i a n s are becoming more involved i n decision-making, as 67 w e l l , invading t e r r i t o r y once considered the preserve of the bureaucrats. In testimony before a workshop organized by the Subcommittee on Asian and P a c i f i c A f f a i r s of the U.S.  Committee on Foreign A f f a i r s , Timothy Curran  a t t r i b u t e d increased p o l i t i c a l i n t e r v e n t i o n to two causes:  (i) in a  period of slow economic growth and t i g h t budgetary c o n d i t i o n s , d i f f i c u l t  - 25 p o l i t i c a l choices have to be made.over the a l l o c a t i o n of resources, and, ( i i ) as LDP p o p u l a r i t y d e c l i n e s , p o l i t i c i a n s have begun taking a greater i n t e r e s t i n economic decision-making to protect (and r e t a i n the backing of) 68 t h e i r support groups and i n f l u e n t i a l i n t e r e s t groups.  A study of the  " p o l i t i c s of budgetting" i n Japan concludes that the LDP, not the bureauc r a t s i n the M i n i s t r y of Finance, c o n t r o l s budget a l l o c a t i o n s .  Budgets  r e f l e c t p o l i t i c a l p r i o r i t i e s (and thus are u s u a l l y i n d e f i c i t ) , and the LDP's  need to balance i n d i v i d u a l D i e t members' needs to meet the demands  of t h e i r respective koen k a i (personal support groups) as w e l l as the 69 sometimes c o n f l i c t i n g i n t e r e s t s of the party's n a t i o n a l support bases. The extent to which government's f l e x i b i l i t y i s compromised by competing i n t e r e s t s can be i l l u s t r a t e d by the dilemma presented by U.S.  pressure on  the Japanese government to increase Japanese purchases of U.S.  c o a l as a  way to reduce the American trade d e f i c i t .  ^  Pre-Northeast B.C. c o a l development Foreign M i n i s t r y explanations that Canadian c o a l was cheaper than American c o a l and thus more a t t r a c t i v e to the s t e e l industry are not r e a d i l y accepted by U.S.  trade o f f i c i a l s who  are  w e l l aware that Canadian m e t a l l u r g i c a l c o a l from the two new mines i s now the most expensive on the i n t e r n a t i o n a l market.  Pressure from MITI, which  has a mission to reduce i n t e r n a t i o n a l trade f r i c t i o n f o r the o v e r a l l b e n e f i t of all.Japanese exporters, f a l l s on h o s t i l e ears i n the s t e e l industry. Industry, spokesmen have indicated that an appeal to increase t h e i r  purchases  of expensive U.S. m e t a l l u r g i c a l c o a l would simply be ignored and, at any r a t e , runs counter to a recent industry-government p r i c e resources. ^  consensus to seek low-  Besides, increased c o a l p r i c e s would be r e f l e c t e d i n  higher s t e e l p r i c e s , adding to the domestic industry's problems of remaining i n t e r n a t i o n a l l y competitive.  MITI has greater regulatory  - 26 -  a u t h o r i t y over the u t i l i t i e s and could conceivably "advise" them to take more U.S.  thermal c o a l .  The u t i l i t i e s are strongly represented i n  Keidanren and t h e i r combined, undoubtedly negative response to government i n t e r f e r e n c e would no doubt be e f f e c t i v e . imports of U.S.  The increased cost of a d d i t i o n a l  c o a l would be passed on to l o c a l consumers, whose wrath  would soon be f e l t by LDP p o l i t i c i a n s whose hold on power remains fragile. U.S.  Japan's luck may h o l d , though..  An a n t i c i p a t e d s t r i k e i n the  coal mines t h i s year may resolve the problem without MITI having to  take any a c t i o n .  - 27 -  Chapter 1 Footnotes  1.  The term i s a t t r i b u t e d to Eugene Kaplan, author of a 1972 U.S. Department of Commerce study on government-business r e l a t i o n s i n Japan. Kaplan states at one point i n the report that "'Japan Incorporated' i s an Economic Fact of L i f e " , but case studies commissioned f o r the study i n d i c a t e otherwise. According to Gerald C u r t i s : The author admits that the studies demonstrate that advance planning i s neither as long range nor as f a r reaching as had been thought; that i n t e r a c t i o n between Keidanren and MITI v a r i e s considerably from case to case and suggests no s i n g l e pattern; that industry operates on i t s own i n i t i a t i v e and without governmental i n t e r v e n t i o n to a greater extent than had been assumed ... Indeed, Kaplan concludes that: ... the government cannot e f f e c t i v e l y interpose i t s judgements on the corporate s t r u c t u r e . I t can encourage but not d i c t a t e mergers or formal combinations. MITI has, therefore, sought, generally w i t h l i t t l e success, to stimulate c o n s o l i d a t i o n through i t s exercise of a v a r i e t y of levers on industry. Eugene J . Kaplan, Japan, The Government-Business R e l a t i o n s h i p , A Guide f o r the American Businessman (Washington, D.C.: U.S. Department of Commerce, February 1972), p. 10, 56. Cited by Gerald C u r t i s i n "Big Business and P o l i t i c a l Influence", i n Modern Japanese Organization and Decision-making, op. c i t . , pp. 35, 36.  2.  See, f o r example, Richard J . Samuels, "The I n d u s t r i a l Destructuring of the Japanese Aluminum Industry", P a c i f i c A f f a i r s , V o l . 56, No. 3 ( F a l l 1983), pp. 495-509.  3.  For example, Martha Ann C a l d w e l l , "Petroleum P o l i t i c s i n Japan: State and Industry i n a Changing P o l i c y Context" (Ph.D. Thesis, U n i v e r s i t y of Wisconsin-Madison, Ann Arbor: U n i v e r s i t y M i c r o f i l m s Inc., 1981).  4.  Matsukura K o j i , Consul, Economic A f f a i r s , Consulate-General of Japan at Vancouver, "Changes i n the Japanese Economy since 1945" (Address at Vancouver Community C o l l e g e , Langara Campus, January 18, 1984).  I  - 28 5.  Eugene J . Kaplan, Japan, The Government-Business R e l a t i o n s h i p , op. c i t . , p. 10, c i t e d by Higashi Chikara i n Japanese Trade P o l i c y Formation (New York: Praeger P u b l i s h e r s , 1983), p. 31.  6.  This i s , i n f a c t , what happened. Following the merger, p a r a l l e l p r i c e r i s e s and production r e s t r i c t i o n s became established p r a c t i c e s i n the industry. Sanekata K e n j i , "Guideline(s) and Cases on the Regulation of Shareholding by the Japanese Antimonopoly Law" (Paper presented at the Faculty of Law, U n i v e r s i t y of B r i t i s h Columbia, Vancouver, November 1983), p. 12.  7.  Sanekata K e n j i , " A n t i - t r u s t i n Japan: Recent Trends and Their Sociop o l i t i c a l Background" (Paper presented at the Faculty of Law, U n i v e r s i t y of B r i t i s h Columbia, Vancouver, September 1983), p. 14. For an account of the MITI/JFTC struggle, see Chalmers Johnson, MITI and the Japanese M i r a c l e : The Growth of I n d u s t r i a l P o l i c y , 1925-1975 (Stanford: Stanford U n i v e r s i t y Press, 1982), pp. 279-283.  8.  For a d e t a i l e d study of the evolution of Japan's response to the 1973 o i l c r i s i s , see Martha Ann C a l d w e l l , "Petroleum P o l i t i c s i n Japan", op_. c i t . . Caldwell found that the z a i k a i (business leaders) led the e f f o r t to b u i l d a c o a l i t i o n which eventually supported a major change i n p o l i c y . There were d i v i s i o n s w i t h i n government, notably between MITI and the M i n i s t r y of Foreign A f f a i r s , and w i t h i n the p r i v a t e sector on an appropriate p o l i c y stand. In the process of gathering information on p o l i c y a l t e r n a t i v e s and forging a consensus, MITI remained the locus of decision-making. C a l d w e l l , p. 477.  9.  "High Tech Fever Takes Over MITI", Japan Economic J o u r n a l , V o l . 22, No. 1117 (July 17, 1984), p. 1, 3.  10.  Amaya Naohiro, "The Economic Development of Japan: MITl's Past and Future Role" (Address to the Centre f o r S t r a t e g i c and I n t e r n a t i o n a l Studies, Washington, D.C, March 2, 1982).  11.  "Administrative guidance" r e f e r s to "advice" from MITI to an industry or company which i s not l e g a l l y enforceable. F a i l u r e by a company to go along with the "advice" could prompt r e t a l i a t i o n by MITI through i t s regulatory arsenal. For a d e t a i l e d d i s c u s s i o n of MITl's use of " a d m i n i s t r a t i v e guidance", see Johnson, MITI and the Japanese M i r a c l e , op. c i t . , pp. 242-274.  12.  I b i d , pp. 268-271; G.C. A l l e n , "Government Intervention i n the Economy of Japan", i n Peter Maunder, ed., Government Intervention i n the Developed Economy (London: Croom Helm L t d . , 1979), pp. 31-32.  13.  Johnson d e t a i l s t h i s kind of exchange i n h i s a n a l y s i s of the s o - c a l l e d "Sumikin a f f a i r " . Johnson, MITI and the Japanese M i r a c l e , pp. 269-270.  14.  I b i d , pp. 281-282.  - 29 -  15.  Coal destined f o r non-Pacific markets i s u s u a l l y priced on a landed cost b a s i s .  16.  See Horie, 1984 Coal Manual, op. c i t . , p. 134.  17.  I b i d , p. 312.  18.  Joseph R. D'Cruz, "Negotiating Coal Contracts with the Japanese Steel Industry: The Co-ordinated Procurement System" (Paper presented at the Nitobe-Ohira Conference on Japanese Studies, U n i v e r s i t y of B r i t i s h Columbia, Vancouver, May 1984), pp. 49-50.  19.  Charges were brought against the r e f i n e r i e s f o r p r i c e f i x i n g and r e s t r i c t i n g output. MITI had been aware of the s i t u a t i o n and had promoted i t through a d m i n i s t r a t i v e guidance.  20.  Sanekata, "Guideline(s) and Cases", p. 5  21.  The LDP suffered a series of setbacks i n e l e c t i o n s i n 1972, 1976 and 1979. In 1976, i t l o s t i t s majority i n the Lower House f o r the f i r s t time since the party had been formed i n 1955.  22.  Sanekata, " A n t i - t r u s t i n Japan", p. 17.  23.  Horie, 1984 Coal Manual, p. 382.  24.  Ibid.  25.  For d e t a i l e d analyses of Japanese resource procurement planning, see Akao Nobutoshi, ed., Japan's Economic Security: Resources as a Factor i n Foreign P o l i c y (Aldershot, Hampshire: The Royal I n s t i t u t e of I n t e r n a t i o n a l A f f a i r s , Gower Publishing Co. L t d . , 1983); Herbert I. Goodman, "Japan and the World Energy Problem", i n Daniel I . Okimoto, ed., Japan's Economy: Coping with Change i n the I n t e r n a t i o n a l Environment (Boulder, Colorado: Westview Press, 1982); Ronald A. Morse, ed. The P o l i t i c s of Japan's Energy Strategy (Berkeley: I n s t i t u t e of East Asian Studies, U n i v e r s i t y of C a l i f o r n i a , 1981); Raymond Vernon, Two Hungry Giants: The U.S. and Japan i n the Quest f o r O i l and Ores (Cambridge and London: Harvard U n i v e r s i t y Press, 1983).  26.  For a more d e t a i l e d d i s c u s s i o n of the nature of v u l n e r a b i l i t y , see David Haglund, "The West's Dependence on Imported Strategic M i n e r a l s : Implications f o r Canada" (Paper presented to the Canadian P o l i t i c a l Science A s s o c i a t i o n , Vancouver, June 1983), pp. 7-10.  27.  D'Cruz, "Negotiating Coal Contracts", p. 21.  28.  I b i d , p. 46.  29.  Vernon, Two Hungry Giants, p. 89.  30.  Goodman, "Japan and the World Energy Problem", p. 54.  - 30 31.  This an argument put f o r t h by Dani Rodrik, "Managing Resource Dependency: The United States and Japan i n the Markets f o r Copper, Iron Ore and Bauxite", World Development, V o l . 10, No. 7 (1982), pp, 541-560.  32.  I b i d , p. 550.  33.  Contracts f o r A u s t r a l i a n and Canadian coal are F.O.B.T., from the t e r m i n a l , making domestic t r a n s p o r t a t i o n costs the concern of the producer.  34.  Rodrik, p. 550.  35.  I b i d , p. 549.  36.  D'Cruz, "Negotiating Coal Contracts", pp. 29, 30.  37.  Toronto Globe and M a i l , "South A f r i c a Cutting P r i c e of Coal Sold to Japan", January 25, 1984; A l b e r t Sigurdson, "South A f r i c a n P r i c e Cuts May A f f e c t Coal Talks", Toronto Globe and M a i l , January 26, 1984.  38.  "Australia: 1984.  39.  A l b e r t Sigurdson, "Byron Creek Slashes P r i c e of Coal 22%", Toronto Globe and M a i l , October 13, 1983.  40.  Vernon, Two Hungry Giants, p. 101.  41.  For a d i s c u s s i o n of "a p e c u l a r i t y of Japanese i n d u s t r i a l o r g a n i z a t i o n monopsony", see Shinohara Miyohei, I n d u s t r i a l Growth, Trade and Dynamic Patterns i n the Japanese Economy (Tokyo: U n i v e r s i t y of Tokyo Press, 1982), pp. 40-41, 42-44, 45-47. The p r a c t i c e of subcontracting w i t h i n a monopsony network, w i t h b i g corporations above and subcontractors below, i s a unique feature of the Japanese i n d u s t r i a l organization. Japanese coal buying on the world market appears to be but l o c a l p r a c t i c e w r i t l a r g e . I n t e r e s t i n g l y , Shinohara draws a t t e n t i o n to the dearth of analyses of Japanese organization which focus on the medium and small e n t e r p r i s e s , a lack due, he says, to the tendency of researchers to "emulat(e) American a n a l y s i s ... on s e l l e r ' s monopoly or o l i g o p o l y " . Shinohara, p. 41.  42.  MITI accepts a l i m i t e d number of o f f i c i a l s from business in.temporary p o s i t i o n s at the entry, section-chief and deputy d i r e c t o r l e v e l s as a means of e s t a b l i s h i n g immediate and long-term personal contacts with future business l e a d e r s , but the flow i s nowhere comparable to that i n the U.S. or Canada. Higashi Chikaraj Japanese Trade P o l i c y . Formulation, op. c i t . , p. 59  43.  I b i d , p. 67.  44.  Samuels, "Japanese Aluminum Industry", op_. c i t . , pp. 497-498.  45.  For an example of the c o n s u l t a t i v e process, see I b i d , pp. 499-501.  P r i c e Cuts f o r Coal", Toronto Globe and M a i l , May 28,  - 31 -  46.  Fukukawa S h i n j i , "Features of the I n d u s t r i a l P o l i c y of Japan" (Lecture given at the Club Franco-Japonais, October 4, 1982); I r a C. Magaziner and Thomas M. Hout, Japanese I n d u s t r i a l P o l i c y (London: P o l i c y Studies I n s t i t u t e No. 585, January 1980), p. 34.  47.  Japan, M i n i s t r y of I n t e r n a t i o n a l Trade and Industry, MITI Handbook 1981/82, n.d., p. 90.  48.  Horie, 1984 Coal Manual, p. 35.  49.  I b i d , p. 6.  50.  "MITI Coal R a t i o n a l i z a t i o n P o l i c y Okayed", Japan Economic Journal , V o l . 22, No. 1114 (June 26, 1984), p. 46.  51.  New Energy Development Organization, "A Guide to New Energy Development Organization" (Tokyo: NEDO, n.d.), p. 16.  52.  I b i d , p. 8.  53.  P h i l i p M. Burgess, " P a c i f i c Rim Steam Coal Outlook: 1984 Demand Assessment" (Study commissioned by the Western Coal Export Board, Golden, Colorado: Management I n s t i t u t e , Colorado School of Mines, 1984), p. 12.  54.  Other vice-chairmen are: Kawamata K a t s u j i (Chairman, Nissan Motor Co. L t d . ) , Hasegawa Norishige (Chairman, Sumitomo Chemical Co. L t d . ) , Hiraiwa G a i s h i (Chairman, The Tokyo E l e c t r i c Power Co., I n c . ) , Ishida Masami (Executive Advisor, Idemitsu Kosan Co., L t d . ) , Nakamura Toshio (Chairman, The M i t s u b i s h i Bank, L t d . ) , Yamashita Isamu (Chairman, M i t s u i Engineering & Shipbuilding Co., L t d . ) , Yoshiyama H i r o k i c h i (Cha irman, H i t a c h i L t d . ) , Toyoda E i j i (Chairman, Toyota Motor Corp.), Hanamura Nihachiro (President, Keidanren). Chairman of the Board of C o u n c i l l o r s i s Iwasa Yoshizane (Advisor, F u j i Bank L t d . ) ; Honourary Chairman i s Doko Toshio (Counsellor, Toshiba Corp.). "Old Men Continue to Dominate Z a i k a i World; Osaka-based Businesses Are Unhappy", Japan Economic Journal , V o l . 22, No. 1114, pp. 46, 47.  55.  Fujiwara Katsuhiro, "Expanding Coal Use i n Japan and Keidanren A c t i v i t i e s " , Keidanren Review, No. 64 (August 1980), p. 12.  56.  The average age of i t s executive vice-chairmen i s about 75. Men Continue to Dominate Z a i k a i World", op_. c i t . , p. 46.  57.  Ibid.  58.  Samuels, "Japanese Aluminum Industry", p. 504.  59.  Shinohara, I n d u s t r i a l Growth, p. 47.  60.  Horie, 1984 Coal Manual, p. 4.  61.  "South Korea Faces Attack Over Export Steel Success", Toronto Globe and M a i l , March 24, 1984.  "Old  - 32 62.  Roger W. Gale, "Tokyo E l e c t r i c Power Company: I t s Role i n Shaping Japan's Coal and LNG P o l i c y " , i n Ronald A. Morse, ed. The P o l i t i c s of Japan's Energy Strategy (Berkeley: U n i v e r s i t y of C a l i f o r n i a , I n s t i t u t e of East Asian Studies, 1981), p. 103.  63.  I b i d , p. 90.  64.  I b i d , pp. 103, 104.  65.  Stuart Kirby and Mary Saso, Japanese I n d u s t r i a l Competition to 1990 (Cambridge, Mass.: Abt Books, 1982), pp. 115-116.  66.  See "Economic S t a b i l i t y Without I n f l a t i o n : Agenda f o r the Japanese Economy" (Statement by Keidanren on proposals f o r economic management) , Keidanren Review, No. 86 ( A p r i l 1984), pp. 11-16.  67.  See Kubota A k i r a , "The P o l i t i c a l Influence of the Japanese Higher C i v i l Service", Japan Quarterly, V o l . X X V t l l , No. 1 (JanuaryMarch 1981), pp. 45-55. Kubota concludes that the higher c i v i l service plays a " c e n t r a l r o l e i n c o n s o l i d a t i n g opinions and generating a consensus" i n negotiations among industry, government and f i n a n c i a l i n t e r e s t s , and that p o l i t i c i a n s "tend to play a r o l e of implementing the consensus created by the career senior bureaucrats and the r o l e of leading and guiding various i n t e r e s t groups". Kubota, p. 46.  68.  United States, U.S. House Committee on Foreign A f f a i r s , Subcommittee on Asian and P a c i f i c A f f a i r s , "Government Decisionmaking i n Japan: Implications f o r the United States" (Report of a workshop organized by the Subcommittee on A s i a n and P a c i f i c A f f a i r s , the Woodrow Wilson I n t e r n a t i o n a l Center f o r Scholars of the Smithsonian I n s t i t u t e , and the Congressional Research Service of the L i b r a r y of Congress, March 16, 1982), p. 5.  69.  Wada Yoshikiyo, "The P o l i t i c s of Budgetting i n Japan" (Ph.D. D i s s e r t a t i o n , Arizona State U n i v e r s i t y , Ann Arbor: U n i v e r s i t y M i c r o f i l m s I n t e r n a t i o n a l , 1983), p. 274.  70.  See, f o r example, "U.S. Push to S e l l Coal to Japan Bad News f o r Canadian Mines", Toronto Globe and M a i l , May 19, 1984.  71.  See Peter. Nemetz, I l a n V e r t i n s k y , P. V e r t i n s k y , "Japan's Energy Strategy at the Crossroads" (Canada and the Changing Economy of the P a c i f i c Basin Working Paper No. 18, Preliminary D r a f t , Vancouver: I n s t i t u t e of Asian Research, U n i v e r s i t y of B r i t i s h Columbia, November 1983), pp. 21-23.  - 33 -  CHAPTER 2:, Western Canadian Coal 1.  Introduction I t i s a c e n t r a l argument of t h i s t h e s i s that the Japanese s t e e l  industry's approach to acquiring coal i s best understood as an ad response to market conditions, and t h a t , with the exception of  hoc  "G-G"  contracts, the Japanese government has not played a d e c i s i v e r o l e i n the process.  The government has been more instrumental i n promoting the sub-  s t i t u t i o n of thermal c o a l for o i l f o r e l e c t r i c power generation,  providing  incentives to the EPDC to invest i n overseas c o a l mine development and d i v e r s i f y sources of supply.  to  Through NEDO, whose requests f o r loan  approval are taken to the M i n i s t r y of Finance by MITI, and the ExportImport Bank, the Japanese government has provided loan guarantees which have contributed to the Gregg R i v e r , Balmer and Northeast B.C.  projects.  Japanese involvement i n Western Canadian mines corresponds w i t h the pattern detected by Rodrik i n h i s a n a l y s i s of the Japanese approach to acquiring copper, i r o n ore and bauxite:  an increasing degree of i n t e g r a t i o n  of the Japanese industry with i t s upstream sources of supply i n order to secure greater p r o t e c t i o n against d i s r u p t i o n s i n d e l i v e r i e s . ^  This  chapter examines some of the main features of Japanese investment i n the Western Canadian coal mines.  °  The Western Canadian mines represent an important a l t e r n a t i v e source of supply f o r the Japanese buyers, and, f u r t h e r , o f f e r two r a i l l i n e s and two major ports to handle the c o a l .  The s t e e l m i l l s ' contract performance  i n the current period of oversupply gives some i n d i c a t i o n of the p r i c e the m i l l s may  be prepared to pay to maintain d i v e r s i f i e d sources of supply.  - 34 2.  The Place of Western Canadian Coal i n Japan's O v e r a l l M e t a l l u r g i c a l and Thermal Coal Requirements B r i t i s h Columbia produces both thermal and m e t a l l u r g i c a l coal f o r  export, but, l i k e A l b e r t a , supplies Japan mainly with low and medium v o l a t i l e bituminous coals f o r steelmaking.  Japan imports approximately 9%  of i t s thermal requirements from Western Canada, although the thermaltype coal i t obtains from mines i n B.C. i s not of a q u a l i t y that can be used immediately by the Japanese u t i l i t i e s .  Thermal coal f o r the Japanese  e l e c t r i c power u t i l i t i e s and cement industry i s produced as a by-product of many of the m e t a l l u r g i c a l coal mines, f o r example, the new mines i n 2 the Northeast of B.C. (i)  Metallurgical coal  The coking ( m e t a l l u r g i c a l ) c o a l industry i n Western Canada e x i s t s only because of Japanese demand.  In 1982, Japan took 73% of t o t a l  production; i n the period 1970-1982, i n aggregate, Japan represented 87% 3 of Canada's market. Viewed from the other d i r e c t i o n , Canada provided, i n 1982, 14.2% of Japan's imported coking c o a l requirements and, i n 1983, 4 17.6%.  Japan i s expected to increase i t s r e l i a n c e on Canadian coking  c o a l to 25-30% by 1985, once production from the new mines comes onstream. Appendix 1 i l l u s t r a t e s Japanese imports of m e t a l l u r g i c a l coal by country of o r i g i n . Japanese demand f o r coking coal has declined as a r e s u l t of a number of f a c t o r s :  the recession, which has reduced demand both i n Japan and  on i n t e r n a t i o n a l markets; changes i n technology which have r e s u l t e d i n a decrease i n the amount of coal required i n i r o n and steel-making; increased production by more competitive producers such as South Korea and Taiwan.  Japanese production of p i g i r o n , crude s t e e l and f i n e l y r o l l e d  - 35 s t e e l products has been f a l l i n g o f f since FY 1980,  p a r a l l e l i n g the trend of  reduced demand i n the r e s t of the i n d u s t r i a l i z e d Western world.  The  increase i n contracted volumes of c o a l from Canadian mines r e f l e c t s d e c i sions taken by the s t e e l industry i n the period 1980-82 to d i v e r s i f y away from heavy dependence on A u s t r a l i a n c o a l , as w e l l as a b e l i e f that demand for s t e e l , and, hence, competition up around (ii)  f o r steel-making m a t e r i a l s , would pick  1985. Thermal coal  The steady increase i n volume of imports a n d . d i v e r s i f i c a t i o n of supplier of thermal coal i s i l l u s t r a t e d i n Appendix 2. from Canada and the U.S.  Volumes imported  jumped i n 1981, as Japanese buyers looked f o r  a l t e r n a t i v e suppliers a f t e r s t r i k e s shut down A u s t r a l i a n mines and " S o l i d a r i t y " protests disrupted exports from Poland.  P r i c e and q u a l i t y  considerations are the most important f a c t o r s i n f l u e n c i n g sourcing.  Given  the a l t e r n a t i v e s on the market, B.C.'s thermal coals are not p a r t i c u l a r l y attractive:  one study of B.C.  decline i n the province's  c o a l exports to Japan documents a 17%  share of the export market f o r thermal c o a l  i n the period 1972-1981, compared w i t h a 242% increase for A u s t r a l i a and a 984% 3.  increase f o r South A f r i c a .  H i s t o r y of Japanese P a r t i c i p a t i o n i n Western Canadian Coal Mine Development Japanese s t e e l m i l l s made t r i a l purchases of B r i t i s h Columbia coal  i n 1958 and 1959, and began commercial scale imports i n 1960. was  The volume  s m a l l , however (421,000 metric tonnes), l a r g e l y because of the high  f r e i g h t element i n the C.I.F. p r i c e . ^  The Japanese m i l l s stepped i n t o  the gap l e f t i n the Canadian coal mining industry when, i n the 1960s,  Canadian P a c i f i c R a i l began c l o s i n g down i t s mines i n the Crowsnest Pass 8 area.  Since then, Japanese c o a l buyers have moved toward progressively  c l o s e r t i e s with t h e i r Western Canadian s u p p l i e r s .  The m i l l s entered into  long-term contracts i n the l a t e 1960s with three mines:  Balmer, Fording  and Luscar, taking a minority equity p o s i t i o n i n one, Balmer.  The Balmer  case i s somewhat unusual, and i s the r e s u l t of a long-standing r e l a t i o n s h i p between the trading company, M i t s u b i s h i , and Balmer's one-time U.S. Kaiser S t e e l .  parent,  The incidence of Japanese investment i n new mines since  i s much greater:  1980  Japanese companies are minority partners i n j o i n t ventures  i n the Gregg R i v e r , Quintette and Bullmoose operations.  New  thermal coal  mines tend to have shorter, five-year contracts with Japanese buyers. Because of the uncertainty i n the s t e e l market, Japanese newspapers and trade journals have been i n d i c a t i n g that the preference of the s t e e l m i l l s i n the future l i k e l y w i l l be for shorter contracts as w e l l , (i)  Coal mine "groups"  While t h i s study w i l l focus on the established m e t a l l u r g i c a l c o a l mines i n Southeast B r i t i s h Columbia and the new p r o j e c t s i n the the B.C.  operations cannot be considered  duction.  Northeast,  i n i s o l a t i o n from A l b e r t a pro-  To give them some f l e x i b i l i t y i n p r i c e and tonnage n e g o t i a t i o n s ,  Japanese s t e e l m i l l s d i v i d e Western Canadian c o a l producers i n t o three groups, whose "boundaries" do not n e c e s s a r i l y p a r a l l e l Canadian divisions: 1.  The old mines i n Southeast B.C. and A l b e r t a : Balmer Coal (Southeast B.C.) Fording River (Southeast B.C.) Coal Mountain (Southeast B.C.) Luscar (Alberta) Smoky River (Alberta)  political  - 37 2.  The new mines i n Southeast B.C. Line Creek (Southeast G r e e n h i l l s (Southeast Gregg River (Alberta)  3.  The new mines i n Northeast  and A l b e r t a :  B.C.) B.C.) B.C.:  Quintette Bullmoose There are several thermal coal mines scheduled to come onstream beginning i n 1985.  These mines w i l l not be discussed i n the body of the  t h e s i s , however, Appendix 3 provides d e t a i l s of ownership and Japanese participation.  The pattern i s s i m i l a r to that f o r the m e t a l l u r g i c a l c o a l  mines. ( i i ) J o i n t ventures Both Japanese and Canadian industry o f f i c i a l s interviewed i n the research f o r t h i s study stressed that the v i r t u e of having Japanese i n v e s t ment does not endow a project with any s p e c i a l treatment by the s t e e l m i l l s during annual p r i c e and volume n e g o t i a t i o n s .  The only reason f o r Japanese  investment i n the mines i s to enhance s e c u r i t y of supply:  the m i l l s '  a t t i t u d e i s that they are not c o a l operators, and do not care about earning a large r e t u r n on t h e i r investment.  The o b j e c t i v e of the Japanese i n v e s t o r ,  then, may not n e c e s s a r i l y be i n harmony with those of i t s other partners. Complications, could a r i s e i f Westar, for example, wishes to d i v e r s i f y into other areas to improve the o v e r a l l performance of the company, while Japanese partners might prefer increased dividends. The Westar example i l l u s t r a t e s the major advantages f o r the buyer of d i r e c t investment over long-term c o n t r a c t u r a l arrangements: risk.  reduction of  Through t h e i r involvement, as shareholders, the s t e e l m i l l s have  some access to company management and some say i n how the resource i s managed and mined.  They also have f u l l e r information on the mine, which  - 38 -  may have u s e f u l a p p l i c a t i o n elsewhere. open p i t e x t r a c t i o n processes,  Experience gained from Westar's  f o r example, has been applied to help  overcome t e c h n i c a l problems at the Quintette s i t e . Japanese investment i n coal mine development has, since 1980, been i n the form of j o i n t ventures.  The major advantage of a j o i n t venture i s  that i t brings the investor a step c l o s e r to the resource:  each p a r t i c i p a n t  i s assured a p o r t i o n of the output according to the equity taken out.  In  the case of the Gregg River mine, the f i r s t such j o i n t venture i n v o l v i n g Japanese investors i n a Canadian coal mine, the arrangement o f f e r s potentially attractive price benefits:  Japanese investors receive at 9  production cost c o a l supplies i n proportion to t h e i r 40% equity share. The a t t r a c t i o n of j o i n t venture projects to Japanese investors i s understandable.  D i r e c t investment i n resource development i s a common  strategy adopted as a hedge against p r i c e increases or supply r e s t r i c t i o n s . For Japanese companies, inexperienced  compared with American MNCs i n  overseas investment and project development, c o l l a b o r a t i o n with several enterprises i s an obvious way of reducing r i s k .  ^  Investment i n the Canadian mines r e f l e c t s the Japanese s t e e l industry's expectations of increased expansion i n i r o n and s t e e l production a f t e r 1985, ^ expectations apparently shared, or at l e a s t supported by the Japanese government, i n view of i t s assistance with the Northeast p r o j e c t . The m i l l s have sought to increase the number of mines producing coal i n a region:  many mines are more "secure" than a few, and increases i n  supply, i f necessary, are more e a s i l y achieved across many producers than a few. A major a t t r a c t i o n of the e x i s t i n g Canadian coal operations i s the close proximity of a p o t e n t i a l a d d i t i o n a l 24.7 m i l l i o n tonnes p.a. capacity, with r a i l l i n e s and other i n f r a s t r u c t u r e e i t h e r already i n place,  - 39 or r e q u i r i n g only l i m i t e d expansion to service new mines.  Appendix 4  l i s t s the major coking operations under survey, showing planned  production  levels. While both industry and Japanese government o f f i c i a l s interviewed repeatedly  emphasized that governments are not involved i n c o a l mine develop-  ment negotiations, host government p a r t i c i p a t i o n i n a major project appears to be an^ important consideration f o r Japanese i n v e s t o r s . Quintette mine i n Northeast B.C.  was considered  The  too large an undertaking  by one Japanese trading company (Nissho Iwai), and a, major s e l l i n g point to the Japanese was  the support of the B.C.  and f e d e r a l governments i n the  construction of r a i l , port and other r e l a t e d a c t i v i t i e s as part of an 12 o v e r a l l r e g i o n a l economic development p r o j e c t .  Japanese investors  appear to regard government involvement i n a project as an a d d i t i o n a l guarantee of a project's long-term s t a b i l i t y .  The 50% p a r t i c i p a t i o n of  Petro Canada Exploration Inc. i s an important f a c t o r i n Sumitomo's i n v o l v e ment i n e x p l o r a t i o n a c t i v i t y at the Monkman coal s i t e . 4.  Buying and S e l l i n g Coal (i)  The trading companies 13  A l l c o a l sold to Japan from Canada a sogo shosha.  i s handled by a trading company,  The shosha act as the main i n i t i a t o r s of long-term  contracts and, t y p i c a l l y , w i l l have been involved i n a project years before a contract sees the l i g h t of day.  M i t s u b i s h i , Nissho Iwai, M i t s u i and  Tokyo Boeki had been involved i n e x p l o r a t i o n and development work i n coal properties i n Northeast B.C.  from the l a t e 1960s.  The shosha are the main i n i t i a t o r s of long term contracts: they develop the commodity and s e l l i t , and are responsible f o r the "form" of 14 the contract.  Once a contract i s signed and the coal moving, the  - 40 shosha w i l l continue t o . c o l l e c t information f o r the buyers on the conditions at the mines, make overseas payments on behalf of the s t e e l m i l l s and act as a communications channel.  Informally, the trading company may also act  as an "agent" f o r the supplier with which i t i s l i n k e d . (ii)  The "coordinators":  the s t e e l industry buying group  P r i c e s and q u a n t i t i e s of c o a l to be purchased are negotiated by industry "coordinators" f o r each region. i s Nippon Kokan K.K.  The main coordinator f o r Canada  (Japan Steel Tube Co., the second l a r g e s t s t e e l  producer i n Japan), aided by Kobe S t e e l . ^ Canada are f a i r l y c l o s e :  Nippon Kokan's l i n k s w i t h  i n 1974, the company became involved i n a j o i n t  f e a s i b i l i t y study with the B.C.  government on a s t e e l plant f o r the  16 province,  and i t s president, Makita Hisao, l e d a 1976 Japanese  businessmen's mission to Canada.  Makita heads the Japanese contingent  to the annual meetings of the Canada-Japan Businessmen's Cooperation Committee, and also c h a i r s the Japan Canada Economic Committee of Keidanren. Negotiations on p r i c e and contract tonnages, to r e f l e c t changes i n the market, are held annually i n Tokyo.  Coordinators meet f i r s t w i t h  t h e i r r e s p e c t i v e s u p p l i e r s , then with senior board members of the s t e e l m i l l s to reach agreements i n a process described by s u p p l i e r s as " d i v i d e and conquer".  Agreements reached with lowest p r i c e producers tend to  set c e i l i n g s and Canadian mines have l i t t l e option but to f o l l o w the trend set by lower-cost producers i n South A f r i c a and A u s t r a l i a .  - 41 5.  The Western Canadian Mines: (i)  A H i s t o r y of Japanese Investment  The old mines  Ealmer M i t s u b i s h i Trading Company, a c t i n g as the agent f o r nine Japanese s t e e l m i l l s , negotiated with Kaiser S t e e l Co. of C a l i f o r n i a i n the l a t e 1960s f o r a contract which involved developing coking c o a l reserves at Sparwood, B.C. ^  The Japanese r o l e expanded i n 1973 when Kaiser was i n  f i n a n c i a l d i f f i c u l t i e s as a r e s u l t of low c o a l p r i c e s and high startup costs.  As a s o l u t i o n to i t s cash flow problem, Kaiser o f f e r e d equity to  the Japanese companies and the Japanese converted t h e i r debt holdings to 18 equity, taking 30%. ...  In October,, 1980, B.C. Resources Investment Corp.  bought 66.6% of the stock from K a i s e r , and the ten Japanese firms con19 verted t h e i r shareholdings to 33.4%.  At present, representatives of  M i t s u b i s h i , Nippon Kokan and Nippon S t e e l s i t on Westar's Board of Directors.  The contract signed i n 1968 with Balmer f o r the period A p r i l  1970 to March 1985 was the f i r s t long-term contract entered into by the 20 Japanese with a Canadian c o a l mine. Fording River Fording Coal L t d . i s a j o i n t venture of Canadian P a c i f i c Investments (60%) and Cominco L t d . (40%). I t has a 15-year contract with Japanese buyers signed i n 1969 that runs from A p r i l 1972 to March 1987.  The  trading companies that handle Fording c o a l are Idemitsu Kosan, Marubeni 21 Corp. and M i t s u i & Co. Coal Mountain Owned by Byron Creek C o l l i e r i e s L t d . (Esso Resources Canada L t d . ) , t h i s mine s t a r t e d up i n 1974.  I t has sold some weak coking c o a l to  Sumitomo Cement and Sumitomo Kanyoku through the trading company Sumitomo  - 42 Corp. Luscar Owned by C o n s o l i d a t i o n Coal Co. of Canada, the mine had a 15-year contract with Japanese s t e e l m i l l s f o r the period 1970-1984. contract signed i n March 1981 f o r FY 1981-1990 replaces i t .  A  new  Luscar a l s o  has c o n t r a c t s f o r thermal coal f o r a ten-year period ending 1993.  The  23 trading companies involved are M i t s u i & Co., and C. Itoh & Co. Smoky River This mine, owned by Mclntyre Mines L t d . , was c l o s e d , by mutual agreement, f o l l o w i n g the e x p i r a t i o n of a one and a h a l f year contract signed with Japanese s t e e l m i l l s i n October, 1982.  The mines' other  a  customers i n B r a z i l , South Korea and Taiwan, paying higher p r i c e s than Japanese buyers, had cancelled t h e i r contracts and the mine was operating at a l o s s .  The extension of the Japanese contract was a concession to  a Lougheed government request to keep the mine operating through a prov i n c i a l e l e c t i o n campaign.  The trading companies involved were:  Mitsubishi, 24  Marubeni, Sumitomo, Mutsui, Kanasho, Nissho Iwai and Toyo Menka. Mines i n the same "group" generally win s i m i l a r contract arrangements from the Japanese s t e e l m i l l s .  Fording, f o r example, has experienced almost  i d e n t i c a l p r i c e and tonnage cutbacks i n recent years to those accepted by Westar's Balmer mine:  both mines have had 23.4% p r i c e increases i n  FY 1982, 15.5% reductions i n FY 1983, and a 1% reduction i n FY  1984.  Comparable f i g u r e s f o r the Luscar mine were not r e a d i l y a v a i l a b l e , however, the 1984 Coal Manual states c l e a r l y in. i t s d e s c r i p t i o n of the Luscar cont r a c t that "no d i s c r i m i n a t o r y treatment should ever be made between t h i s 25 c o a l and Balmer c o a l " .  - 43 In FY 1979-82, coal shipments by the three mines were also s i m i l a r overall: 1979  1980  1981  1982  Balmer  92 .4%  100. 0%  97 .0%  75. 0%  Fording  113 .4%  95. 2%  96 .9%  75. 9%  Luscar  104 .5%  102. 9%  101 .4%  76. 1%  The s t e e l m i l l s d i s t i n g u i s h between o l d and new mines i n r e c o g n i t i o n of high start-up costs.  P r i c e s i n the e a r l y years of a contract f o r  production from a new mine thus w i l l be higher than those f o r o l d mines, which have been able to depreciate these costs. (ii)  The new mines, Southeast B.C. and A l b e r t a  Gregg River The Gregg River mine represents  the f i r s t d i r e c t investment i n an 27  overseas c o a l development by Japanese steelmakers,  although the m i l l s  had had extensive experience i n i r o n ore mine development i n A u s t r a l i a . Basic agreement on the project was reached i n August 1980, and the contract was signed i n 1981.  Gregg River i s an unincorporated j o i n t  venture between Gregg River Coal L t d . (60%) and s i x Japanese s t e e l m i l l s 28 led by the trading company M i t s u i and Co. L t d . (40%). Among the reasons given f o r the Japanese d e c i s i o n f o r equity p a r t i c i p a t i o n i n t h i s project are: (1)  the mine's proximity and  s i m i l a r i t y to the Luscar coal mine with which M i s t u i & Co. had been involved since 1968:  conditions f o r development were, then, f a i r l y c l e a r ;  (2) the project had r e a d i l y a v a i l a b l e r a i l , port and other i n f r a s t r u c t u r a l facilities;  (3) c o a l proportionate  to the 40% equity i n t e r e s t could be  imported at c o s t ; (4) a unique investment/financing  method was employed.  T o t a l development costs were estimated at C$185 m i l l i o n .  Japanese  - 44 investors covered $104 m i l l i o n :  $30 m i l l i o n (farm-in) f o r 40% equity  i n t e r e s t , and $74 m i l l i o n f o r e x p l o r a t i o n , a l l o c a t e d i n proportion to the equity holding.  Japanese also borrowed low-interest funds from the Export-  Import Bank and syndicate loans from c i t y banks on behalf of Manalta Coal (owner of Gregg River Coal Ltd.) f o r $15 m i l l i o n of the $111 m i l l i o n 29  Manalta was to cover f o r exploration. Line Creek Owned by Crows Nest Resources L t d . (a 100% subsidiary of S h e l l Canada Resources L t d . ) , Line Creek signed a 15-year contract i n J u l y 1980 to provide Japanese buyers one m i l l i o n tonnes per year f o r 15 years from A p r i l 1983.  M i t s u i & Co. i s the trading company handling Line Creek c o a l .  The mine also produces some thermal coal f o r export to Korea, Taiwan and 30 Japan. G r e e n h i l l s (Westar) An unincorporated j o i n t venture established i n 1980 between Westar Mining L t d . (80%), owned by B.C. Resources and Japanese i n t e r e s t s , and Pohang Iron and Steel Co. of South Korea (20%), M i t s u b i s h i Corp. i s the trading company.  The mine signed a 3-year contract i n A p r i l 1982 f o r the  period J u l y 1983-March 1986, and Westar has received the s t e e l m i l l s ' commitment to extend the contract when i t expires, (iii)  The new mines, Northeast B.C.  The Bullmoose and Quintette contracts comprise a package deal which involves both the B.C. and f e d e r a l Canadian governments.  The p r o j e c t s  were, at the time of pre-contract discussions i n the l a t e 1970s, and remain today, the subject of considerable controversy.  Viewed from the  Canadian perspective, the issue?:appears to be whether i t i s appropriate 32 for governments to invest upwards of $2.9 b i l l i o n  i n a resource-based  mega-project aimed at supplying one market as a means of creating  - 45 employment.  For the Japanese, the question may be whether to continue  investing i n projects whose economic f e a s i b i l i t y may be d i s t o r t e d as a r e s u l t of government involvement. Northeast c o a l has become an extremely c o s t l y a l t e r n a t e supply of coal f o r the Japanese.  Negotiations on p r i c e and volume l e v e l s f o r 1984  had not been f i n a l i z e d at the date of w r i t i n g , however, the p r i c e f o r Quintette coal was approximately $97 a tonne as of August 1984, compared 33 with $69.09 f o r Balmer coking c o a l . The Bullmoose and Quintette projects are contracted to supply Japanese steelmakers with 6.7 m i l l i o n tonnes a year of m e t a l l u r g i c a l coal (5 m i l l i o n from Quintette and 1.7 m i l l i o n from Bullmoose) and, from the Quintette mine, 1.38 m i l l i o n tonnes of thermal c o a l , f o r 15 years (October 1983 to March 1998).  Together, the mines o f f e r Japanese s t e e l  m i l l s a new source of supply w i t h i n a r e g i o n , a new t r a n s p o r t a t i o n route v i a a new port at Ridley Island, and the p o t e n t i a l to access further supplies at 13 nearby s i t e s .  These f a c t o r s were instrumental i n securing  MITl's and the Japanese M i n i s t r y of Finance's approval f o r NEDO and ExportImport Bank a s s i s t a n c e . 34 „  i  Bullmoose The Japanese importer and trading company f o r the Bullmoose project i s Nissho Iwai Corp., through i t s subsidiary Nissho Iwai Coal Development (Canada) L t d .  Nissho Iwai has been engaged i n c o a l e x p l o r a t i o n a c t i v i t i e s  i n the Northeast since 1969, i n i t i a l l y with the Canadian f i r m Brameda Resources L t d .  The f i r s t t e c h n i c a l presentation was made to Japanese  buyers i n June 1977.  In August 1980, Nissho Iwai took a 10% equity p o s i t i o n  i n order to.secure the r i g h t to handle the c o a l .  In January 1981, the  project received basic agreement on contracts w i t h the s t e e l m i l l s  - 46 necessary to secure B.C. structure.  government agreement for spending on i n f r a -  The mine i s an unincorporated  Corp. (51%) i s project manager. April  j o i n t venture of which Teck  Lornex Mining Co. took.39% equity i n  1982. Nissho Iwai has taken 10% of the t o t a l construction cost  o r i g i n a l l y at C$275 m i l l i o n ) on deferred payment terms: sales i s to pay for construction costs.  (estimated  cash from coal  Nissho Iwai's Tokyo headquarters  entered into a loan agreement with the Export-Import Bank and  other  35 Japanese commercial banks for 100% of the loan. Quintette The Quintette mine i s by f a r the l a r g e s t of the two, and the i n v o l v e ment of the B.C.  and f e d e r a l governments i n providing i n f r a s t r u c t u r e helped 36  overcome i n i t i a l Japanese caution.  Tokyo Boeki, the trading company,  and M i t s u i Mining Overseas Development Corp. joined Denison i n the project i n 1971, and by January 1981 a basic sales agreement had been reached between the s t e e l m i l l s and Quintette.  On the basis of t h i s agreement, 37  Quintette decided to seek project f i n a n c i n g . Organization  The New  Energy Development  (NEDO) endorsed recourse loans from Tokyo Boeki and M i t s u i  Mining Overseas Development Corp. to Quintette Coal L t d . , the project manager. Ownership of the mine i s Denison Coal L t d . (50%), Charbonnages de 38 France (12%), Japanese i n t e r e s t s (38%).  Tokyo Boeki i s the trading  company handling 70% of production; Sumitomo handles the remaining 30%.  - 47 -  Chapter 2 Footnotes 1.  Rodrik, "Managing Resource Dependency", op. e x t . , p. 554.  2.  While thermal c o a l p r i c e s were r i s i n g , the u t i l i t i e s were expected to convert t h e i r b o i l e r s to take advantage of the poorer q u a l i t y , but lower-priced Canadian thermal c o a l . Now that world c o a l p r i c e s have dropped, however, and Canadian p r i c e s remained comparatively high, i t i s u n l i k e l y the u t i l i t i e s w i l l continue conversion.  3.  H.N. Halvorson Consultants L t d . , "Forecast of Coal Mining A c t i v i t y to 2002 f o r B.C. Hydro and Power A u t h o r i t y " (n.p., March 1983), p. 20.  4.  "The S t e e l Industry of Japan 1984", op_. c i t . , p. 12.  5.  Horie, 1984 Coal Manual, gives d e t a i l e d f i g u r e s on Japanese and world s t e e l and i r o n production, pp. 29, 98.  6.  H.N.  7.  D'Cruz, "Negotiating Coal Contracts", pp. 21, 22.  8.  Frank Langdon, The P o l i t i c s of Canadian-Japanese R e l a t i o n s , 1952-1983 (Vancouver: U n i v e r s i t y of B r i t i s h Columbia Press, 1983), p. 13.  9.  Horie, 1984 Coal Manual, p. 310.  Halvorson Consultants L t d . (1983), p. 65.  10.  See Sekiguchi Sueo, Japanese D i r e c t Foreign Investment ( M o n t c l a i r , New Jersey: Allenhead, Osmun & Co., P u b l i s h e r s , 1979), pp. 25-38, f o r a d i s c u s s i o n of Japanese investment i n resource development, and Tsurumi Yoshi, M u l t i n a t i o n a l Management: Business Strategy and Government P o l i c y (Cambridge, Mass.: B a l l i n g e r P u b l i s h i n g Co., 1977). Tsurumi found i n h i s a n a l y s i s that while U.S. companies t y p i c a l l y own two-thirds of t h e i r f o r e i g n s u b s i d i a r i e s , and European and Canadian companies about one-half, Japanese u s u a l l y take a m i n o r i t y p o s i t i o n . Tsurumi, p. 95.  11.  According to a recent a n a l y s i s , the Japanese s t e e l industry was c l o s e to f u l l y u t i l i z i n g m e t a l l u r g i c a l c o a l mine capacity i n 1979, 1980 and e a r l y 1981 and, without mine expansion, would have exceeded capacity by 1985 or 1986. C a r t e r , op_. c i t . , p. 10.  12.  See "Quintette Coal L t d . " , an information summary prepared on the occasion of the o f f i c i a l opening of the Quintette p r o j e c t on August 10, 1984 (n.p.).  13.  And from A u s t r a l i a . companies.  U.S.  c o a l i s purchased by i n d i v i d u a l s t e e l  - 48 14.  P. Lesley Cook, The Supply of A u s t r a l i a n Coal (Science P o l i c y Research Unit Occasional Paper Series No. 14, Sussex: U n i v e r s i t y of Sussex, A p r i l 1981), p. 59.  15.  In A u s t r a l i a , i t i s Nippon S t e e l , aided by Kawasaki S t e e l . Because of i t s s i z e , Nippon S t e e l i n e f f e c t acts as p r i c e - s e t t e r f o r the U.S. too.  16.  Langdon,. P o l i t i c s of Canadian-Japanese R e l a t i o n s , p. 82.  17.  I b i d , pp. 125, 126.  18.  I b i d , p. 126.  19.  The Japanese equity holders are: M i t s u b i s h i Corp. (the trading company f o r the Balmer mine, 13.1%), Nippon S t e e l Corp. (6.4%), Nippon Kokan K.K. (5.9%), Kawasaki S t e e l Corp. (1.6%), Sumitomo Metal Industries (0.8%), Kobe S t e e l (0.9%), N i s s h i n Steel Corp. (0.7%), Godo Steel Co. (0.1%), M i t s u b i s h i Chemical Corp. (0.8%) and Toho Gas Co. (0.1%). 1984 Coal Manual, p. 303. The company has since changed i t s name to Westar.  20.  For d e t a i l s of the Balmer contract, see Horie, 1984 Coal Manual, pp. 303-304.  21.  I b i d , pp. 307-308.  22.  I b i d , pp. 451-452.  23.  I b i d , pp. 304-306.  24.  I b i d , pp. 306-307.  25.  I b i d , pp. 303, LV305, 307; "Westar to Cut Coal to Japan", Toronto Globe and M a i l , A p r i l 22, 1984; "Fording Cuts Coal P r i c e " , I b i d , A p r i l 28, 1984.  26.  Horie , 1984 Coal Manual, p. 299.  27.  I b i d , p. 328.  28.  Nippon S t e e l Corp. (13.98%), Nippon Kokan K.K. (5.9%), Kawasaki S t e e l Corp. (5.44%), Sumitomo Metal Industries (5.42%), Kobe Steel Corp. (3.21%), N i s s h i n Steel Corp. (1.05%), M i t s u i & Co. L t d . (5%). I b i d , p. 309.  29.  I b i d , p. 311, 310.  30.  I b i d , pp. 308-309, 450-451.  31.  I b i d , p. 313.  32.  The estimate i s a conservative one.  See Carter, p. 12.  - 49 33.  "Coal P r i c e Dispute Shadows Opening of Quintette Mine", Toronto Globe and M a i l , August 11, 1984. The Quintette and Bullmoose contracts contain a base p r i c e and an e s c a l a t i o n formula that were negotiated before construction began. A base p r i c e of $75.00 F.O.B.T. Ridley Island per metric tonne was negotiated as of A p r i l 1, 1980 for Quintette coal and $75.50 f o r Bullmoose c o a l . Of t h i s p r i c e , 53% was to escalate from A p r i l 1980, based on government i n f l a t i o n indices for wages, materials and equipment. While the contracts s p e c i f y p r i c e reviews of - the s t a r t :price in'1987, 1991 and 1995, a side l e t t e r to the Quintette contract enables e i t h e r party to propose a p r i c e review i n October 1, 1983. See Halvorson, 1983, p. 96. The p r i c e equity review clause permits either side to re-open p r i c e negotiations to adjust the d i f f e r e n t i a l between market p r i c e and contract p r i c e . The Japanese m i l l s , c i t i n g t h i s clause, are at present seeking a $14 per tonne reduction. See Horie, 1984 Coal Manual, pp. 311, 329, 335.  34.  See Appendix 5 for f i g u r e s on p o t e n t i a l annual c o a l production i n the Northeast B.C. region.  35.  Horie, 1984 Coal Manual, pp. 312-313.  36.  See Halvorson, 1983, pp. 3-12. Japanese have provided low-interest loans to develop i n f r a s t r u c t u r e i n the USSR, PRC-and A u s t r a l i a . Canadian f e d e r a l and p r o v i n c i a l government p a r t i c i p a t i o n i n the Northeast project represented an o v e r a l l reduction i n the cost to the Japanese i n v e s t o r , and provided an a d d i t i o n a l guarantee that the massive undertaking had the long-term support of the host country.  37.  The story makes a f a s c i n a t i n g p o s t s c r i p t to the t a l e of Canadian banks' f i n a n c i a l woes f o l l o w i n g the f a i l u r e of Dome Petroleum and B r a z i l to pay debts i n 1981. In the face of r i s i n g i n t e r n a t i o n a l i n t e r e s t r a t e s , the o r i g i n a l banking syndicate led by the Bank of Montreal backed out of a financing package arranged at lower than current r a t e s . A second syndicate, led by the Bank of Montreal and the Canadian Imperial Bank of Commerce, sought,.in January 1982, the p a r t i c i p a t i o n of Japanese banks. By June, an i n t e r n a t i o n a l banking consortium comprised of the Bank of Montreal, the CIBC, the F u j i Bank, Bank of Tokyo, M i t s u i Bank, M i t s u b i s h i Bank and the C r e d i t Lyonnais (France) had reached a basic agreement with Quintette. The banks requested the s t e e l m i l l s to take equity i n Quintette because they f e l t the four o r i g i n a l p a r t i c i p a n t s alone were not r e l i a b l e . Short of investment c a p i t a l because of the e f f e c t s of the recession, the s t e e l m i l l s approached the trading company Sumitomo to j o i n the venture. For d e t a i l s of the financing arrangements, see 1984 Coal Manual, p. 288. The development cost of the Quintette p r o j e c t , at January, was C$1.3 b i l l i o n , broken down as f o l l o w s : Project Finance Recourse Loans Quintette Coal Co.  $700 m i l l i o n $250 m i l l i o n $350 m i l l i o n  1983  - 50 -  NEDO endorsed recourse loans provided by M i t s u i Mining Overseas Development Co. ($2.5 m i l l i o n ) and Tokyo Boeki ($2.1 m i l l i o n ) . M i t s u i Mining Overseas Development Co. (12.5%), Tokyo Boeki L t d . (10.5%), Sumitomo Corp. ( 5 % ) , Nippon Steel Corp. (3.85%), Nippon Kokan K.K. (1.62%), Kawasaki Steel Corp. (1.5%), Sumitomo Metal Industries L t d . (1.49%), Kobe Steel L t d . (0.88%), N i s s h i n S t e e l Co. L t d . (0.29%), Nakayama Steel Works L t d . (0.20%), Godo S t e e l Co. L t d . (0.07%), M i t s u b i s h i Chemical Co. (0.11%). Horie, 1984 Coal Manual, p. 288.  -51  CHAPTER 3: 1.  -  Summary and Conclusions  "Japan Inc." Re-examined:  The Changing Role of MITI  This t h e s i s has attempted to i l l u s t r a t e , by examining Japan's approach to procuring m e t a l l u r g i c a l and thermal c o a l , that the "Japan Inc." a p p e l l a t i o n i s a misleading d e s c r i p t i o n of the nature of decision-making i n Japan.  The view that a t r i u m v i r a t e of top business, p o l i t i c a l and  bureaucratic o f f i c i a l s e f f e c t i v e l y determines p o l i c y ignores the obvious: each sector i s not a monolith. Within the z a i k a i there i s a d i v e r s i t y of a t t i t u d e s , motives and interests.  The four major economic o r g a n i z a t i o n s , the k e i z a i yon d a n t a i ,  are important i n s t i t u t i o n s f o r consensus-building, but issues on which they can m o b i l i z e consensus tend to be l i m i t e d to those which do not involve c o n f l i c t s w i t h i n t h e i r membership.  Many of Keidanren's r e s o l u -  t i o n s , f o r example, are the product of such broad compromise t h a t , according to one a n a l y s t , "they emerge at a l e v e l of g e n e r a l i t y that l a r g e l y undercuts t h e i r p o s s i b l e i n f l u e n c e on government p o l i c y " . ^ Strong competition e x i s t s w i t h i n sectors as w e l l .  E f f o r t s to  achieve uniform cutbacks i n production f a i l e d at the time of the "Sumikin" case, when one company refused to forego i t s share of the market f o r the "common good".  Neither do the i n t e r e s t s of the b l a s t furnace (BOF) m i l l s  always p a r a l l e l those of the e l e c t r i c furnace m i l l s .  The l a t t e r  received government assistance as i n d u s t r i e s undergoing s t r u c t u r a l adjustment i n the post-1979 o i l c r i s i s p e r i o d , but now that they can take 2 advantage of cheaper supplies of s t e e l scrap as a raw m a t e r i a l , the e l e c t r i c furnace m i l l s are competing strongly with the BOF m i l l s .  - 52 -  To meet competition from.the e l e c t r i c furnace m i l l s , the BOF m i l l s are having to i n t e g r a t e and scrap i d l e f a c i l i t i e s . MITl's a b i l i t y to "guide" the i n d u s t r y , to prevent excessive compet i t i o n , f a i l e d notably i n the 1960s, despite the m i n i s t r y ' s considerable regulatory c l o u t .  MITl's s k i l l i n by-passing the JFTC to e f f e c t the  c r e a t i o n of Nippon S t e e l was a dramatic example of the m i n i s t r y ' s power at that time, but i t was a move that i n some respects b a c k f i r e d .  The exposure  of MITl's wheeling and dealing corresponded with growing p u b l i c disenchantment with both p o l i c i e s of high speed growth and the policymakers.  Capital  and trade l i b e r a l i z a t i o n i n the 1970s further l i m i t e d the range of regulatory instruments a v a i l a b l e to MITI.  In the 1980s, the government  faces steady pressure from the business community f o r " a d m i n i s t r a t i v e reform", a reduction by both n a t i o n a l and l o c a l administrations to reduce 3 t h e i r scale and increase t h e i r e f f i c i e n c y . The r o l e of MITI i n the 1980s i s perhaps best understood by viewing events from a broader perspective. P o l i c i e s developed during the 1960s and 1970s were intended to implement a program designed by MITI to strengthen the i n t e r n a t i o n a l competitive p o s i t i o n of Japanese i n d u s t r y . As domestic and i n t e r n a t i o n a l economic and s o c i a l conditions have changed, MITI has had to share pride of place i n the decision-making hierarchy with an expanding body of i n t e r e s t s . p o l i c y concern has taken a sharp turn:  Today, the m i n i s t r y ' s  i t i s now more involved i n  domestic needs and welfare issues, as i t s major c l i e n t s face r e s t r u c t u r i n g and phasing-out, and workers, with government a s s i s t a n c e , 4 are r e - t r a i n e d and re-deployed.  - 53 -  MITI remains an important forum f o r consensus-building.  Some  analysts suggest that business r e l i e s on the m i n i s t r y to engineer a consensus where the business community has been unable to resolve d i s agreements. ~* Contacts between MITI o f f i c i a l s and industry representatives are a d a i l y occurrence, but which side i s advising which appears to vary with the issue. The p o l i t i c i a n s have been introduced i n t o the d i s c u s s i o n to the extent that t h e i r need to look out f o r supporters' i n t e r e s t s impinges on the bureaucrats'  freedom of a c t i o n .  Some case studies have documented instances  where p o l i t i c a l considerations have p r e v a i l e d over the recommendations of the top l e v e l s of the bureaucracy. ^  Insofar as Japanese s t e e l m i l l s '  coal buying p r a c t i c e s are concerned, the p o l i t i c i a n s ' influence i s probably s l i g h t .  As the d i s c u s s i o n on thermal c o a l has shown, however,  MITl's f l e x i b i l i t y to pursue c e r t a i n d i v e r s i f i c a t i o n options could be constrained by domestic p o l i t i c a l considerations. 2.  The "Conspiracy Theory" and Japanese Coal Procurement A goal of t h i s study has been to attempt to r e f u t e a l l e g a t i o n s of  a "conspiracy theory", that i s , the charge that the s t e e l industry and the Japanese government, a c t i n g together, have i n f l a t e d producer expectat i o n s of Japanese demand and contributed, through d i r e c t f o r e i g n investment i n new mines and the o f f e r of long-term contracts, to an over-development of the resource.  In the long run, according to t h i s scenario, the  savings f o r Japan i n reduced coal p r i c e s more than o f f s e t s the cost of investment i n coal mine development.. This view i s suggested by Fesharaki and Schultz i n t h e i r study of o i l and gas trade i n the P a c i f i c Basin. They conclude that "a t i n y suspicion blooms that the Japanese government  - 54 -  i s ... attempting  to create a buyer's market i n LNG by i m p l i c i t l y  encouraging the construction of new LNG expedient of exaggerating  export projects v i a the  simple  Japan's future demand." ^  This l i n e of thought i s taken up by Nemetz and Vertinsky i n t h e i r a n a l y s i s of the i n t e r n a t i o n a l market f o r LNG.  The authors attempt to  l i n k such a scheme to what i s c u r r e n t l y occurring i n the m e t a l l u r g i c a l c o a l market, where Japanese s t e e l m i l l s are attempting g  to negotiate  reductions i n contracted tonnages. Such an argument i m p l i c i t l y assumes that there e x i s t s some monolithic government-business board of d i r e c t o r s of "Japan Inc." which determines long-term procurement strategy.  This t h e s i s has attempted to i l l u s t r a t e  the contrary. The "conspiracy theory" i s also rejected on the grounds that i t i s overly s i m p l i s t i c ; a too-easy response to what i s a l a r g e r problem of 9 f o r e c a s t i n g requirements i n a climate of uncertainty.  Evidence  accumulated during the research and interviews suggests strongly that the Japanese s t e e l industry's problem with an oversupply of coal ^® i s due to ( i ) the unexpectedly prolonged r e c e s s i o n , ( i i ) the strong i n t e r - f i r m competition w i t h i n the s t e e l industry which r e s u l t e d i n overexpansion of c a p a c i t y , and,  ( i i i ) heavy odds against a l l sources of supply a c t u a l l y  meeting d e l i v e r y targets set out i n the contracts. To c i t e the Japanese involvement i n the Northeast coal p r o j e c t as a d e l i b e r a t e attempt to finance more capacity than would appear warranted by market conditions ignores the major concern of the s t e e l m i l l s : ensuring there . w i l l be a supply of a key resource when i t i s needed. planning process for new mines i s long:  The  ten to f i f t e e n years passed  between i n i t i a l exploratory discussions i n v o l v i n g the trading companies  - 55 and Canadian i n t e r e s t s and the conclusion of basic agreements with the steel m i l l s .  F i n a l decisions on the new mines i n the Northeast corresponded,  however, with the beginning of what appears now to be a steady l e v e l l i n g o f f i n demand f o r s t e e l products.  The B r i t i s h Columbia government's f i l m on  the development of the project ^  i n f a c t emphasizes the recessionary  context i n which the project was constructed.  The s t e e l m i l l s , however,  based on t h e i r experience with the regular f l u c t u a t i o n s i n the i n d u s t r y , expected demand to pick up by 1985, and invested i n expanded capacity to ensure that secure supplies of coal would be a v a i l a b l e to Japanese buyers at that time.  The m i l l s ' experience i n the period 1980-82 with c o a l  shipments i s relevant.  The Japanese s t e e l industry experienced  severe,  and extremely c o s t l y d i s r u p t i o n s i n supply as a r e s u l t of labour unrest or t r a n s p o r t a t i o n blockages a f f e c t i n g three of i t s major s u p p l i e r s : A u s t r a l i a and the United States.  Poland,  The f o u r t h major s u p p l i e r , Canada, had a  poor record of labour peace as w e l l .  One Japanese spokesman estimated  that the industry's experience with s u p p l i e r s had been 60-70% as a r e s u l t 12 of t e c h n i c a l and labour problems a t the mines. The response of the industry has been to overbuy, by as much as 30-60%, 13 according to some estimates.  Canadian industry o f f i c i a l s  interviewed  indicated that 10-15% overbuying i s considered normal, accepted p r a c t i c e . What i s a "normal" margin of safety f o r an industry located i n a country with p l e n t i f u l a l t e r n a t i v e sources of supply or s u b s t i t u t e s i s , of course, l i k e l y to be very d i f f e r e n t from the margin of safety required by 1  i n d u s t r i e s almost 100% dependent on imports.  - 56 -  3.  What P r i c e D i v e r s i f i c a t i o n :  Lessons from the Case of Western Canadian  Coal The d e s c r i p t i o n of the Japanese s t e e l industry's approach to buying c o a l has emphasized the p r i o r i t y attached  to d i v e r s i f y i n g sources of supply.  D i v e r s i f i c a t i o n of supplier i s important as a strategy to minimize the damage to the s t e e l industry or, i n the case of thermal c o a l , to those sectors of the Japanese economy dependent on e l e c t r i c power provided by coal burning u t i l i t i e s , i n the event of a c u t o f f of supply from any s i n g l e source.  Investment decisions taken by the s t e e l industry, however, are  also rooted i n the knowledge that Japanese s t e e l must remain i n t e r n a t i o n a l l y competitive.  While Northeast coal i s today priced almost $30.00  a tonne higher than other comparable q u a l i t y c o a l s , the s t e e l m i l l s , at the time of signing the basic agreements, f u l l y expected i t to be competitive with the world p r i c e .  The basic s t a r t i n g p r i c e i n 1980 was higher than  that f o r c o a l from the older Southeast B.C. mines, an "acknowledgement" by the s t e e l m i l l s that the new mines would have, i n i t i a l l y , higher  costs.  The Northeast coal p r i c e was, however, i n a range comparable to that f o r Gregg River c o a l . The outcome of the protracted Northeast c o a l p r i c e and tonnage negotiations w i l l provide considerable  i n s i g h t i n t o the question:  how  much of a premium w i l l the Japanese m i l l s pay to safeguard the f l e x i b i l i t y d i v e r s i f i e d sources of supply provides?  Canada's major competitor i s  A u s t r a l i a , which has coal of comparable q u a l i t y , at lower cost (the coal i s closer to port and cheaper to mine).  Yet the m i l l s wish to lessen  t h e i r dependence on A u s t r a l i a n c o a l , given that country's poor record as a r e l i a b l e supplier. the m i l l s .  Canadian c o a l also provides bargaining leverage f o r  Thermal coal from South A f r i c a i s much cheaper than Canadian,  - 57 -  but the p r i c e i s r i s i n g and the mines are p r i m a r i l y oriented to the European market and the p h y s i c a l supply i s , , therefore, t i g h t .  Coal from  the PRC and USSR has advantages over Canadian coal i n terms of geographic proximity and p r i c e , but since supplies have been negotiated between governments, the m i l l s do not look on them as being wholly secure.  I f government  p o l i c y changes, the m i l l s r e a l i z e they may lose t h e i r source of supply. Japanese industry spokesmen warn that Canadian coal i s i n danger of becoming uncompetitive.  The FY 1980 p r i c e d i f f e r e n t i a l s between old mines  (Balmer, $63.95) and new (Gregg R i v e r , $73.50; Quintette, $75.00) suggests than an acceptable premium f o r new coals i s i n the range of $10-12 a tonne. 14 The s t e e l industry i s reportedly w i l l i n g to s e t t l e at about $14.00. The experiences of the mines i n winning p r i c e and/or volume commitments from the Japanese buyers i l l u s t r a t e a Japanese concern with " f a i r share" i n a l l o c a t i o n s . ^  The Japanese c o a l buyers s t r i v e to ensure  " f a i r and equal treatment" to mines i n the same category, and there i s an understanding that the s p e c i a l . c o n s i d e r a t i o n p r e s e n t l y extended to the new mines i n the Northeast w i l l not l a s t i n d e f i n i t e l y . Important as p r i c e i s the question of contracted volumes of c o a l . The Japanese m i l l s have been seeking reductions of approximately 25% i n contract tonnages from a l l s u p p l i e r s , yet have made commitments to take f u l l contract volumes from the Northeast mines. ^  The Canadian volumes  would be balanced by cutbacks from other s u p p l i e r s , l i k e l y American, which do not have long-term contracts.  The recently-concluded n e g o t i a t i o n s  between Westar (33% Japanese-owned) are r e v e a l i n g .  Westar has accepted  a $7.87 a tonne cut i n the p r i c e of i t s G r e e n h i l l s m e t a l l u r g i c a l c o a l f o r the balance of d e l i v e r i e s i n i t s present c o n t r a c t , from A p r i l 1984 to  - 58 March 1986. I t has, however, received guarantees that the m i l l s w i l l take f u l l contracted tonnages ( w i t h i n a s p e c i f i e d t o l e r a n c e ) .  The m i l l s  have a l s o accepted the long-term, 20-year mine plan f o r the Balmer operat i o n , the f i r s t step i n renewing the contract.  Although d e t a i l s have not  been worked out, the m i l l s have agreed to extend the G r e e n h i l l s contract as w e l l , a commitment that w i l l help reassure nervous Westar shareholders. In a move that w i l l help ease the impact of the lower p r i c e Balmer w i l l receive for i t s c o a l , the m i l l s have agreed to exert t h e i r "best e f f o r t s " to set i n place a payment mechanism whereby Westar w i l l be paid i n advance, i n yen, at a f i x e d exchange r a t e .  The company would then be able  to convert some of i t s e x i s t i n g h i g h - i n t e r e s t Canadian and U.S. debt i n t o lower-cost yen loans.  ^  While i t would be premature to venture any f i r m conclusions from these two examples, they do suggest that mines i n which Japanese have taken an equity i n t e r e s t may receive s p e c i a l consideration from the steel m i l l s .  The r e s u l t s of contract negotiations with other mines i n  the old group may. help to confirm whether there i s a trend. The volume commitments undertaken t h i s year f o r Canadian coal confirm the s t e e l industry's long-term concern with maintaining a d i v e r s i f i e d supply base.  The squeeze on p r i c e s i n d i c a t e s that there i s a l i m i t to  the amount they are w i l l i n g to pay f o r d i v e r s i f i c a t i o n .  - 59 -  Chapter 3 Footnotes *  1.  Gerald C u r t i s , "Big Business and P o l i t i c a l Influence", op_. c i t . , p. 59.  2.  The p r i c e of scrap has gone up about 20% i n the past ten years, while the cost of p i g i r o n production has nearly doubled. See Horie, 1984 Coal Manual, p. 5.  3.  See "Economic S t a b i l i t y Without I n f l a t i o n : Agenda f o r the Japanese Economy", a statement by Keidanren on economic management. Keidanren Review, No. 86 ( A p r i l 1984), pp. 11-16, and "Toward Balanced, Sustainable Growth", I b i d , No. 87 (June 1984), pp. 5-7. The Advisory Council on Enforcement of A d m i n i s t r a t i v e Reform has c a l l e d f o r sharp cutbacks i n government budgets and reductions i n public works spending, a p o s i t i o n supported by Prime M i n i s t e r Nakasone. See " F i s c a l P o l i c y a Hot Debate Topic", The Japan Times Weekly, August 4, 1984, and "Council Backs A u s t e r i t y Budget", I b i d , August 11, 1984.  4.  Shinohara, I n d u s t r i a l Growth, op. c i t . , p. 52.  5.  Vogel suggests that the business community "lacks the cohesiveness to t a c k l e disagreements between i n d u s t r i a l sectors or between companies w i t h i n a sector and that, despite businessmen's bravado, they are eager to r e l y on MITI f o r advice." Ezra Vogel, "Guided Free Enterprise i n Japan", Harvard Business Review, V o l . 56, No. 3 (May-June, 1978), p. 165.  6.  See Michael Donnelly, "Setting the P r i c e of Rice: A Study i n P o l i t i c a l Decisionmaking", i n T.J. Pempel, ed., Policymaking i n Contemporary Japan, op. c i t . , pp. 143-200, f o r a d e s c r i p t i o n of the i n t e r p l a y of p o l i t i c a l and economic f a c t o r s i n the annual negotiations to set the p r i c e to be paid to Japanese r i c e farmers. Wada's study of the p o l i t i c s of budget-making i n Japan stresses the primacy of p o l i t i c a l considerations over bureaucratic concerns i n the drawing up of the annual n a t i o n a l budget. Wada Y o s h i k i y o , "The P o l i t i c s of Budgetting i n Japan", op_. c i t .  7.  Fereidun Fesharaki and Wendy Shultz, " O i l and Gas P a c i f i c Basin" (Paper presented to the Conference U.S.-Japan Cooperation and Competition, East A s i a Wilson Centre, Washington, D.C, A p r i l 15, 1983),  Trade i n the on Prospects f o r Program, Woodrow p. 30.  8  Nemetz and V e r t i n s k y , "Japan and the I n t e r n a t i o n a l Market f o r LNG", op. c i t . , p. 11.  - 60 -  9.  Nemetz and Vertinsky c i t e a long l i s t of delays i n scheduled c o n s t r u c t i o n of power plants f u e l l e d by LNG, c o a l and uranium as evidence that Japan, " l i k e many of her Western a l l i e s , has been c o n s i s t e n t l y unable to assess accurately the extent of g l o b a l recessionary c o n d i t i o n s , t h e i r i n t e r r e l a t i o n s h i p with energy p r i c e s and consequently energy use." I b i d , p. 10.  10.  The s t e e l m i l l s are overcontracted for c o a l : b l a s t furnaces alone had a surplus of coking c o a l supply from p r o j e c t mines of 5 m i l l i o n tonnes i n 1983 and are expected.to have a surplus of 9 m i l l i o n metric tonnes i n 1984. Horie, 1984 Coal Manual, p. 5.  11.  "Take a Giant Step: The Northeast Coal and Transportation Development", Gem F i l m s , for the Government of B r i t i s h Columbia (1984).  12.  See a l s o A l b e r t Sigurdson, "Quintette H i t By D e l i v e r y S h o r t f a l l " , Toronto Globe and M a i l , February 10, 1984.  13.  Halvorson, 1983, p. 39.  14.  "Coal P r i c e Dispute Shadows Opening of Quintette Mine", Toronto Globe and M a i l , August 11, 1984.  15.  See Ezra Vogel, "Toward More Accurate Concepts", op. c i t . , pp. x x i i i . x x i v , f o r a d i s c u s s i o n of the concept. 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Cambridge, Mass.: Harvard U n i v e r s i t y Press, 1976.  - 67 -  Appendix 1 Imports of Coking Coal by Area, 1973-83 Australia  USA  Canada  Others  1973  43.3%  30.5%  19.1%  7.1%  1979  45.7%  24.8%  18.9%  10.5%  1980  41.4%  31.9%  17.2%  9.5%  1981  43.9%  33.9%  14.1%  8.1%  1982  39.0%  37.5%  14.9%  8.7%  1983  46.6%  26.1%  17.6%  9.7%  * Includes USSR, South A f r i c a , Poland, PRC, others  Source:  The Japan Iron and S t e e l Federation, "The Steel Industry of Japan 1984", p. 12.  - 68 -  Appendix 2 Imports of Thermal Coal by Area ( i n 1,000 M/T) 1975  1976  1977  1978  1979  1980  1981  1982  PRC  135 (35%)  125 (21%)  167 (18%)  173 (16%)  236 (14%)  741 (10%)  1,305 (11%)  1,618 (12%)  USSR  31 .( 8%)  211 (35%)  237 (25%)  123 .. 129 (11%) ( 8%)  Canada  -  -  -  12 ( 1%)  USA  -  -  -  South A f r i c a  -  15 ( 2%)  217 (57%)  248 (41%)  Australia Others  -  Total  383  4 603  6 527 (56%) 937  Compared w i t h Previous Yr-. ,146.7% 157.4% 155.4%  248 ( 3%)  271 ( 2%)  186 ( 1%)  -  600 ( 8%)  1,108 ( 9%)  1,259 ( 9%)  -  640 ( 9%)  2,330 (19%)  1,388 (10%)  488 ( 7%)  1,853 (15%)  2,186 (16%)  5,399 (44%)  7,040 (51%)  25 29 ( 2%) ( 2%) 749 1,282 (69%) (76%) 1,082  1 1,677  25.5% 155.0%  Customs S t a t i s t i c s , M i n i s t r y of Finance % may not equal 100% due to rounding Source:  1984 Coal Manual, p. 498.  •4,517 (62%) 7,234 431.4%  5  40  12,271  13,717  169.6%  111.8.  - 69 -  Appendix 3 New Thermal Coal Mines 1'.  Mercoal (Manalta Coal L t d . ) , A l b e r t a J o i n t development terms f o r t h i s project were reached i n October 1981 between the importer, Idemitsu Kosan, and Manalta. The property i s being developed together with the Shaughnessy p r o j e c t . Production startup i s scheduled f o r 1985.  2.  Quinsam (Quinsam Coal L t d . , owned by Weldwood of Canada and Brinco Mining L t d . ) , B.C. Importer: Startup:  3.  Kipp (Petro Canada E x p l o r a t i o n ; Union Gas), A l b e r t a Importer: Startup:  4.  Marubeni 1985  Nichimen not decided  Shaughnessy (Fording Coal L t d . ) , A l b e r t a An unincorporated j o i n t venture of Fording Coal L t d . (80%) and Idemitsu I n t e r n a t i o n a l Resources Canada L t d . (the Canadian subsidiary of Idemitsu Kosan) (20%), established i n 1981. Importer: Startup:  5.  M i t s u i & Co. 1985  MacLeod River (Manalta Coal L t d . ) , A l b e r t a A basic agreement f o r e x p l o i t a t i o n of t h i s property was reached between Manalta and the EPDC i n 1980. The proposed equity shares i n the case of e x p l o i t a t i o n are Manalta Coal, 70%; EPDC, 15%, M i t s u b i s h i Mining Cement, 15%. Importer: Startup:  6.  Mitsubishi 1987  Sage Creek (Sage Creek Coal L t d . , owned 60% by Rio Algom, 40% by Pan Ocean O i l ) , B.C. Importer: Startup:  Source:  Mitsubishi 1985  1984 Coal Manual, pp. 410-411; 474-477.  - 70 -  The Obed Marsh mine i n A l b e r t a started operations i n 1984 with 5-year contracts with the Japanese u t i l i t i e s f o r thermal c o a l d e l i v e r i e s u n t i l 1988. Owned by Union O i l of Canada L t d . (84%), Rescon Coal Holdings L t d . (10%) and Norcen Energy Resources ( 6 % ) , the Japanese trading companies handling i t s c o a l sales are M i t s u b i s h i Corp. and Sumitomo Corp. (1984 Coal Manual, p. 449.) The Coal V a l l e y operation i s an older thermal c o a l mine owned by Luscar Stereo L t d . , a 100% s u b s i d i a r y of Luscar L t d . The Japanese importer i s M i t s u i & Co. The mine has 5-year contracts with three Japanese cement and two power companies. ( I b i d , p. 448.)  - 71 -  Appendix 4 Coking Coal Operations Under Survey Monkman, B.C. (Petro Canada E x p l o r a t i o n Inc.. , 50%, Canadian Superior E x p l o r a t i o n L t d , Mclntyre Mines L t d . , Sumitomo Corp.) Importer: Sumitomo Corp. Planned production: 3 m i l l i o n tonnes p.a. Hosmer-Wheeler, B.C. (Westar Mining L t d . subsidiary) Importer: M i t s u b i s h i Corp. Planned production: 2 m i l l i o n tonnes p.a. Saxon, B.C. (Saxon Coal Ltd.: Denison Mines, 50%; Rukrkohle AG 22.5%; M i t s u i & Co., 22.5%; Usinor, 5%) Importer: M i t s u b i s h i Corp. Planned production: 4 m i l l i o n tonnes p.a. Sage Creek, B.C. (Rio Algom Mines Ltd. , 60%, Pan Ocean O i l L t d . , 40%) Importer:  M i t s u b i s h i Corp.  Planned production:  1.7 m i l l i o n tonnes p.a.  Granridge, A l b e r t a (Can Pac Mineral L t d . (Canadian P a c i f i c R a i l ) ) Importers: M i t s u i , Marubeni, Sumitomo Planned production: 3 m i l l i o n tonnes p.a. Sukunka,  B.C.  (BP Coal 87.5%, Brascan Resources L t d . , 12.5%) Importers: Nissho Iwai Corp. , Marubeni Corp. Planned production: 3 m i l l i o n tonnes p.a. Mt. Spieker, B.C. (Teck Corp., 65%; Ranger O i l L t d . ,  35%)  Importer: Nishimen Corp. Planned production: 1 m i l l i o n tonnes p.a.  - 72 -  Elk R i v e r , B.C. (Scurry Rainbow O i l L t d . , Elco Mining L t d . (W. Germany)) Importers: Nichlmen, M i t s u i , Okura, Marubeni Planned production: 4 m i l l i o n tonnes p.a. Kakwa, A l b e r t a (Cyprus A n v i l Mining Co.) Importers: Nichimen, Tonan, Marubeni Planned production: 3 m i l l i o n tonnes p.a.  Source:  1984 Coal Manual, pp. 294-295  - 73 -  Appendix 5 P o t e n t i a l Annual Coal Production ..Northeast B.C. P o t e n t i a l Annual Coal Production i n M i l l i o n s of Tonnes Property  Coking  Quintette Bullmoose Sukunka Monkman Burnt River Goodrich Bow River Belcourt Saxon Mt. Spieker Hasler Creek Cinnabar Carbon Creek Willow Creek Wapiti TOTAL  Source:  5.0 1.7+ 3.0 3.3 0 1.0 0 4.0 4.0 1.0 0.5 0 2.5 0 0 26.0+  Thermal 1.0+ 0 0 1.0 1.0  Total  1.3 0 0 o' 0 2.0 0 0.6 1.0  6.0+ 1.7+ 3.0 4.3 .1.0 1.0 1.3 4.0 4.0 1.0 0.5 2.0 2.5 0.6 1.0  7.9+  33.9+  N.A.  A Benefit-Cost A n a l y s i s of the North East Coal Development (Report prepared by the Economic, F i n a n c i a l and Marketing Sub-Committee (and i t s consultants) under the CanadaB r i t i s h Columbia Subsidiary Agreement on North East Coal and Related Developments) (Ottawa: Government of Canada, Regional Economic Expansion; V i c t o r i a , B.C.: Province of B r i t i s h Columbia, M i n i s t r y of Industry and Small Business Development, 1982), p. 54.  

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