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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. McGill University, 1971 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS i n THE FACULTY OF GRADUATE STUDIES (Department of P o l i t i c a l Science) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA October 1984 0 Heather R. Gibb, 1984 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department of The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date DE-6 (3/81) - i i -Abstract In the current si 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 deliberately over-stimulated the supply by offering 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 steel industry have collaborated to set the conditions for oversupply. The thesis finds at the root of th i s assumption remnants of the "Japan Incorporated" stereotype. Examining the case of the steel 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 coal by Japanese interests i s discussed to introduce further evidence of the d i v e r s i t y of interests which participate i n policy decisions i n Japan. An examination of the ste e l industry's approaches to acquiring coal reveals that a major concern of the industry has been to find 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 international 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 supplier. The case of Western Canadian coal 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 security of their coal contracts, Japanese buyers increas-ingly have chosen to invest d i r e c t l y i n the coal mine. - i i i -Table of Contents Page Abstract i i Acknowledgements v Introduction 1 Footnotes 4 Chapter 1: 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 for a New Entrant 14 6. The Institutions of Government 17 7. The Zaikai 21 8. Summary and Conclusions 22 Footnotes 27 Chapter 2: Western Canadian Coal 33 1. Introduction 33 2. The Place of Western Canadian Coal i n Japan's Overall Metallurgical and Thermal Coal Requirements 34 ( i ) Metallurgical Coal 34 ( i i ) Thermal Coal 35 - i v -Page 3. History of Japanese P a r t i c i p a t i o n i n Western Canadian Coal Mine Development 35 ( i ) Coal mine "groups" 36 ( i i ) Joint ventures 37 4. Buying and Selling Coal 39 ( i ) The trading companies 39 ( i i ) The "coordinators": the steel industry buying group 40 5. The Western Canadian Mines: A History of Japanese Investment 41 ( i ) The old mines 41 ( i i ) The new mines, Southeast B.C. and Alberta 43 ( i i i ) The new mines, Northeast B.C. 44 Footnotes 47 Chapter 3: Summary and Conclusions 51 1. "Japan Inc." Re-examined: The Changing Role of MITI 51 2. The "Conspiracy Theory" and Japanese Coal Procurement 53 3. What Price 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 instruct me i n the mysteries of the coal industry: Geoffrey Carter, Midland Doherty Ltd.; N.H. Halvorson,.H.N. Halvorson Consultants Ltd.; Don Morgan, Placer Development Ltd. To the sho-in of Mitsubishi Canada Ltd. and Sumitomo Canada Ltd., my thanks for answering my questions about their shosha. I am grateful to Nippon Kokan K.K. for providing material on the Japanese steel industry. Hugh Courtenay, Westar Mining International Ltd., and Yoshida Takeshi, Nissho Iwai Coal Development (Canada) Ltd., were particu-l a r l y generous with their time. Matsukura K o j i , Consul, Consulate-General of Japan at Vancouver, and Yamakoshi Atsushi, Keidanren, patiently answered my many questions and provided research material. I am grateful to members of my committee, Kal H o l s t i , Frank Langdon and George P e r l i n , for the i r cooperation and assistance. To Frank, my supervisor, I owe particular thanks for sharing his time and material so fre e l y . The assistance of the Department of P o l i t i c a l Science with funding and technical arrangements i s acknowledged with sincere appreciation. F i n a l l y , I wish to express my appreciation to Bob Milko for his c r i t i c i s m and suggestions and, most important, support and encouragement throughout this venture. - 1 -INTRODUCTION In FY 1983, Japanese steel 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 re-cession and depressed markets for s t e e l , the steel m i l l s ' demand for coking coal continued a downward s l i d e which had begun two years before. Agreements with suppliers around the world were re-negotiated, and a l l were forced to accept price rollbacks and volume reductions averaging about 15%. * 2 Canadian shipments actually declined to about 76% of contracted tonnages. Output from three major new mines i n B r i t i s h Columbia and Alberta i s scheduled to reach f u l l volume i n 1984, bringing the Japanese steel m i l l s ' contract commitments for Canadian coal 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 further gloomy forecasts for demand and 4 pressure from Japanese purchasers for further cuts i n price and volume. Some observers foresee the investment of upwards of $2.9 b i l l i o n i n public funds the Northeast development represents culminating i n pro-6 jects 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 unprofitable operations of surviving mines have been, and w i l l continue to be shut down, causing severe unemployment i n regions already suffering 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 suffer as a result of the development of unnecessary capacity i n the North. ^ In such a highly charged environ-ment, suggestions are made that Japanese buyers have deliberately encouraged overexpansion of coal production to create t h i s glut, thus g achieving considerable cost savings for themselves. - 2 -The allegation appears to disregard the fact that similar results 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 deliberate "strategy" by the Japanese to depress world coal prices over-states and oversimplifies the case. If we understand by "strategy" merely "the display or exercise of s k i l l and forethought i n carrying out of one's plans" a study of the Japanese steel industry's response to the challenges presented by both domestic and international conditions to the a c q u i s i t i o n of supplies of coal which are both reasonable i n p r i c e , and, to the greatest extent possible, secure from disruption, does indeed reveal a "strategy": d i v e r s i f i c a t i o n . Japanese interest i n Western Canadian coal derives from that objective, and t h i s thesis 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 offers. C r i t i c s suggest, however, that the "Japanese strategy" involves both the Japanese government and industry collaborating 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 big business" who comprise a "regular and effective a l l i a n c e and control decision-making -, . . • „ 12 on major policy issues. The e l i t e model of the Japanese decision-making apparatus rests on three basic p r i n c i p l e s : that the groups are normally united i n purpose and action; that they participate i n most, i f not a l l , important policy decisions, and that individuals and groups other than those included i n the e l i t e categories are regularly excluded from decision-making processes - 3 -13 on important policy issues. Case studies, however, tend to cast doubt on the e l i t i s t perspective. Among the most v i s i b l e examples i s the f i e r c e 14 factionalism which i s the trademark of the LDP. Gerald Cur t i s ' study of interaction between business and government stresses the importance of changes i n the economy and socia l structure which have made the business community "increasingly p l u r a l i s t i c " . ^ This thesis uses the case of coal to highlight the diverse, and often competing interests which factor i n the Japanese coal buying "strategy". By looking at the evolution of the roles of the major actors, the analysis 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 incorrect to assume that e l i t e groups are "normally united i n purpose and action"; that a growing number of groups participates i n most important policy decisions, and that the "big three" e l i t e groups cannot "regularly exclude" other groups from the decision-making process. . Chapter 1 presents the Japanese setting, 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 for 62.573. m i l l i o n metric tonnes but took 54.23 m i l l i o n . "The Steel Industry of Japan 1984", Japan Iron and Steel Federation, n.p., p. 12. 2. Ibid. 3. Horie Hiroyuki, Coal Manual, 1984 Edition (Tokyo: The Tex Report Ltd., 1984), pp. 300-302. The FY 85 figure assumes that neither the Balmer nor the Smoky River contracts are renewed. 4. "The Steel Industry of Japan 1984", p. 12. One forecast estimates that the Japanese ste 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. Baylis and Simon D. Handelsman, "International 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. Carter, "Metallurgical Coal: B r i t i s h Columbia's Panacea or A c h i l l e s Heel" (Toronto: Midland Doherty Ltd., December 1983), p. 21. 6. Ibid, 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 Ltd., "New Coal Production from Southeastern B.C. Compared with Proposed Northeastern B.C. Development" (Study prepared for the Council of Mayors of South-eastern B.C., July 1980); Jacqueline K. Maund, "The Implications of the Japanese Resource Procurement Strategy for Staple Resource Regions: An Examination of Coal Mining i n Southeastern B.C." (M.A. Thesis, Depart-ment of Geography, University 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 Baylis and Handelsman, p. 2; Maund, p. i i i ; Peter Nemetz and Ilan Vertinsky, "Japan and the International Market for LNG" (Canada and the Changing Economy of the P a c i f i c Basin, Working Paper No. 19, Preliminary Draft, Vancouver: Ins t i t u t e for Asian Research, University of B r i t i s h Columbia, February, 1984), p. 11. 9. See, for example, Dani Rodik, "Managing Resource Dependency: The United States and Japan i n the Markets for Copper, Iron Ore and Bauxite", World Development, Vol. 10, No. 7 (1982), p. 551. Rodrik rejects "the complaint that Japan was deliberately attempting to maintain excess supply i n the iron 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 steel m i l l s , u n t i l the early 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 global productive capacity has produced depressed prices. T.P. Mohide, C.L. Warden, J.D. Mason, "Towards a Nickel Policy for the Province of Ontario" (Mineral Policy Background Paper No. 4, Toronto: Ministry of Natural Resources, D i v i s i o n of Mines, 1977), pp. 12-13, cited i n David Haglund, "The West^SE Dependence on Imported Strategic Minerals: Implications for Canada" (Paper presented to the CPSA, Vancouver, June, 1983), p. 10. 10. Funk and Wagnells New Standard Dictionary of the English Language, 1959, s.v. "strategy". 11. The expression has different meanings for different users, but generally i s meant to suggest that Japan behaves l i k e one large corporation. Some writers suggest by i t the domination.of government by big 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 writers mean by the expression c o l l u s i o n between the two, with, occasionally, the added implication 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: University 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 Literature", i n Policymaking i n Contemporary Japan, T.J. Pempel, ed. (Ithaca and London: Cornell University Press, 1977), pp. 22, 23. 13. Ibid, p. 35. 14. See Fukui, op_. c i t . , for a description 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; cited by Fukui, op. c i t . , p. 39. - 6 -CHAPTER 1: The Japanese Setting 1. Introduction Among the myths that continue to cloud our understanding of the interaction 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 coal purchasing. They do not comprise a homogeneous group, nor are t h e i r s p e c i f i c interests always i n harmony. 2 Recent analyses of Japan's i n d u s t r i a l re-structuring and energy 3 p o l i c i e s a t t r i b u t e the policy outcome more to the effects of market forces and a certain 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 quantities of coal has been determined largely by the steel industry. I t i s a central argument of t h i s thesis that the industry's coal purchasing a c t i v i t i e s are largely an ad_ hoc response to domestic and international economic conditions, not the product of a government-industry strategy to control the international coal market. The steel industry i s not the only user of coal i n Japan and, i n the wake of the o i l crises 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 substitute thermal coal for 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 Ministry of International Trade and Industry's (MITI), authority 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 actors, 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 history 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 effects 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 steel companies, Yawata Steel 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 policy of strengthening the international competitiveness of the steel 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 Fa 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, after three months of deliberation, 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 administration of the antimonopoly law (AML) with respect to measures for i n d u s t r i a l reorganiza-t i o n . ^ 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 within MITI and industry ran the country. The merger can be viewed as a symbolic event which led to widespread discussion 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 big business and big 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 policy which placed emphasis on rapid economic growth: 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 services. The Nippon Steel merger prompted more vigorous enforcement by the 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 central coordinating role i n o v e r a l l energy policymaking, but i n other sectors, i t takes a more reactive stance. Its t r a d i t i o n a l c l i e n t s , are the older industries: t e x t i l e s , petrochemicals, paper and pulp, s t e e l ; industries which benefitted from MITl's "guidance", vast information base and broad national overview. They also enjoyed protection MITI could provide, through t a r i f f and other regulatory controls, from foreign competition. In the period of structural 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 into decline. National p r i o r i t i e s have shifted to high technologies, the fiefdom of other m i n i s t r i e s , notably Science and Technology, and Posts and Tele-communications. A recent analysis suggests that the flood of MITI budget requests for high technology-related a c t i v i t i e s derives as much from bureaucratic motives to restore the ministry's declining position as from 9 a genuine commitment to promote high technology. 3. Adjusting the G r i s t m i l l The relationship 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. Different sectors require different adjustments. ^ An examination of the history of relations between the steel industry and MITI shows that the position of the wheel has changed as the Japanese economy and the industry have strengthened. Increasingly, i t appears that the mover of the wheel i s industry, not government. The st e e l industry has a history 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 closely controlled from the period immediately after WW I I u n t i l approximately 1960 through the Industrial Rationalization Council and the Foreign Capital Law. MITI Vice-Minister Matsuo proposed a steel industry law i n 1960 to establish an investment coordination c a r t e l as an exception to the AML, but the industry rejected i t i n favour of s e l f -coordination. By 1965, the attempt at self-regulation had broken down, and overcapacity i n the industry, combined with a recession, threatened to bankrupt several firms. The steel 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 authority. MITI could restrict'Sumitomo's coking coal imports to an amount necessary to produce the proposed quota, but yielded. Information obtained from interviews with industry representatives revealed a similar attitude among industry leaders to MITl's powers to "control" foreign exchange during the 1960s. Growing companies acquired their own foreign exchange and the steel companies seem to have had their way, regardless of 13 regulations, after "under the surface" discussions. The "Sumikin a f f a i r " , as the Sumitomo incident was c a l l e d , exposed the industry's i n a b i l i t y to regulate i t s e l f and, fearing the results of excessive i n t r a -firm competition, the presidents of Yawata and F u j i proposed the merger 14 which eventually created Nippon Steel. The extent to which Nippon Steel e f f e c t i v e l y dictates coal prices i s a question of considerable interest 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 . ^ The drop i n price Nippon Steel negotiated i n 1983 with P i t t s t o n , the largest single 16 U.S. supplier, for example, set a benchmark for other U.S. suppliers. Nippon Steel, which acts as s t e e l industry "coordinator" for A u s t r a l i a (and, e f f e c t i v e l y , for 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 blast furnace m i l l s have not been unanimous i n their support of expensive Canadian coal projects: Kawasaki Steel, for example, was reluctant to take out equity i n the Quintette project because of concerns about soaring costs.^ D'Cruz, i n his analysis of the steel industry's buyers' group, states that the steel companies seek the "informal approval" of Nippon Steel before making any major decisions. ^ The uproar over the Nippon Steel merger was one force among several that contributed to the weakening of MITl's prestige and authority. The JFTC's charges against the o i l r e f i n e r i e s i n 1974 challenged 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 ' action i l l e g a l despite administrative 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 their action was acceptable, since i t 20 had been endorsed by MITI. The merger also prompted widespread discussion of the merits of a n t i -monopoly enforcement and l e d , eventually, to the 1977 strengthening of the AML. The amendments can be viewed as a " p o l i t i c a l phenomenon", action taken by the governing LDP i n an attempt to shore up an image badly 21 tarnished by the 1974 Lockheed bribery 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 vigorously promoting relaxation of c a r t e l regulations and has picked up some support i n the Diet. S t i l l , the LDP, having experienced renewed setbacks i n the 1983 Lower House elections, may be reluctant to y i e l d to big business i n opposition to strong consumer group and small- and medium-business group expectations of s t r i c t enforce-ment. 4. Securing Stable Supplies of Coal The problem of resource procurement for Japan, a country of limited natural resources, i s acute. Coal i s both a key component i n iron and ste e l making and an important alternative to o i l as a f u e l . Domestic supplies of metallurgical coal are both i n s u f f i c i e n t to meet requirements and expensive (because of quality l i m i t a t i o n s and delivery costs), thus the Japanese s t e e l industry r e l i e s on imports for approximately 94% of i t s requirements. The use of thermal coal for e l e c t r i c power generation became more at t r a c t i v e when o i l prices soared following the two o i l c r i s e s . Imports of thermal coal rose from 383,000 metric tonnes i n 1975 to 23 1,677,000 metric tonnes i n 1979. In 1982, Japan imported approximately 48% of i t s thermal coal requirements. 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 forecast to increase i n importance to 10% i n 1992. 2 4 In dealing with the problem of resource security, Japan has adopted a multi-point approach: ( i ) d i v e r s i f y source of supply and, i n the case of energy resources, substitute f u e l s , as a means of assuring adequate and r e l i a b l e flows at reasonable, predictable prices; - 13 -( i i ) exploit domestic deposits and c a p a b i l i t i e s ; ( i i i ) stockpile; (iv) invest i n offshore resource development projects; (v) extend low-interest loans to producers. The relevance of each option, and the identity of the major promoter, w i l l vary according to commodity. Deposits of coal are broadly distributed 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 st 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 unattractive physical properties of coal, 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 factors to consider. Among the economic: the p o s s i b i l i t y of future shortages, either as a result of depleted supplies, or as a result of a lack of timely investment i n resource development to ensure s u f f i c i e n t quantities w i l l be available to meet anticipated demand some time i n the future. Investment may not be forthcoming as a result of several factors, including the i n a b i l i t y , or unwillingness, of the host government to develop the resource for foreign 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. Existing or potential internal p o l i t i c a l i n s t a b i l i t y i n major pro-26 ducing areas are also important considerations. The termination of trade relations with the People's Republic of China i n 1958 cut off 27 supplies of Chinese coal to the Japanese ste e l m i l l s . One effect of the 1973.oil c r i s i s and the scramble for alternatives to o i l was to send prices for coal on the U.S. spot market, where Japanese buyers made - 14 -substantial purchases, soaring 250% i n 1974 over the previous year's 28 prxces. 5. Options for a New Entrant In attempting to enter international markets, Japanese buyers faced a common obstacle: other investors, usually 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 , for instance, the p r i n c i p a l international o i l companies, had, by 1929, developed a network of allianc e s through which they e f f e c t i v e l y controlled world trade. Standard O i l Co. and Mobil, together, controlled 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 Asia. Having f a i l e d i n WW I I to secure control 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, relying primarily on foreign-owned o i l companies for 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 with 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 foreign 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 coal 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 for integrative arrangements, which, from the example provided by the o i l majors, offered the best solution to the problem of obtaining r e l i a b l e 31 supplies at the lowest price. The country's limited reserves of foreign exchange were directed 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 foreign 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 their requirements on the spot market, or from developing countries on short-term contracts. The history of Japanese coal procurement p a r a l l e l s that for iron ore: the buyer i s the same. To improve thei r bargaining leverage, the largest steel companies formed a "buying c a r t e l " , the "Committee of Ten", i n 32 1964, to coordinate purchases as a single unit, while Australian mining companies and states competed against each other. As a r e s u l t , Japanese buyers were able to negotiate contract prices F.G.B., not C.I.F., securing for Japanese benefits that would accrue from future declines i n transporta-33 t i o n costs. Japanese were able to obtain Australian ore, at landed cost 34 i n Japan, at about 20% less than imports from Asia, A f r i c a and America. In the long run, Japanese buying practices paid off better than did American integrative practices: according to Rodrik, i n 1960, U.S. steel m i l l s had a 16% cost advantage over Japan i n iron ore input; by 1976, the 35 advantage had swung to a 43% disadvantage. Not locked into integrative arrangements i n other countries, Japanese steel m i l l s could take advantage of the discovery of iron ore i n A u s t r a l i a and participate i n development by offering long-term contracts and loans. American companies, on the other hand, suffered heavy losses from nation-a l i z a t i o n of mines by increasingly 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 coal mining capacity i n A u s t r a l i a i n the 1960s by offering to provide c a p i t a l assistance to new projects. Long-term contracts negotiated with new projects helped begin large scale development of Australian coal. Long term contracts and promises of f i n a n c i a l assistance were offered, to potential Canadian suppliers i n the same period, but were not realized u n t i l the following A A 3 6 decade. A monopsonist buyer, the s t e e l m i l l s are able to play one supplier against another. In the current s i t u a t i o n of an oversupply of coal, Japanese buyers can make price cuts and volume reductions negotiated - 16 -with South A f r i c a the basis for negotiations for supplies from other countries. The 5-10% price cut agreed to by South African mines i n 37 January, 1984, "set the tone" of the market. In May, Australian hard coking coal prices f e l l by U.S.$1.50-2.50 a tonne, below those previously 38 agreed upon by the Australian government and coal mining industry. In Canada, Byron Creek C o l l i e r i e s Ltd., which supplies the Japanese cement industry with thermal coal, cut i t s prices by 22%, and Marketing Vice-President Arthur Wilson indicated that the competition from South A f r i c a 39 was a key factor i n the decision. Long-term contracts entered into by the Japanese st 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 glut, may help prevent the premature closure of uneconomic mines. They are not, however, f a i l s a f e . In times of s c a r c i t y , the Japanese buyers lose their leverage. Neither do contracts, which are open to re-negotiation and, i n any event, are almost impossible to enforce, offer as much s t a b i l i t y as the Japanese buyers wish. Australian iron ore contracts had barely been signed i n 1966 when the 40 Australian side called for re-negotiation. The solution for Japanese companies has been to enter into equity p a r t i c i p a t i o n i n foreign mining operations, f i r s t i n A u s t r a l i a i n the la t e 1960s then, with the l i f t i n g of foreign exchange controls, 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, especially since 1980, provided loans and guarantees, but has been served as well 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 highly effective response to the challenge posed by the problem of obtaining raw materials i n a highly competitive international market. The existence of such " c a r t e l s " may grate against the philosophical framework of some suppliers and competitors, but f i t s i n e a s i l y with the more relaxed approach to a n t i - t r u s t i n Japan. ^ 6. The Institutions of Government At the heart of the Japanese policymaking system l i e s a network of councils 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 authority rests on the fact that the ministry operates from a s o l i d data base, data collected, for the most part, from the industries 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 r e f l e c t the very different perspectives of industry and government. Higashi Chikara, a former Ministry of Finance o f f i c i a l , attributes a major portion 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 individual businesses when they are negotiating with, for 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 effect with an 43 antagonistic Japanese private sector. The ministry i s not always successful i n i t s e f f o r t s to guide industry, as the discussion on the steel industry has shown. Despite the ongoing dialogue at both upper levels (between top business leaders and senior bureaucrats) and lower levels (between spe c i f i c industry associations and - 18 -their respective divisions within MITI), international and domestic market forces can overtake the most careful of plans. Samuels' description of the "de-structuring" of the aluminum industry i n Japan i n the late 1970s and early 1980s reveals that market conditions forced the shutdown of domestic capacity much faster than the "restructuring" plans of the ministry and aluminum subcommittee of the Industrial Structure Council had a n t i -cipated, forcing costly emergency measures to cushion the impact on workers 44 and regional economies. MITI i s advised by councils which investigate and deliberate on future p o l i c i e s i n their respective administrative areas. Membership on the councils i s broadly based, drawing from top levels of business, academia and the government. While their reports do not have the force of law, because they represent the consensus achieved following an extensive process of consultation, their 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 councils serve more as fora to give advice to MITI, or to endorse policy which MITI has already drafted and for which i t seeks broad acceptance. Samuels' analysis indicates i t i s a two-way street. MITI has both v e r t i c a l and horizontal d i v i s i o n s . V e r t i c a l divisions handle a particular sector of industry and aim at eliminating obstacles to the development of that industry. Horizontal divisions are concerned with issues common to a l l industries: 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 location as a 46 whole, and p o l l u t i o n . V e r t i c a l d i visions which l i a i s e closely with their c l i e n t s i n the iron and s t e e l industry are the Iron and Steel Administration D i v i s i o n and the Iron and Steel Products D i v i s i o n . Within the Agency of Natural Resources - 19 -(which forms part of MITI) - the Planning Division of the Coal Mining Department i s concerned with planning and formulation of coal policy and coal supply and demand plans, and mine r a t i o n a l i z a t i o n with 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 with coping with employment dis l o c a t i o n resulting from mine closures. MITl's policy i s to maintain a program to produce 20 m i l l i o n tonnes of domestic coal a year; smooth the importation of coal, and promote research and development of coal u t i l i z a t i o n techniques. The d i v i s i o n controls the licensing of import quotas for ordinary coal. The interests of the industry divisions can be contradictory. The m i l l s are required to purchase a minimum amount of domestic coal and, after domestic supplies have been allocated, imports may make up the balance of coal requirements. The cost of t h i s protection for the domestic coal mines i s high. 1981 domestic soft coking coal averaged $100.16 a tonne, compared with $72.93 (average of soft and hard imported coal), and the 1982 price 48 spread was $95.24, compared with $74.50 for imported coal. Consequently, domestic consumers are attempting to reduce their requirements for the type available i n Japan. Both the u t i l i t i e s and the cement makers are converting to alternate cheaper fuels such as anthracite and petroleum 49 coke, which are free from compulsory purchases of l o c a l coal. The ministry 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 Policy Office i s charged with planning r e s p o n s i b i l i t i e s , including short-term and long-term import plans, international cooperation with the International Energy Agency and private sector organizations, and research, on overseas markets. I t emphasizes.information c o l l e c t i o n and dissemination to industry. - 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 introduction of alternative energy sources through govern-mental bodies such as the New Energy Development Organization (NEDO, estab-lished 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., Ltd. (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 private 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 private sector alone for funding. NEDO's'functions are: ( i ) the development of new energy technology, ( i i ) assistance measures for the development of geothermal resources and overseas coal, ( 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 coal industry. Within i t s mandate to aid i n the development of overseas coal., NEDO. provides subsidies for surveying, market research and development of new resources. In the case of development of Canadian coal mines, NEDO's guarantees for a portion of Japanese investors' loans f a l l within i t s mandate to provide loans and guarantees to private companies engaged i n the development and import of overseas coal. NEDO w i l l guarantee bank loans for the development of overseas coal, including associated infrastructure costs, to the extent of 50% of the Export-Import Bank of Japan loans and/or up to 100% of the other bank loans at a low rate of interest. Funds are made available i n the form of low interest 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 for energy projects are divided 70/30. The Japan Coal Development Co., Ltd. was established to survey, prospect, develop, import and s e l l thermal coal for 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 for 52 coal. While the JCDC has formal authority for import management, a recent study conducted for the (U.S.) Western Coal Export Board found that as the indiv i d u a l u t i l i t i e s learned more about the coal business, they 53 "appear(ed) to be following p a r a l l e l but independent courses", conducting their own negotiations or relying on the trading companies. 7. The Zaikai The high-level 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 associations: Keidanren, the largest and most i n f l u e n t i a l ; the more progressive Ke i z a i Doyukai (Committee for Economic Development); the Nihon Shoko Kaigaisho (Nissho, the Chamber of Commerce and Industry, which speaks for small business), and Nikkeiren (the Japanese Federation of Employers Associations. Its membership i s the same as that of Keidanren), which attempts to develop common labour policy for big business. The iron and steel industry and the u t i l i t i e s are well represented i n the upper echelons of Keidanren. Following i t s general meeting i n May, 1984, the ste e l industry had two representatives on the board: Inayama Yoshihiro, of Nippon Steel i s Honourary Chairman, and the Vice-Chairman i s 54 Saito E i s h i r o , Chairman of Nippon Steel. Keidanren's influence with government rests i n i t s a b i l i t y to forge a consensus among private sector groups, through i t s study committees, which p a r a l l e l the government's advisory councils. The Executive Committee on Coal Development, established i n January, 1980, deals mainly with domestic coal and with Japan-Australia coal matters. Keidanren also l i a i s e s with the Japan-China Association on Economy and. Trade and with the Japan-China - 22 -Long-Term Trade Committee to f a c i l i t a t e arrangements for Japanese coal imports from the PRC. Canada-Japan coal 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 reflects.the old guard i n Japan, "^and emerging high-tech industries have l i t t l e say i n i t s policy-making. Like MITI, i t s major c l i e n t s are the older industries, and the organization i s con-cerned about losing some of i t s authority, as maturing industries abandon i t s umbrella and operate on their own. In recent years, Keidanren has carved out a special role for i t s e l f i n promoting the development of a l t e r -native forms of energy. The organization i s not immune from divisions either: i n the 1982 debate over extending government assistance to the aluminum industry under the Structurally Depressed Industries Law, for example, Keidanren was divided between having to j u s t i f y assistance for i t s group-affiliated aluminum r e f i n i n g firm members while "maintaining both an ideological resistance to state intervention 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 analysis of the progression of strategies Japan has adopted to secure r e l i a b l e foreign supplies of low-cost metallurgical coal indicates that i t i s government which has responded to the needs of what has become a self-regulating industry. Steel industry desire to invest i n coal and iron ore development i n A u s t r a l i a provided strong domestic pressure for the Japanese government's decision to relax foreign invest-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 steel plant have not been noticeably e f f e c t i v e : the blast furnaces today, as a result 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 private sector, government cannot impose i t s preference without a price. To encourage the s t e e l m i l l s to cooperate with "G-G" (government-to-government) con-tracted volumes of coal from the PRC, for example, government must provide aid to the industry to make up the difference i n cost and to insure against the added r i s k involved. The steel industry cannot always win over broader, national interests: attempts by the industry to have MITI control steel imports from the strongly competitive South Korean company Pohang Iron and Steel Co., and to bring anti-dumping cases against South Korea have f a i l e d . ^ The case for thermal coal i s somewhat d i f f e r e n t , for MITI has taken on a widely accepted role as central "coordinator of energy policy, and used i t s regulatory authority to encourage industry compliance with o v e r a l l policy goals. Cooperation i s a two-way street, however. The enthusiasm of MITI i n 1980 for promotion of i n t e r - f u e l substitution and development of foreign thermal coal supplies was not shared by the e l e c t r i c power u t i l i t i e s . An analysis of the role played by the Tokyo E l e c t r i c Power Co. i n shaping Japan's coal and LNG policy reveals that the u t i l i t i e s are very reluctant to switch to coal for both technical reasons (coal i s d i r t y , needs to be stored, and large sit e s are required for c o a l - f i r e d plants) and cost factors (ocean freight charges, cost of port infrastructure). The u t i l i t i e s favoured conversion to nuclear power and LNG, and were reluctant to increase their dependence on American and Australian 62 coal. They have also been reluctant to d i v e r s i f y their sources away - 24 -from c a p i t a l i s t countries and have balked at government-to-government deals with the PRC and USSR promoted by MITI and the Ministry of Foreign 63 A f f a i r s . I t was only after MITI indicated i t would help the EPDC finance acq u i s i t i o n of reserves i n Au 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 coal. Industry representa-tives indicated resistance to government eff 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 coal to purchase. The attitude of industry o f f i c i a l s reflected a widespread view i n Japan that the private 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 increasingly internationalized, govern-ment, i n the view of the organization, 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. creative technological 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 6 7 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 attributed increased p o l i t i c a l intervention to two causes: ( i ) i n a period of slow economic growth and tight budgetary conditions, 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 popularity declines, p o l i t i c i a n s have begun taking a greater interest i n economic decision-making to protect (and retain the backing of) 68 their support groups and i n f l u e n t i a l interest groups. A study of the " p o l i t i c s of budgetting" i n Japan concludes that the LDP, not the bureau-crats i n the Ministry of Finance, controls budget allocations. 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 usually i n d e f i c i t ) , and the LDP's need to balance individual Diet members' needs to meet the demands of their respective koen k a i (personal support groups) as well as the 69 sometimes c o n f l i c t i n g interests of the party's national support bases. The extent to which government's f l e x i b i l i t y i s compromised by competing interests 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. coal as a way to reduce the American trade d e f i c i t . ^ Pre-Northeast B.C. coal development Foreign Ministry explanations that Canadian coal was cheaper than American coal and thus more a t t r a c t i v e to the st e e l industry are not readily accepted by U.S. trade o f f i c i a l s who are well aware that Canadian metallurgical coal from the two new mines i s now the most expensive on the international market. Pressure from MITI, which has a mission to reduce international trade f r i c t i o n for the o v e r a l l benefit of all.Japanese exporters, f a l l s on h o s t i l e ears i n the st e e l industry. Industry, spokesmen have indicated that an appeal to increase their purchases of expensive U.S. metallurgical coal would simply be ignored and, at any rate, runs counter to a recent industry-government consensus to seek low-price resources. ^ Besides, increased coal prices would be reflected i n higher st e e l prices, adding to the domestic industry's problems of remaining internationally competitive. MITI has greater regulatory - 26 -authority over the u t i l i t i e s and could conceivably "advise" them to take more U.S. thermal coal. The u t i l i t i e s are strongly represented i n Keidanren and their combined, undoubtedly negative response to government interference would no doubt be eff e c t i v e . The increased cost of additional imports of U.S. coal 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 f r a g i l e . Japan's luck may hold, though.. An anticipated s t r i k e i n the U.S. coal mines this year may resolve the problem without MITI having to take any action. - 27 -Chapter 1 Footnotes 1. The term i s attributed to Eugene Kaplan, author of a 1972 U.S. Department of Commerce study on government-business relations 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 for the study indicate otherwise. According to Gerald Curtis: 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 interaction between Keidanren and MITI varies considerably from case to case and suggests no single pattern; that industry operates on i t s own i n i t i a t i v e and without governmental intervention 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 structure. I t can encourage but not dictate mergers or formal combinations. MITI has, therefore, sought, generally with l i t t l e success, to stimulate consolidation through i t s exercise of a variety of levers on industry. Eugene J. Kaplan, Japan, The Government-Business Relationship, A Guide for the American Businessman (Washington, D.C.: U.S. Department of Commerce, February 1972), p. 10, 56. Cited by Gerald Curtis 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, for example, Richard J. Samuels, "The Industrial Destructuring of the Japanese Aluminum Industry", P a c i f i c A f f a i r s , Vol. 56, No. 3 ( F a l l 1983), pp. 495-509. 3. For example, Martha Ann Caldwell, "Petroleum P o l i t i c s i n Japan: State and Industry i n a Changing Policy Context" (Ph.D. Thesis, University of Wisconsin-Madison, Ann Arbor: University Microfilms 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 College, Langara Campus, January 18, 1984). I - 28 -5. Eugene J. Kaplan, Japan, The Government-Business Relationship, op. c i t . , p. 10, cited by Higashi Chikara i n Japanese Trade Policy Formation (New York: Praeger Publishers, 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 price r i s e s and production r e s t r i c t i o n s became established practices i n the industry. Sanekata Kenji, "Guideline(s) and Cases on the Regulation of Shareholding by the Japanese Antimonopoly Law" (Paper presented at the Faculty of Law, University of B r i t i s h Columbia, Vancouver, November 1983), p. 12. 7. Sanekata Ke n j i , "Anti-trust i n Japan: Recent Trends and Their Socio-p o l i t i c a l Background" (Paper presented at the Faculty of Law, University 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 Miracle: The Growth of Industrial P o l i c y , 1925-1975 (Stanford: Stanford University Press, 1982), pp. 279-283. 8. For a detailed study of the evolution of Japan's response to the 1973 o i l c r i s i s , see Martha Ann Caldwell, "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 build a c o a l i t i o n which eventually supported a major change i n policy. There were divisions within government, notably between MITI and the Ministry of Foreign A f f a i r s , and within the private sector on an appropriate policy stand. In the process of gathering information on policy alternatives and forging a consensus, MITI remained the locus of decision-making. Caldwell, p. 477. 9. "High Tech Fever Takes Over MITI", Japan Economic Journal, Vol. 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 for Strategic and International Studies, Washington, D.C, March 2, 1982). 11. "Administrative guidance" refers to "advice" from MITI to an industry or company which i s not l e g a l l y enforceable. Failure 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 detailed discussion of MITl's use of "administrative guidance", see Johnson, MITI and the Japanese Miracle, 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 Ltd., 1979), pp. 31-32. 13. Johnson d e t a i l s this kind of exchange i n his analysis of the so-called "Sumikin a f f a i r " . Johnson, MITI and the Japanese Miracle, pp. 269-270. 14. Ib i d , pp. 281-282. - 29 -15. Coal destined for non-Pacific markets i s usually priced on a landed cost basis. 16. See Horie, 1984 Coal Manual, op. c i t . , p. 134. 17. Ib 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, University 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 for price 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 si t u a t i o n and had promoted i t through administrative guidance. 20. Sanekata, "Guideline(s) and Cases", p. 5 21. The LDP suffered a series of setbacks i n elections i n 1972, 1976 and 1979. In 1976, i t lost i t s majority i n the Lower House for the f i r s t time since the party had been formed i n 1955. 22. Sanekata, "Anti-trust i n Japan", p. 17. 23. Horie, 1984 Coal Manual, p. 382. 24. Ibid. 25. For detailed analyses of Japanese resource procurement planning, see Akao Nobutoshi, ed., Japan's Economic Security: Resources as a  Factor i n Foreign Policy (Aldershot, Hampshire: The Royal I n s t i t u t e of International A f f a i r s , Gower Publishing Co. Ltd., 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 International  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, University 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 for O i l and Ores (Cambridge and London: Harvard University Press, 1983). 26. For a more detailed discussion 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 Minerals: Implications for Canada" (Paper presented to the Canadian P o l i t i c a l Science Association, Vancouver, June 1983), pp. 7-10. 27. D'Cruz, "Negotiating Coal Contracts", p. 21. 28. Ibid, 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 forth by Dani Rodrik, "Managing Resource Dependency: The United States and Japan i n the Markets for Copper, Iron Ore and Bauxite", World Development, Vol. 10, No. 7 (1982), pp, 541-560. 32. Ib i d , p. 550. 33. Contracts for Australian and Canadian coal are F.O.B.T., from the terminal, making domestic transportation costs the concern of the producer. 34. Rodrik, p. 550. 35. Ibid, 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 Price of Coal Sold to Japan", January 25, 1984; Albert Sigurdson, "South African Price Cuts May Affect Coal Talks", Toronto Globe and M a i l , January 26, 1984. 38. "Australia: Price Cuts for Coal", Toronto Globe and M a i l , May 28, 1984. 39. Albert Sigurdson, "Byron Creek Slashes Price of Coal 22%", Toronto  Globe and M a i l , October 13, 1983. 40. Vernon, Two Hungry Giants, p. 101. 41. For a discussion of "a pecularity of Japanese i n d u s t r i a l organization -monopsony", see Shinohara Miyohei, Industrial Growth, Trade and  Dynamic Patterns i n the Japanese Economy (Tokyo: University of Tokyo Press, 1982), pp. 40-41, 42-44, 45-47. The practice of subcontracting within a monopsony network, with big corporations above and sub-contractors 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 practice writ large. Interestingly, Shinohara draws attention to the dearth of analyses of Japanese organization which focus on the medium and small enterprises, a lack due, he says, to the tendency of researchers to "emulat(e) American analysis ... on s e l l e r ' s monopoly or oligopoly". Shinohara, p. 41. 42. MITI accepts a limited number of o f f i c i a l s from business in.temporary positions at the entry, section-chief and deputy director levels as a means of establishing immediate and long-term personal contacts with future business leaders, but the flow i s nowhere comparable to that i n the U.S. or Canada. Higashi Chikara j Japanese Trade Policy. Formulation, op. c i t . , p. 59 43. Ib i d , p. 67. 44. Samuels, "Japanese Aluminum Industry", op_. c i t . , pp. 497-498. 45. For an example of the consultative process, see Ibid, pp. 499-501. - 31 -46. Fukukawa S h i n j i , "Features of the Industrial Policy of Japan" (Lecture given at the Club Franco-Japonais, October 4, 1982); Ira C. Magaziner and Thomas M. Hout, Japanese Industrial Policy (London: Policy Studies Institute No. 585, January 1980), p. 34. 47. Japan, Ministry of International Trade and Industry, MITI Handbook  1981/82, n.d., p. 90. 48. Horie, 1984 Coal Manual, p. 35. 49. Ib i d , p. 6. 50. "MITI Coal Rationalization Policy Okayed", Japan Economic Journal, Vol. 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. Ibid, 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 Katsuji (Chairman, Nissan Motor Co. Ltd.), Hasegawa Norishige (Chairman, Sumitomo Chemical Co. Ltd.), Hiraiwa Gaishi (Chairman, The Tokyo E l e c t r i c Power Co., Inc.), Ishida Masami (Executive Advisor, Idemitsu Kosan Co., Ltd.), Nakamura Toshio (Chairman, The Mitsubishi Bank, Ltd.), Yamashita Isamu (Chairman, Mitsui Engineering & Shipbuilding Co., Ltd.), Yoshiyama Hi r o k i c h i (Cha irman, Hitachi Ltd.), Toyoda E i j i (Chairman, Toyota Motor Corp.), Hanamura Nihachiro (President, Keidanren). Chairman of the Board of Councillors i s Iwasa Yoshizane (Advisor, F u j i Bank Ltd.); Honourary Chairman i s Doko Toshio (Counsellor, Toshiba Corp.). "Old Men Continue to Dominate Zaikai World; Osaka-based Businesses Are Unhappy", Japan Economic Journal, Vol. 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. "Old Men Continue to Dominate Zaikai World", op_. c i t . , p. 46. 57. Ibid. 58. Samuels, "Japanese Aluminum Industry", p. 504. 59. Shinohara, Industrial 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. - 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 Po 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: University 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. Ibid, p. 90. 64. I b i d , pp. 103, 104. 65. Stuart Kirby and Mary Saso, Japanese Industrial 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 for the Japanese Economy" (Statement by Keidanren on proposals for economic manage-ment) , Keidanren Review, No. 86 ( A p r i l 1984), pp. 11-16. 67. See Kubota Akira, "The P o l i t i c a l Influence of the Japanese Higher C i v i l Service", Japan Quarterly, Vol. X X V t l l , No. 1 (January-March 1981), pp. 45-55. Kubota concludes that the higher c i v i l service plays a "central rol e i n consolidating opinions and generating a consensus" i n negotiations among industry, government and f i n a n c i a l interests, and that p o l i t i c i a n s "tend to play a role of implementing the consensus created by the career senior bureaucrats and the role of leading and guiding various interest 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 for the United States" (Report of a workshop organized by the Subcommittee on Asian and P a c i f i c A f f a i r s , the Woodrow Wilson International Center for Scholars of the Smithsonian I n s t i t u t e , and the Congressional Research Service of the Library 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. Disserta-t i o n , Arizona State University, Ann Arbor: University Microfilms International, 1983), p. 274. 70. See, for example, "U.S. Push to S e l l Coal to Japan Bad News for Canadian Mines", Toronto Globe and M a i l , May 19, 1984. 71. See Peter. Nemetz, Ilan Vertinsky, P. Vertinsky, "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 Draft, Vancouver: Ins t i t u t e of Asian Research, University 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 central argument of t h i s thesis that the Japanese steel industry's approach to acquiring coal i s best understood as an ad hoc response to market conditions, and that, with the exception of "G-G" contracts, the Japanese government has not played a decisive role 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 coal for o i l for e l e c t r i c power generation, providing incentives to the EPDC to invest i n overseas coal mine development and to d i v e r s i f y sources of supply. Through NEDO, whose requests for loan approval are taken to the Ministry of Finance by MITI, and the Export-Import Bank, the Japanese government has provided loan guarantees which have contributed to the Gregg River, Balmer and Northeast B.C. projects. Japanese involvement i n Western Canadian mines corresponds with the pattern detected by Rodrik i n his analysis of the Japanese approach to acquiring copper, iron ore and bauxite: an increasing degree of integration of the Japanese industry with i t s upstream sources of supply i n order to secure greater protection against disruptions 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 alternative source of supply for the Japanese buyers, and, further, offer two r a i l l i n e s and two major ports to handle the coal. The steel m i l l s ' contract performance i n the current period of oversupply gives some indication of the price 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 Overall Metallurgical  and Thermal Coal Requirements B r i t i s h Columbia produces both thermal and metallurgical coal for export, but, l i k e Alberta, supplies Japan mainly with low and medium vola-t i l e bituminous coals for steelmaking. Japan imports approximately 9% of i t s thermal requirements from Western Canada, although the thermal-type coal i t obtains from mines i n B.C. i s not of a quality that can be used immediately by the Japanese u t i l i t i e s . Thermal coal for 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 metallurgical coal mines, for example, the new mines i n 2 the Northeast of B.C. (i) M etallurgical coal The coking (metallurgical) coal industry i n Western Canada exists 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 coal requirements and, i n 1983, 4 17.6%. Japan i s expected to increase i t s reliance on Canadian coking coal 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 metallurgical coal by country of o r i g i n . Japanese demand for coking coal has declined as a result of a number of factors: the recession, which has reduced demand both i n Japan and on international markets; changes i n technology which have resulted i n a decrease i n the amount of coal required i n iron and steel-making; increased production by more competitive producers such as South Korea and Taiwan. Japanese production of pig iro n , crude steel and f i n e l y r o l l e d - 35 -st e e l products has been f a l l i n g off since FY 1980, p a r a l l e l i n g the trend of reduced demand i n the rest 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 coal from Canadian mines r e f l e c t s deci-sions taken by the steel industry i n the period 1980-82 to d i v e r s i f y away from heavy dependence on Australian coal, as well as a b e l i e f that demand for s t e e l , and, hence, competition for steel-making materials, would pick up around 1985. ( i i ) Thermal coal The steady increase i n volume of imports and.diversification of supplier of thermal coal i s i l l u s t r a t e d i n Appendix 2. Volumes imported from Canada and the U.S. jumped i n 1981, as Japanese buyers looked for alternative suppliers after strikes shut down Australian mines and " S o l i d a r i t y " protests disrupted exports from Poland. Price and quality considerations are the most important factors influencing sourcing. Given the alternatives on the market, B.C.'s thermal coals are not p a r t i c u l a r l y a t t r a c t i v e : one study of B.C. coal exports to Japan documents a 17% decline i n the province's share of the export market for thermal coal i n the period 1972-1981, compared with a 242% increase for A u s t r a l i a and a 984% increase for South A f r i c a . 3. History of Japanese P a r t i c i p a t i o n i n Western Canadian Coal Mine  Development Japanese steel 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. The volume was small, however (421,000 metric tonnes), largely because of the high freight element i n the C.I.F. price. ^ The Japanese m i l l s stepped into 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 closing down i t s mines i n the Crowsnest Pass 8 area. Since then, Japanese coal buyers have moved toward progressively closer t i e s with their Western Canadian suppliers. 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 position i n one, Balmer. The Balmer case i s somewhat unusual, and i s the result of a long-standing relationship between the trading company, Mitsubishi, and Balmer's one-time U.S. parent, Kaiser Steel. The incidence of Japanese investment i n new mines since 1980 i s much greater: Japanese companies are minority partners i n j o i n t ventures i n the Gregg River, 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 steel market, Japanese newspapers and trade journals have been indicating 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 this study w i l l focus on the established metallurgical coal mines i n Southeast B r i t i s h Columbia and the new projects i n the Northeast, the B.C. operations cannot be considered i n i s o l a t i o n from Alberta pro-duction. To give them some f l e x i b i l i t y i n price and tonnage negotiations, Japanese steel m i l l s divide Western Canadian coal producers into three groups, whose "boundaries" do not necessarily p a r a l l e l Canadian p o l i t i c a l d i v i s i o n s : 1. The old mines i n Southeast B.C. and Alberta: Balmer Coal (Southeast B.C.) Fording River (Southeast B.C.) Coal Mountain (Southeast B.C.) Luscar (Alberta) Smoky River (Alberta) - 37 -2. The new mines i n Southeast B.C. and Alberta: Line Creek (Southeast B.C.) Greenhills (Southeast B.C.) Gregg River (Alberta) 3. The new mines i n Northeast 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 thesis, however, Appendix 3 provides d e t a i l s of ownership and Japanese pa r t i c i p a t i o n . The pattern i s similar to that for the metallurgical coal mines. ( i i ) Joint ventures Both Japanese and Canadian industry o f f i c i a l s interviewed i n the research for t h i s study stressed that the v i r t u e of having Japanese invest-ment does not endow a project with any special treatment by the steel m i l l s during annual price and volume negotiations. The only reason for Japanese investment i n the mines i s to enhance security of supply: the m i l l s ' attitude i s that they are not coal operators, and do not care about earning a large return on their investment. The objective of the Japanese investor, then, may not necessarily be i n harmony with those of i t s other partners. Complications, could arise 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 for the buyer of direct investment over long-term contractural arrangements: reduction of r i s k . Through their involvement, as shareholders, the steel 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 useful application elsewhere. Experience gained from Westar's open p i t extraction processes, for example, has been applied to help overcome technical 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 closer to the resource: each participant i s assured a portion 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 involving Japanese investors i n a Canadian coal mine, the arrangement offers p o t e n t i a l l y a t t r a c t i v e price benefits: Japanese investors receive at 9 production cost coal supplies i n proportion to their 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. Direct investment i n resource development i s a common strategy adopted as a hedge against price 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, collaboration 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 steel industry's expectations of increased expansion i n iron and steel production after 1985, ^ expectations apparently shared, or at least supported by the Japanese government, i n view of i t s assistance with the Northeast project. 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 ea s i l y achieved across many producers than a few. A major at t r a c t i o n of the existing Canadian coal operations i s the close proximity of a potential additional 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 infrastructure either already i n place, - 39 -or requiring only limited expansion to service new mines. Appendix 4 l i s t s the major coking operations under survey, showing planned production l e v e l s . 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 coal mine develop-ment negotiations, host government pa r t i c i p a t i o n i n a major project appears to be an^ important consideration for Japanese investors. The Quintette mine i n Northeast B.C. was considered 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 federal governments i n the construction of r a i l , port and other related a c t i v i t i e s as part of an 12 o v e r a l l regional economic development project. Japanese investors appear to regard government involvement i n a project as an additional 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 factor i n Sumitomo's involve-ment i n exploration 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 coal sold to Japan from Canada i s handled by a trading company, a sogo shosha. 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. Mitsubishi, Nissho Iwai, M i t s u i and Tokyo Boeki had been involved i n exploration and development work i n coal properties i n Northeast B.C. from the late 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 for the "form" of 14 the contract. Once a contract i s signed and the coal moving, the - 40 -shosha w i l l continue to.collect information for the buyers on the conditions at the mines, make overseas payments on behalf of the steel m i l l s and act as a communications channel. Informally, the trading company may also act as an "agent" for the supplier with which i t i s linked. ( i i ) The "coordinators": the steel industry buying group Prices and quantities of coal to be purchased are negotiated by industry "coordinators" for each region. The main coordinator for Canada i s Nippon Kokan K.K. (Japan Steel Tube Co., the second largest steel producer i n Japan), aided by Kobe Steel. ^ Nippon Kokan's l i n k s with Canada are f a i r l y close: 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 st e e l plant for the 16 province, and i t s president, Makita Hisao, led 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 chairs the Japan Canada Economic Committee of Keidanren. Negotiations on price 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 with their respective suppliers, then with senior board members of the steel m i l l s to reach agreements i n a process described by suppliers as "divide and conquer". Agreements reached with lowest price 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 follow 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: A History of Japanese Investment (i) The old mines  Ealmer Mitsubishi Trading Company, acting as the agent for nine Japanese steel m i l l s , negotiated with Kaiser Steel Co. of C a l i f o r n i a i n the l a t e 1960s for a contract which involved developing coking coal reserves at Sparwood, B.C. ^ The Japanese role 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 result of low coal prices and high startup costs. As a solution to i t s cash flow problem, Kaiser offered equity to the Japanese companies and the Japanese converted their debt holdings to 18 equity, taking 30%. ... In October,, 1980, B.C. Resources Investment Corp. bought 66.6% of the stock from Kaiser, and the ten Japanese firms con-19 verted their shareholdings to 33.4%. At present, representatives of Mitsubishi, Nippon Kokan and Nippon Steel s i t on Westar's Board of Directors. The contract signed i n 1968 with Balmer for 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 coal mine. Fording River Fording Coal Ltd. i s a j o i n t venture of Canadian P a c i f i c Investments (60%) and Cominco Ltd. (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 coal 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 Ltd. (Esso Resources Canada Ltd.), this mine started up i n 1974. I t has sold some weak coking coal to Sumitomo Cement and Sumitomo Kanyoku through the trading company Sumitomo - 42 -Corp. Luscar Owned by Consolidation Coal Co. of Canada, the mine had a 15-year contract with Japanese steel m i l l s for the period 1970-1984. A new contract signed i n March 1981 for FY 1981-1990 replaces i t . Luscar also has contracts for thermal coal for a ten-year period ending 1993. The 23 trading companies involved are Mitsui & Co., and C. Itoh & Co. Smoky River This mine, owned by Mclntyre Mines Ltd., was closed, by mutual agreement, following the expiration of a one and a half year contract signed with Japanese ste 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 prices than Japanese buyers, had cancelled their contracts and the mine was operating at a loss. The extension of the Japanese contract was a concession to a Lougheed government request to keep the mine operating through a pro-v i n c i a l election 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 similar contract arrangements from the Japanese steel m i l l s . Fording, for example, has experienced almost i d e n t i c a l price and tonnage cutbacks i n recent years to those accepted by Westar's Balmer mine: both mines have had 23.4% price increases i n FY 1982, 15.5% reductions i n FY 1983, and a 1% reduction i n FY 1984. Comparable figures for the Luscar mine were not readily available, however, the 1984 Coal Manual states c l e a r l y in. i t s description of the Luscar con-tract that "no discriminatory treatment should ever be made between this 25 coal and Balmer coal". - 43 -In FY 1979-82, coal shipments by the three mines were also similar o v e r a l l : 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 st e e l m i l l s distinguish between old and new mines i n recognition of high start-up costs. Prices i n the early years of a contract for production from a new mine thus w i l l be higher than those for old mines, which have been able to depreciate these costs. ( i i ) The new mines, Southeast B.C. and Alberta Gregg River The Gregg River mine represents the f i r s t direct investment i n an 27 overseas coal development by Japanese steelmakers, although the m i l l s had had extensive experience i n iron 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 Ltd. (60%) and s i x Japanese steel m i l l s 28 led by the trading company Mitsui and Co. Ltd. (40%). Among the reasons given for the Japanese decision for 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 Mistui & Co. had been involved since 1968: conditions for development were, then, f a i r l y clear; (2) the project had readily available r a i l , port and other i n f r a s t r u c t u r a l f a c i l i t i e s ; (3) coal proportionate to the 40% equity interest could be imported at cost; (4) a unique investment/financing method was employed. Total 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) for 40% equity in t e r e s t , and $74 m i l l i o n for exploration, allocated 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.) for $15 m i l l i o n of the $111 m i l l i o n 29 Manalta was to cover for exploration. Line Creek Owned by Crows Nest Resources Ltd. (a 100% subsidiary of Shell Canada Resources Ltd.), Line Creek signed a 15-year contract i n July 1980 to provide Japanese buyers one m i l l i o n tonnes per year for 15 years from A p r i l 1983. Mitsui & Co. i s the trading company handling Line Creek coal. The mine also produces some thermal coal for export to Korea, Taiwan and 30 Japan. Greenhills (Westar) An unincorporated j o i n t venture established i n 1980 between Westar Mining Ltd. (80%), owned by B.C. Resources and Japanese inte r e s t s , and Pohang Iron and Steel Co. of South Korea (20%), Mitsubishi Corp. i s the trading company. The mine signed a 3-year contract i n A p r i l 1982 for the period July 1983-March 1986, and Westar has received the st e e l m i l l s ' commitment to extend the contract when i t expires, ( i i i ) The new mines, Northeast B.C. The Bullmoose and Quintette contracts comprise a package deal which involves both the B.C. and federal Canadian governments. The projects 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 distorted as a result of government involvement. Northeast coal has become an extremely costly alternate supply of coal for the Japanese. Negotiations on price and volume levels for 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 price for Quintette coal was approximately $97 a tonne as of August 1984, compared 33 with $69.09 for Balmer coking coal. 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 metallurgical 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 coal, for 15 years (October 1983 to March 1998). Together, the mines offer Japanese steel m i l l s a new source of supply within a region, a new transportation route vi a a new port at Ridley Island, and the potential to access further supplies at 13 nearby s i t e s . These factors were instrumental i n securing MITl's and the Japanese Ministry of Finance's approval for NEDO and Export-„ i 34 Import Bank assistance. Bullmoose The Japanese importer and trading company for the Bullmoose project i s Nissho Iwai Corp., through i t s subsidiary Nissho Iwai Coal Development (Canada) Ltd. Nissho Iwai has been engaged i n coal exploration 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 firm Brameda Resources Ltd. The f i r s t technical presentation was made to Japanese buyers i n June 1977. In August 1980, Nissho Iwai took a 10% equity position i n order to.secure the right to handle the coal. In January 1981, the project received basic agreement on contracts with the st e e l m i l l s - 46 -necessary to secure B.C. government agreement for spending on i n f r a -structure. The mine i s an unincorporated j o i n t venture of which Teck Corp. (51%) i s project manager. Lornex Mining Co. took.39% equity i n A p r i l 1982. Nissho Iwai has taken 10% of the t o t a l construction cost (estimated o r i g i n a l l y at C$275 mi l l i o n ) on deferred payment terms: cash from coal sales i s to pay for construction costs. 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 far the largest of the two, and the involve-ment of the B.C. and federal governments i n providing infrastructure 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 financing. The New Energy Development Organization (NEDO) endorsed recourse loans from Tokyo Boeki and M i t s u i Mining Overseas Development Corp. to Quintette Coal Ltd., the project manager. Ownership of the mine i s Denison Coal Ltd. (50%), Charbonnages de 38 France (12%), Japanese interests (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. ext., p. 554. 2. While thermal coal prices were r i s i n g , the u t i l i t i e s were expected to convert their b o i l e r s to take advantage of the poorer quality, but lower-priced Canadian thermal coal. Now that world coal prices have dropped, however, and Canadian prices remained comparatively high, i t i s unlikely the u t i l i t i e s w i l l continue conversion. 3. H.N. Halvorson Consultants Ltd., "Forecast of Coal Mining A c t i v i t y to 2002 for B.C. Hydro and Power Authority" (n.p., March 1983), p. 20. 4. "The Steel Industry of Japan 1984", op_. c i t . , p. 12. 5. Horie, 1984 Coal Manual, gives detailed figures on Japanese and world ste e l and iron production, pp. 29, 98. 6. H.N. Halvorson Consultants Ltd. (1983), p. 65. 7. D'Cruz, "Negotiating Coal Contracts", pp. 21, 22. 8. Frank Langdon, The P o l i t i c s of Canadian-Japanese Relations,  1952-1983 (Vancouver: University of B r i t i s h Columbia Press, 1983), p. 13. 9. Horie, 1984 Coal Manual, p. 310. 10. See Sekiguchi Sueo, Japanese Direct Foreign Investment (Montclair, New Jersey: Allenhead, Osmun & Co., Publishers, 1979), pp. 25-38, for a discussion of Japanese investment i n resource development, and Tsurumi Yoshi, Multinational Management: Business Strategy and  Government Policy (Cambridge, Mass.: Ballinger Publishing Co., 1977). Tsurumi found i n his analysis that while U.S. companies t y p i c a l l y own two-thirds of their foreign subsidiaries, and European and Canadian companies about one-half, Japanese usually take a minority position. Tsurumi, p. 95. 11. According to a recent analysis, the Japanese ste e l industry was close to f u l l y u t i l i z i n g metallurgical coal mine capacity i n 1979, 1980 and early 1981 and, without mine expansion, would have exceeded capacity by 1985 or 1986. Carter, op_. c i t . , p. 10. 12. See "Quintette Coal Ltd.", an information summary prepared on the occasion of the o f f i c i a l opening of the Quintette project on August 10, 1984 (n.p.). 13. And from A u s t r a l i a . U.S. coal i s purchased by ind i v i d u a l steel companies. - 48 -14. P. Lesley Cook, The Supply of Australian Coal (Science Policy Research Unit Occasional Paper Series No. 14, Sussex: University 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 Steel, aided by Kawasaki Steel. Because of i t s s i z e , Nippon Steel i n effect acts as price-setter for the U.S. too. 16. Langdon,. P o l i t i c s of Canadian-Japanese Relations, p. 82. 17. Ib i d , pp. 125, 126. 18. Ib i d , p. 126. 19. The Japanese equity holders are: Mitsubishi Corp. (the trading company for the Balmer mine, 13.1%), Nippon Steel Corp. (6.4%), Nippon Kokan K.K. (5.9%), Kawasaki Steel Corp. (1.6%), Sumitomo Metal Industries (0.8%), Kobe Steel (0.9%), Nisshin Steel Corp. (0.7%), Godo Steel Co. (0.1%), Mitsubishi 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. Ibi d , pp. 307-308. 22. Ibi d , pp. 451-452. 23. Ibi d , pp. 304-306. 24. Ibi d , pp. 306-307. 25. Ibi d , Globe pp. 303, LV305, 307; "Westar and M a i l , A p r i l 22, 1984; to Cut Coal to Japan", Toronto "Fording Cuts Coal Price", Ibid, A p r i l 28, 1984. 26. Horie , 1984 Coal Manual, p. 299. 27. Ibi d , p. 328. 28. Nippon Steel Corp. (13.98%), Nippon Kokan K.K. (5.9%), Kawasaki Steel Corp. (5.44%), Sumitomo Metal Industries (5.42%), Kobe Steel Corp. (3.21%), Nisshin Steel Corp. (1.05%), M i t s u i & Co. Ltd. (5%). Ib i d , p. 309. 29. Ib i d , p. 311, 310. 30. Ibid, pp. 308-309, 450-451. 31. Ib i d , p. 313. 32. The estimate i s a conservative one. See Carter, p. 12. - 49 -33. "Coal Price Dispute Shadows Opening of Quintette Mine", Toronto  Globe and M a i l , August 11, 1984. The Quintette and Bullmoose contracts contain a base price and an escalation formula that were negotiated before construction began. A base price 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 for Bullmoose coal. Of t h i s price, 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 specify price reviews of - the start :price in'1987, 1991 and 1995, a side l e t t e r to the Quintette contract enables either party to propose a price review i n October 1, 1983. See Halvorson, 1983, p. 96. The price equity review clause permits either side to re-open price negotiations to adjust the d i f f e r e n t i a l between market price and contract price. The Japanese m i l l s , c i t i n g t his clause, are at present seeking a $14 per tonne reduction. See Horie, 1984 Coal Manual, pp. 311, 329, 335. 34. See Appendix 5 for figures on potential annual coal 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 infrastructure i n the USSR, PRC-and A u s t r a l i a . Canadian federal 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 investor, and provided an additional guarantee that the massive undertaking had the long-term support of the host country. 37. The story makes a fascinating postscript to the tale of Canadian banks' f i n a n c i a l woes following 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 international interest rates, 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 rates. 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 international banking consortium comprised of the Bank of Montreal, the CIBC, the F u j i Bank, Bank of Tokyo, Mi t s u i Bank, Mitsubishi Bank and the Credit 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 participants alone were not r e l i a b l e . Short of investment c a p i t a l because of the effects 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 project, at January, 1983 was C$1.3 b i l l i o n , broken down as follows: 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 - 50 -NEDO endorsed recourse loans provided by Mitsui 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 tsui Mining Overseas Development Co. (12.5%), Tokyo Boeki Ltd. (10.5%), Sumitomo Corp. (5%), Nippon Steel Corp. (3.85%), Nippon Kokan K.K. (1.62%), Kawasaki Steel Corp. (1.5%), Sumitomo Metal Industries Ltd. (1.49%), Kobe Steel Ltd. (0.88%), Nisshin Steel Co. Ltd. (0.29%), Nakayama Steel Works Ltd. (0.20%), Godo Steel Co. Ltd. (0.07%), Mitsubishi Chemical Co. (0.11%). Horie, 1984 Coal Manual, p. 288. -51 -CHAPTER 3: Summary and Conclusions 1. "Japan Inc." Re-examined: The Changing Role of MITI This thesis has attempted to i l l u s t r a t e , by examining Japan's approach to procuring metallurgical and thermal coal, that the "Japan Inc." appellation i s a misleading description of the nature of decision-making i n Japan. The view that a triumvirate 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 policy 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 attitudes, motives and interests. The four major economic organizations, the k e i z a i yon dantai, are important i n s t i t u t i o n s for consensus-building, but issues on which they can mobilize consensus tend to be limited to those which do not involve c o n f l i c t s within their membership. Many of Keidanren's resolu-t i o n s , for example, are the product of such broad compromise that, according to one analyst, "they emerge at a l e v e l of generality that largely undercuts their possible influence on government policy". ^ Strong competition exists within sectors as wel l . Efforts 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 for the "common good". Neither do the interests of the blast 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 industries undergoing s t r u c t u r a l adjust-ment i n the post-1979 o i l c r i s i s period, but now that they can take 2 advantage of cheaper supplies of steel scrap as a raw material, 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 integrate 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 industry, to prevent excessive compe-t i t i o n , f a i l e d notably i n the 1960s, despite the ministry's considerable regulatory clout. MITl's s k i l l i n by-passing the JFTC to effect the creation of Nippon Steel was a dramatic example of the ministry's power at that time, but i t was a move that i n some respects backfired. The exposure of MITl's wheeling and dealing corresponded with growing public disenchant-ment 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 limited the range of regulatory instruments available to MITI. In the 1980s, the government faces steady pressure from the business community for "administrative reform", a reduction by both national and l o c a l administrations to reduce 3 their scale and increase their e f f i c i e n c y . The role 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 international competitive position of Japanese industry. As domestic and international 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 interests. Today, the ministry's policy concern has taken a sharp turn: 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 restructuring and phasing-out, and workers, with government assistance, 4 are re-trained and re-deployed. - 53 -MITI remains an important forum for consensus-building. Some analysts suggest that business r e l i e s on the ministry 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 into the discussion to the extent that their need to look out for supporters' interests impinges on the bureaucrats' freedom of action. Some case studies have documented instances where p o l i t i c a l considerations have prevailed over the recommendations of the top levels of the bureaucracy. ^ Insofar as Japanese steel m i l l s ' coal buying practices 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 discussion on thermal coal has shown, however, MITl's f l e x i b i l i t y to pursue certain 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 th i s study has been to attempt to refute allegations of a "conspiracy theory", that i s , the charge that the steel industry and the Japanese government, acting together, have i n f l a t e d producer expecta-tions of Japanese demand and contributed, through direct foreign investment i n new mines and the offer of long-term contracts, to an over-development of the resource. In the long run, according to t h i s scenario, the savings for Japan i n reduced coal prices more than offsets the cost of investment i n coal mine development.. This view i s suggested by Fesharaki and Schultz i n their study of o i l and gas trade i n the P a c i f i c Basin. They conclude that "a tin 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 export projects v i a the simple expedient of exaggerating Japan's future demand." ^ This l i n e of thought i s taken up by Nemetz and Vertinsky i n their analysis of the international market for LNG. The authors attempt to l i n k such a scheme to what i s currently occurring i n the metallurgical coal market, where Japanese ste e l m i l l s are attempting to negotiate g reductions i n contracted tonnages. Such an argument i m p l i c i t l y assumes that there exists some monolithic government-business board of directors of "Japan Inc." which determines long-term procurement strategy. This thesis 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 larger problem of 9 forecasting requirements i n a climate of uncertainty. Evidence accumulated during the research and interviews suggests strongly that the Japanese steel industry's problem with an oversupply of coal ®^ i s due to ( i ) the unexpectedly prolonged recession, ( i i ) the strong i n t e r - f i r m competition within the steel industry which resulted i n overexpansion of capacity, and, ( i i i ) heavy odds against a l l sources of supply actually meeting delivery targets set out i n the contracts. To c i t e the Japanese involvement i n the Northeast coal project as a deliberate attempt to finance more capacity than would appear warranted by market conditions ignores the major concern of the steel m i l l s : ensur-ing there . w i l l be a supply of a key resource when i t i s needed. The planning process for new mines i s long: ten to f i f t e e n years passed between i n i t i a l exploratory discussions involving the trading companies - 55 -and Canadian interests 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 off i n demand for steel products. The B r i t i s h Columbia government's f i l m on the development of the project ^ i n fact emphasizes the recessionary context i n which the project was constructed. The ste e l m i l l s , however, based on their experience with the regular fluctuations i n the industry, expected demand to pick up by 1985, and invested i n expanded capacity to ensure that secure supplies of coal would be available to Japanese buyers at that time. The m i l l s ' experience i n the period 1980-82 with coal shipments i s relevant. The Japanese st e e l industry experienced severe, and extremely costly disruptions i n supply as a result of labour unrest or transportation blockages affecting three of i t s major suppliers: Poland, Austral i a and the United States. The fourth major supplier, Canada, had a poor record of labour peace as w e l l . One Japanese spokesman estimated that the industry's experience with suppliers had been 60-70% as a resu l t 12 of technical and labour problems at 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 practice. What i s a "normal" margin of safety for an industry located i n a country with p l e n t i f u l alternative sources of supply or substitutes i s , of course, l i k e l y to be very different 1 from the margin of safety required by industries almost 100% dependent on imports. - 56 -3. What Price D i v e r s i f i c a t i o n : Lessons from the Case of Western Canadian  Coal The description of the Japanese steel industry's approach to buying coal 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 steel industry or, i n the case of thermal coal, 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 cutoff of supply from any single source. Investment decisions taken by the steel industry, however, are also rooted i n the knowledge that Japanese steel must remain i n t e r -nationally competitive. While Northeast coal i s today priced almost $30.00 a tonne higher than other comparable quality coals, the ste 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 price. The basic starting price i n 1980 was higher than that for coal from the older Southeast B.C. mines, an "acknowledgement" by the steel 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 price was, however, i n a range comparable to that for Gregg River coal. The outcome of the protracted Northeast coal price and tonnage negotiations w i l l provide considerable insight into 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 Au s t r a l i a , which has coal of comparable quality, at lower cost (the coal i s closer to port and cheaper to mine). Yet the m i l l s wish to lessen their dependence on Australian coal, given that country's poor record as a r e l i a b l e supplier. Canadian coal also provides bargaining leverage for the m i l l s . Thermal coal from South A f r i c a i s much cheaper than Canadian, - 57 -but the price i s r i s i n g and the mines are primarily oriented to the European market and the physical 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 price, but since supplies have been negotiated between govern-ments, the m i l l s do not look on them as being wholly secure. If government policy changes, the m i l l s r e a l i z e they may lose their source of supply. Japanese industry spokesmen warn that Canadian coal i s i n danger of becoming uncompetitive. The FY 1980 price d i f f e r e n t i a l s between old mines (Balmer, $63.95) and new (Gregg River, $73.50; Quintette, $75.00) suggests than an acceptable premium for new coals i s i n the range of $10-12 a tonne. 14 The st 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 price and/or volume commit-ments 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 allocations. ^ The Japanese coal 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 special.consideration presently 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 price i s the question of contracted volumes of coal. The Japanese m i l l s have been seeking reductions of approximately 25% i n contract tonnages from a l l suppliers, 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 suppliers, l i k e l y American, which do not have long-term contracts. The recently-concluded negotiations between Westar (33% Japanese-owned) are revealing. Westar has accepted a $7.87 a tonne cut i n the price of i t s Greenhills metallurgical coal for the balance of de l i v e r i e s i n i t s present contract, 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 (within a specified tolerance). The m i l l s have also accepted the long-term, 20-year mine plan for the Balmer opera-t 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 Greenhills 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 price Balmer w i l l receive for i t s coal, the m i l l s have agreed to exert the 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 fixed exchange rate. The company would then be able to convert some of i t s existing high-interest Canadian and U.S. debt into lower-cost yen loans. ^ While i t would be premature to venture any firm conclusions from these two examples, they do suggest that mines i n which Japanese have taken an equity interest may receive special consideration from the steel m i l l s . The results 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 for Canadian coal confirm the steel industry's long-term concern with maintaining a d i v e r s i f i e d supply base. The squeeze on prices indicates that there i s a l i m i t to the amount they are w i l l i n g to pay for d i v e r s i f i c a t i o n . - 59 -Chapter 3 Footnotes * 1. Gerald Cu 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 price of scrap has gone up about 20% i n the past ten years, while the cost of pig iron 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 for 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", Ibid, No. 87 (June 1984), pp. 5-7. The Advisory Council on Enforcement of Administrative Reform has cal l e d for sharp cutbacks i n government budgets and reductions i n public works spending, a position supported by Prime Minister Nakasone. See " F i s c a l Policy a Hot Debate Topic", The Japan Times  Weekly, August 4, 1984, and "Council Backs Austerity Budget", Ibid, August 11, 1984. 4. Shinohara, Industrial Growth, op. c i t . , p. 52. 5. Vogel suggests that the business community "lacks the cohesiveness to tackle disagreements between i n d u s t r i a l sectors or between companies within a sector and that, despite businessmen's bravado, they are eager to r e l y on MITI for advice." Ezra Vogel, "Guided Free Enterprise i n Japan", Harvard Business Review, Vol. 56, No. 3 (May-June, 1978), p. 165. 6. See Michael Donnelly, "Setting the Price 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, for a description of the interplay of p o l i t i c a l and economic factors i n the annual negotiations to set the price 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 national budget. Wada Yoshikiyo, "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 Trade i n the P a c i f i c Basin" (Paper presented to the Conference on Prospects for U.S.-Japan Cooperation and Competition, East Asia Program, Woodrow Wilson Centre, Washington, D.C, A p r i l 15, 1983), p. 30. 8 Nemetz and Vertinsky, "Japan and the International Market for 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 construction of power plants fuelled by LNG, coal and uranium as evidence that Japan, " l i k e many of her Western a l l i e s , has been consistently unable to assess accurately the extent of global recessionary conditions, their interrelationship with energy prices and consequently energy use." Ibid, p. 10. 10. The steel m i l l s are overcontracted for coal: blast furnaces alone had a surplus of coking coal supply from project 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 Films, for the Government of B r i t i s h Columbia (1984). 12. See also Albert Sigurdson, "Quintette Hit By Delivery 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 Price 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 -. xxiv, for a discussion of the concept. In the case of rulings by MITI, for example, i t i s understood by a l l that i f one company i s disadvantaged by a decision at one time, that company w i l l be given special consideration at another time. 16. P a t r i c i a Lush, "100% of Coal Output Committed", Toronto Globe and  M a i l , June 6, 1984. 17. P a t r i c i a Lush, "Vulnerable Mines Seek Markets Outside Japan", Toronto Globe and M a i l , September 24, 1984. - 61 -Bibliography Akao, Nobutoshi, ed. Japan's Economic Security: Resources as a Factor i n Foreign Policy. Aldershot, Hampshire: Gower Publishing Co., Ltd., 1983. A l l e n , G.C. "Government Intervention i n the Economy of Japan." In Government Intervention i n the Developed Economy, Peter Maunder, ed., pp. 17-40. London: Croom Helm Ltd., 1979. Amaya, Naohiro. "The Economic Development of Japan: MITl's Past and Future Role". Address to the Center for Strategic and International Studies, Washington, D.C., March 2, 1982. "Australia: Price Cuts for Coal". Toronto Globe and M a i l , May 28, 1984. Ba y l i s , Ken E., and Handelsman, Simon D. "International Trade i n Coal". Paper for presentation at the 113th Annual Meeting, Society of Mining Engineers of AIME, Los Angeles, C a l i f o r n i a , February 27-March 1, 1984. "Benefit-Cost Analysis of the North East Coal Development: A Report prepared by the Economic, Financial and Marketing Sub-Committee (and i t s consultants) under the Canada-British 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, Ministry of Industry and Small Business Development, 1982. Burgess, P h i l i p M. " 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. Caldwell, Martha Ann. "Petroleum P o l i t i c s i n Japan: State and Industry i n a Changing Policy Context". Ph.D. Dissertation, University of Wisconsin-Madison, 1981. Carter, Geoffrey S. "Metallurgical Coal: B r i t i s h Columbia's Panacea or A c h i l l e s Heel". Midland Doherty Ltd. Research Report, December, 1983. "Coal Price Dispute Shadows Opening of Quintette Mine". Toronto Globe and  M a i l , August 11, 1984. Cook, P. Lesley. The Supply of Australian Coal. Science Policy Research Unit Occasional Paper Series No. 14. University of Sussex, A p r i l , 1981. "Council Backs Austerity Budget". The Japan Times Weekly, August 11, 984. - 62 -Curran, Timothy J. "The P o l i t i c s of Trade L i b e r a l i z a t i o n i n Japan." Journal  of International A f f a i r s , Vol. 37, No. 1 (Summer 1983), pp. 105-122. Cu r t i s , Gerald L. "Big Business and P o l i t i c a l Influence." In Modern Japanese Organization and Decision-making, Ezra F. Vogel, ed. Berkeley: University of C a l i f o r n i a Press, 1975. D'Cruz, Joseph R. "Negotiating Coal Contracts with the Japanese Steel Industry: The Co-ordinated Procurement System." Paper given at the Nitobe-Ohira Conference on Japanese Studies, Institute of Asian Research, University of B r i t i s h Columbia, Vancouver, May 1984. "Quasi Integration i n Raw Material Markets: The Overseas Procurement of Coking Coal by the Japanese Steel Industry." Ph.D. Dissertation, Harvard University, 1979. Donnelly, Michael. "Setting the Pr ice of Rice: A Study i n P o l i t i c a l Decision-Making." In Policymaking i n Contemporary Japan, T.J. Pempel, ed. Ithaca: Cornell University Press, 1977. "Economic S t a b i l i t y Without I n f l a t i o n : Agenda for the Japanese Economy." Keidanren Review, No. 86 ( A p r i l 1984), pp. 11-16. Fesharaki, Fereidun and Schultz, Wendy. " O i l and Gas i n the P a c i f i c Basin.". Paper presented to the Conference on Prospects for U.S.-Japan Coopera-tion and Competition, East-Asia Program, Woodrow Wilson Center, Washington, D.C, A p r i l 5, 1983. " F i s c a l Policy a Hot Debate Topic." The Japan Times Weekly, August 4, 1984. "Fording Cuts Coal Price." Toronto Globe and M a i l , A p r i l 28, 1984. 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). Fukui, Haruhiro. "Studies i n Policymaking: A Review of the Li t e r a t u r e . " In Policymaking i n Contemporary Japan, op. c i t . Fukukawa, S h i n j i . "Features of the Industrial Policy of Japan: March 1983." Lecture given at the Club Franco-Japonais, October 4, 1982. Funk & Wagnalls New Standard Dictionary of the English Language, 1959. Gherson, Joan. "Japanese Investment i n Canada." Foreign Investment Review, Vol. 3, No. 1 (Autumn 1979), pp. 4-7. Goodman, Herbert I. "Japan and the World Energy Problem." In.Japan's Economy: Coping with Change i n the International Environment, Daniel I. Okimoto, ed. Boulder, Colorado: Westview Press, 1982. Haglund, David. "The West's Dependence on Imported Strategic Minerals: Implications for Canada." Paper presented to the Canadian P o l i t i c a l Science Association, June, 1983. - 63 -Halvorson, H.N. "The Dubious Economics of Developing Northeast Coal." Vancouver Sun, A p r i l 21, 1983. Hay, Keith A.J.; H i l l , S.R.; and Rahman, S.S.; Canadian Coal for Japan. Ottawa: Economix International Ltd., 1979. Higashi, Chikara. Japanese Trade Policy Formulation. New York: Praeger, 1983. "High Tech Fever Takes Over MITI." Japan Economic Journal, Vo. 22, No. 1117 (July 17, 1984), p. 1, 3. H.N. Halvorson Consultants Ltd. "Forecast of Coal Mining A c t i v i t y to 2002 for B.C. Hydro and Power Authority." (Vancouver, n.p.) March 1983. "New Coal Production from Southeastern B.C. Compared with Proposed Northeastern B.C. Development." A Study for the Council of Mayors of Southeastern B r i t i s h Columbia. (Vancouver, n.p.) July 1980. Horie, Hiroyuki. Coal Manual. 1984 Edition. Tokyo: The Tex Report Ltd., 1984. Japan, Ministry of International Trade and Industry. MITI Handbook 81/82. Tokyo: MITI, n.d. "The Visi o n of MITI P o l i c i e s i n the 1980s - Summary." Provisional translation NR-226 (80-7). Tokyo: MITI Information Office, March 17, 1980. Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial  P o l i c y , 1925-1975. Stanford: Stanford University Press, 1982. Kirby, Stuart, and Saso, Mary. Japanese Industrial Competition to 1990. Cambridge, Mass.: Abt Books, 1982. Kubota, Akira. "The P o l i t i c a l Influence of the Japanese Higher C i v i l Service." Japan Quarterly, Vol. XXVIII, No. 1 (January-March 1981), pp. 45-55. Langdon, Frank. The P o l i t i c s of Canadian-Japanese Economic Relations 1952- 1983. Vancouver: University of B r i t i s h Columbia Press, 1983. Lush, P a t r i c i a . "100% of Coal Output Committed." Toronto Globe and M a i l , June 6, 1984. "Vulnerable Mines Seek Markets Outside Japan." Toronto Globe and M a i l , September 24, 1984. Magaziner, Ira C. and Hout, Thomas M. Japanese Industrial Strategy. London: Policy - Studies Institute No. 585, January 1980. Matsukura, K o j i . "Changes i n the Japanese Economy Since 1945." Address given at Vancouver Community College, Langara Campus, Vancouver, January 18, 1984. - 64 -Maund, Jacqueline K. "The Implications of the Japanese Resource Procurement Strategy for Staple Resource Regions: An Examination of.Coal Mining i n Southeastern B.C." Master's thesis, University of B r i t i s h Columbia, A p r i l 1984. "MITI Coal Rationalization Policy Okayed." Japan Economic Journal, Vol. 22, No. 1114 (June 26, 1984), p. 46. Nakagawa, Katsuhiro. "Japanese Industrial Policy and MITI." Address to the Fourth Annual Comparative Law and Business Conference, New York, February 27, 1981. New Energy Development Organization. "A Guide to New Energy Development Organization." Tokyo: NEDO, n.d. Nemetz-, Peter and Vertinsky, Ilan. "Japan and the International Market for L i q u i f i e d Natural Gas." Canada and the Changing Economy of the P a c i f i c Basin Working Paper No. 19, Preliminary Draft. Vancouver: In s t i t u t e for Asian Research, University of B r i t i s h Columbia, February 1984. Nemetz, P.; Vertinsky, I.; and Vertinsky, P. "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 Draft. Vancouver: I n s t i t u t e for Asian Research, University of B r i t i s h Columbia, November 1983. Ogata, Sadako. "The Business Community and Japanese Foreign Policy: Normalization of Relations with the People's Republic of China." In The Foreign Policy of Modern Japan, Robert A. Scalapino, ed. Berkeley: University of C a l i f o r n i a Press, 1977. Okimoto, Daniel I., ed. Japan's Economy: Coping with Change i n the Interna- t i o n a l Environment. Boulder, Colorado: Westview Press, 1982. "Old Men Continue to Dominate Zaikai World; Osaka-based Businesses Are Unhappy." Japan Economic Journal, Vol. 22, No. 1114 (June 26, 1984), pp. 46, 47. Pempel, T.J. "Japanese Foreign Economic Policy: The Domestic Bases for International Behavior." In Between Power and Plenty: Foreign Economic P o l i c i e s of Advanced Industrial States, Peter J. Katzinstein, ed. Madison, Wisconsin: The University of Wisconsin Press, 1978. "Quintette Coal Ltd." An information summary prepared on the occasion of the o f f i c i a l opening of the Quintette project, (n.p.) August 10, 1984. Rodrik, Dani. "Managing Resource Dependency: The United States and Japan i n the Markets for Copper, Iron Ore and Bauxite." World Development, Vol. 10, No. 7 (1982). Samuels, Richard J. "The Industrial Destructuring of the Japanese Aluminum Industry." P a c i f i c A f f a i r s , Vol. 56, No. 3 ( F a l l 1983). Sanekata, Kenji. "Anti-Trust i n Japan: Recent Trends and Their Socio-p o l i t i c a l Background." Paper presented at the Faculty of Law, University of B r i t i s h Columbia, September 1983. - 65 -Sanekata, Kenji. "Guideline(s) and Cases on the Regulation of Stockholding by the Japanese Antimonopoly Law." Paper presented at the Faculty of Law, University of B r i t i s h Columbia, November 1983. Sekiguchi, Sueo. Japanese Direct Foreign Investment. Montclair, N.J.: Allanhead, Osmun & Co., Publishers, 1979. Shinohara, Miyohei. Industrial Growth, Trade and Dynamic Patterns i n the  Japanese Economy. Tokyo: University of Tokyo Press, 1982. Sigurdson, Albert. "Byron Creek Slashes Price of Coal 22%." Toronto Globe  and M a i l , October 13, 1983. "South African Price Cuts May Affect Coal Talks." Toronto Globe and M a i l , January 26, 1984. "Quin t e t t e Hit By Delivery S h o r t f a l l . " Toronto Globe and M a i l , February 10, 1984. Smith, Ben. "The Japanese Connection: Negotiating a Two-way Street." In Australia's ResourcesFuture: Threats, Myths and the R e a l i t i e s i n the  1980s, Peter Hastings and Andrew Farran, eds. Melbourne: Thomas Nelson Au s t r a l i a Pty. Ltd., 1978. "South A f r i c a Cutting Price of Coal Sold to Japan." Toronto Globe and M a i l , January 25, 1984. "South Korea Faces Attack Over Export Steel Success." Toronto Globe and M a i l , March 24, 1984. "The Steel Industry of Japan 1984." Japan Iron and Steel Federation, n.d. "Take a Giant Step: The Northeast Coal and Transportation Development." Gem Films, for the Government of B r i t i s h Columbia. (1984). "Toward Balanced, Sustainable Growth." Keidanren Review, No. 87 (June 1984), pp. 5-7. Tsurumi, Yoshi. Multinational Management: Business Strategy and Government  Policy. Cambridge, Mass.: Ballinger Publishing Co., 1977. 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 for the U.S." Report of 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 Committee on Foreign A f f a i r s , the Woodrow Wilson International Center for Scholars of the Smithsonian I n s t i t u -t i o n and the Congressional Research Service of the Library of Congress, March 16, 1982. "U.S. Push to S e l l Coal to Japan Bad News for Canadian Mines." Toronto Globe  and M a i l , May 19, 1984. Vernon, Raymond. Two Hungry Giants: The U.S. and Japan i n the Quest for O i l  and Ores. Cambridge and London: Harvard University Press, 1983. - 66 -Vogel, Ezra F. "Guided Free Enterprise:in Japan." Harvard Business Review, Vol. 56, No. 3 (May-June 1978), pp. 161-170. "Towards More Accurate Concepts." In.. Modern Japanese Organization and Decision-Making, op. c i t . Wada, Yoshikiyo. "The P o l i t i c s of Budgetting i n Japan." Ph.D. di s s e r t a t i o n , Arizona State University, 1983. "Westar to Cut Coal to Japan." Toronto Globe and M a i l , A p r i l 22, 1984. Yoshihara, Kunio. Sogo Shosha: The Vanguard of the Japanese Economy. Tokyo: Oxford University Press, 1982. Yoshino, M.Y. Japan's Multinational Enterprises. Cambridge, Mass.: Harvard University Press, 1976. - 67 -Appendix 1 Imports of Coking Coal by Area, 1973-83 Au s t r a l i a 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 Steel 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 (11%) .  129 ( 8%) 248 ( 3%) 271 ( 2%) 186 ( 1%) Canada - - - 12 ( 1%) - 600 ( 8%) 1,108 ( 9%) 1,259 ( 9%) USA - - - - 640 ( 9%) 2,330 (19%) 1,388 (10%) South A f r i c a - 15 ( 2%) 6 25 ( 2%) 29 ( 2%) 488 ( 7%) 1,853 (15%) 2,186 (16%) Au s t r a l i a 217 (57%) 248 (41%) 527 (56%) 749 (69%) 1,282 (76%) •4,517 (62%) 5,399 (44%) 7,040 (51%) Others - 4 - - 1 - 5 40 Total 383 603 937 1,082 1,677 7,234 12,271 13,717 Compared with Previous Yr-. ,146.7% 157.4% 155.4% 25.5% 155.0% 431.4% 169.6% 111.8. Customs S t a t i s t i c s , Ministry of Finance % may not equal 100% due to rounding Source: 1984 Coal Manual, p. 498. - 69 -Appendix 3 New Thermal Coal Mines 1'. Mercoal (Manalta Coal Ltd.), Alberta Joint development terms for 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 project. Production startup i s scheduled for 1985. 2. Quinsam (Quinsam Coal Ltd., owned by Weldwood of Canada and Brinco Mining Ltd.), B.C. Importer: Marubeni Startup: 1985 3. Kipp (Petro Canada Exploration; Union Gas), Alberta Importer: Nichimen Startup: not decided 4. Shaughnessy (Fording Coal Ltd.), Alberta An unincorporated j o i n t venture of Fording Coal Ltd. (80%) and Idemitsu International Resources Canada Ltd. (the Canadian subsidiary of Idemitsu Kosan) (20%), established i n 1981. Importer: Mitsui & Co. Startup: 1985 5. MacLeod River (Manalta Coal Ltd.), Alberta A basic agreement for exploitation of this property was reached between Manalta and the EPDC i n 1980. The proposed equity shares i n the case of exploitation are Manalta Coal, 70%; EPDC, 15%, Mitsubishi Mining Cement, 15%. Importer: Mitsubishi Startup: 1987 6. Sage Creek (Sage Creek Coal Ltd., owned 60% by Rio Algom, 40% by Pan Ocean O i l ) , B.C. Importer: Mitsubishi Startup: 1985 Source: 1984 Coal Manual, pp. 410-411; 474-477. - 70 -The Obed Marsh mine i n Alberta started operations i n 1984 with 5-year contracts with the Japanese u t i l i t i e s for thermal coal d e l i v e r i e s u n t i l 1988. Owned by Union O i l of Canada Ltd. (84%), Rescon Coal Holdings Ltd. (10%) and Norcen Energy Resources (6%), the Japanese trading companies handling i t s coal sales are Mitsubishi Corp. and Sumitomo Corp. (1984 Coal Manual, p. 449.) The Coal Valley operation i s an older thermal coal mine owned by Luscar Stereo Ltd., a 100% subsidiary of Luscar Ltd. The Japanese importer i s Mitsui & Co. The mine has 5-year contracts with three Japanese cement and two power companies. (Ibid, p. 448.) - 71 -Appendix 4 Coking Coal Operations Under Survey Monkman, B.C. (Petro Canada Exploration Inc.. , 50%, Canadian Superior Exploration Ltd, Mclntyre Mines Ltd., Sumitomo Corp.) Importer: Sumitomo Corp. Planned production: 3 m i l l i o n tonnes p.a. Hosmer-Wheeler, B.C. (Westar Mining Ltd. subsidiary) Importer: Mitsubishi 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: Mitsubishi 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 Ltd., 40%) Importer: Mitsubishi Corp. Planned production: 1.7 m i l l i o n tonnes p.a. Granridge, Alberta (Can Pac Mineral Ltd. (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 Ltd., 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 Ltd., 35%) Importer: Nishimen Corp. Planned production: 1 m i l l i o n tonnes p.a. - 72 -Elk River, B.C. (Scurry Rainbow O i l Ltd., Elco Mining Ltd. (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, Alberta (Cyprus Anvi 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 Potential Annual Coal Production ..Northeast B.C. Potential Annual Coal Production i n M i l l i o n s of Tonnes Property Coking Thermal Total Quintette 5.0 1.0+ 6.0+ Bullmoose 1.7+ 0 1.7+ Sukunka 3.0 0 3.0 Monkman 3.3 1.0 4.3 Burnt River 0 1.0 .1.0 Goodrich 1.0 N.A. 1.0 Bow River 0 1.3 1.3 Belcourt 4.0 0 4.0 Saxon 4.0 0 4.0 Mt. Spieker 1.0 o' 1.0 Hasler Creek 0.5 0 0.5 Cinnabar 0 2.0 2.0 Carbon Creek 2.5 0 2.5 Willow Creek 0 0.6 0.6 Wapiti 0 1.0 1.0 TOTAL 26.0+ 7.9+ 33.9+ Source: A Benefit-Cost Analysis of the North East Coal Development (Report prepared by the Economic, Financial and Marketing Sub-Committee (and i t s consultants) under the Canada-B 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, Ministry of Industry and Small Business Development, 1982), p. 54. 

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