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Japan's government and steel industry policies towards coking coal procurement : the implications of.. Catliff, Christopher Edward 1985-12-31

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JAPAN'S GOVERNMENT AND STEEL INDUSTRY POLICIES TOWARDS COKING COAL PROCUREMENT: THE IMPLICATIONS OF INDUSTRIAL RESTRUCTURING FOR THE NORTHEAST COAL PRQJECT By CHRISTOPHER EDWARD CATLIFF B.A., The University of British Columbia, 1985 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS in THE FACULTY OF GRADUATE STUDIES (Department of Political Science) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA December 19 8 5 ©Christopher Edward Catliff, 1985 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department The University of British Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date /$f6 DE-6(3/81) Abstract Japan's recent economic success or what has often been termed "the Japanese Miracle" has been a result of perceptive industrial policies and import and export strategies pursued by both government and industry together. Bilateral trade surpluses have brought about allegations from trading partners that Japan's trading practices are "unfair". While this study does not explicitly examine such a broad and subjective accusation, it does analyse distinct Japanese policies in the context of the steel industry and its overseas procurement of coking coal for steel production. The case of Japan's last major overseas coal venture, the Northeast Coal Project, is presented to provide answers to four questions which form the basic themes of the paper. How do the Japanese seek secure supplies of coking coal? Do the Japanese seek lower prices by encouraging excess supply? What conditions affecting coal demand have changed since January 19 81 when the coal contracts were signed? Finally, will the Japanese abide by the terms of these contracts they signed in 1981? Through a focus on the process and substance of Japanese coal procurement policy, its application in the case of north east coal, and its response to unexpectedly adverse market con ditions, five propositions are developed. First, Japan persuades foreigners to commit themselves to the development and export of resources through quasi-integration. Second, the government and firms within the steel sector coordinate all procurement of coking coal. Third, Japan will pay a premium to ensure security of its coal supply. Fourth, structural shifts within the Japanese economy and changing world market conditions will cause a lower demand for coking coal than forecast;and finally, the Japanese will not break existing contracts if they perceive that that will undermine their access to resources and export markets. iv TABLE OF CONTENTS Abstract ii Table of Contents iv Acknowledgements v Chapter I Introduction 1 Chapter II Japanese Industrial Policies and Import Strategies - Introduction 11 - The Government-Business Relationship and Industrial Policy 13 - Quasi-Integration 20 - Coordinated Procurement 24 - Diversification 31 Chapter III The Negotiations of the Northeast  Coal Project - Introduction 34 - The Negotiation of the Northeast Coal Project 5 Chapter IV Japanese Actions Since Signing the  Contracts - Increased Japanese Involvement 55 - The Contracts 59 - Recession and Renegotiation 62 Chapter V Japanese Industrial Policies and Their Implications for Northeast Coal 74 Chapter VI Will the Japanese Honour the Terms of The Contracts? 85 Chapter VII Conclusions 94 Footnotes 103 Bibliography 12Appendices 6 V Acknowledgements I am indebted to many people for this undertaking. I received valuable assistance and materials for researching this study from the Japanese Consulate in Vancouver, the Japan External Trade Organization (JETRO) and B.C. Hydro Ltd. I wish to thank Joyce and Michael Catliff, Mark Zacher and William Wray for their helpful editing and criticisms. It was Professor Wray's fascinating course on the modern history of Japanese business that inspired this venture. He provided hundreds of newspaper clippings spanning thirteen years that made the case study all the more plausible. Finally, I wish to express my deepest appreciation to Diana Winkler whose typing, suggestions and support as well as her attitude towards procrastination ensured this project moved swiftly and smoothly. - 1 -Chapter I Introduction The Japanese government has always had extensive involvement in Japan's economic relations with other nations. Besides monitoring specific international trading arrangements, the government of Japan has been adept at implementing industrial policies. Such industrial policies have affected trading re lationships greatly. By following strategies of export pro motion and import substitution of manufactured goods, the Japanese have created an industrial structure reliant on other nations' raw materials and, as well, their domestic markets. In the recent past, Japan's trading relationship with Canada has generally consisted of importing raw resources and process ing them into manufactured goods which are then exported back to Canada. The government of Canada has viewed this unbalanced trading relationship with concern. In both the past and present, the Canadian government has sought to inhibit imports from Japan in manufactured goods. A recent case involves Canadian quotas on imports of Japanese automobiles. The federal govern ment has to date been unsuccessful in its ambitious plans to greatly increase Canada's exports of fully-manufactured goods to Japan, which in 1981 accounted for only four percent of exports to Japan.^ The government of British Columbia, which has juris diction over its natural resources, has striven to maintain - 2 -exports of large quantities of primary goods. For the past twenty years, successive provincially-sponsored trade missions have visited Japan peddling such raw resources as lumber, fish and coal. Japan receives approximately 25% of the total of 2 British Columbia's exports. In fact, during the 1970's, Japan became the world's largest importer of raw materials. Yet by 1982, supplying commodities to the dynamic Japanese economy became extremely competitive. Other countries which were suffering severe bilateral trade deficits with Japan used fire-sale prices and all the political pressure they could muster to persuade the Japanese to buy their commodities. Increased competition created problems for British Columbia. Many of its exports of raw materials to Japan were "demand-controlled", that is, the majority of their output went to that market only. Such is the case with the province's coal exports, which continue to be almost entirely dependent on the Japanese steel industry. Negotiations to supply coal to Japan are not determined simply by the amount or price of coal in British Columbia. Instead, the province's coal sales depend on events within the Japanese steel industry and on decisions made by steel-executives and Japanese government officials. This situation is reflected most clearly in the 1981 choice of a Japanese steel consortium to sign a fifteen year contract to purchase 115 million tons of coal from northeastern British Columbia when this coal was clearly both more expensive and more difficult to bring to tidewater than coal from existing suppliers in southeastern B.C. and Australia. - 3 -The reasons for this seemingly paradoxical decision of the Japanese to buy northeast coal were many and varied. However, two factors were critical during the key decision making period in 1980. Firstly, that while northeast coal was expensive, it provided an additional supply source with a separate infrastructure as a hedge against costly disruptions of supply. In 1980 the steel industry was severely traumatized by labour strife in its major coal suppliers, the U.S., Poland and Australia. Secondly, after more than a year of difficult negotiations with the northeastern B.C. coal companies, a con sensus finally emerged within the Japanese steel industry that an additional supply source was necessary if Japan was to remain committed to its ambitious switch-over from expensive oil-fired steel mills to cheaper coal-fired steel mills. The decision to procure northeast coal was to be a costly mistake. Neither the Japanese steel executives and gov ernment officials on the one hand, nor the Canadian coal companies and the federal and provincial governments on the other hand fore saw the devastating and prolonged recession that began in earnest in late 1981, after the coal deal was already secured. Indeed, the decision by both sides to commit billions of dollars towards the Northeast Coal Project was predicated on the belief that the Japanese steel industry would continue to grow. But during the three years the mega-project was being built, the recession brought about a severe drop in world-wide steel demand as planned industrial expansion, which used steel as its chief building - 4 -block, was drastically curtailed. Protectionist sentiment in the form of trade barriers, especially in the United States and the European Economic Community, further reduced Japanese steel exports. The success of_the Japanese economy has in the past been largely due to its ability to adapt to such external changes in the international economic environment and restruct ure its major exporting industries accordingly. It is most likely then, that the Japanese economy will again adapt to the constraints placed on it by changing international economic conditions. Caught up in shifting market conditions beyond its control is the Northeast Coal Project. On 7th January 1984, the first Japanese freighter loaded with coal from the Northeast Coal Project sailed from the newly-created port facility at Prince George, B.C. Because many of the assumptions that had led the Japanese steel industry to commit billions of dollars to northeast coal were no longer valid, the largest mining project in Canadian history was immed iately mired in controversy. The declining demand for steel had caused a glut in the market for metallurgical (met) or coking coal causing a world-wide drop in its price. A similar glut existed in the market for thermal coal. Coking coal is used to produce steel, while thermal coal is used largely for electric power generation. While the Japanese had contracted to procure mostly coking coal from northeast B.C., additional small but significant purchases of thermal coal had been contracted by the Japanese. The latter was successful during the 1980 negotiations in forcing con cessions on price in return for an increased volume of coal - 5 -purchases. In 1984, the Japanese sought to alter the terms of the contracts they had signed three years earlier, by once-again negotiating a further reduction in the price of the coal. Teck Corporation's Bullmoose Mine and Denison Mines Ltd.'s Quintette Coal Company were adamant that the contracted price and volume be maintained because of the large debt and high start up costs of their operations. The Japanese considered it to be unacceptable that they should continue to pay thirty per cent above market price for northeast coal. Because of the $2.9 billion in public funds invested by the provincial and federal governments, the situation became politically charged. British Columbians became extremely concerned that the downward pressure on the price of coal would force the provincial cabinet to waive royalties and surcharges so as to protect the project's viability and the government's political future. These royalties and sur charges were the only guaranteed return on the taxpayer's invest ment. The sardonic phrase, "the Japanese get the coal, we get the hole" became very popular among British Columbians at this time. They began asking, "Were we duped by the Japanese?" The case of the Northeast Coal Project raises a number of important questions about both the nature of the Japanese decision-making process on international economic issues and the substance and evolutions of Japanese policy towards the pro curement of natural resources. With regard to process, do Japan ese steel firms collaborate and act as one purchaser when - 6 -dealing with overseas suppliers? If so, what are the conditions that make for variously-sized, divergent steel corporations that operate in a free market system to suborn their own interests to :the interests of their industrial sector as a whole? With regard to substance, what are the general Japanese strategies towards resource procurement? Is the priority of Japanese pro curement of overseas coal the actual price of the coal or the assurance of security of supply? Has this been consistent? Answers to the question How did the negotiations for north east coal start, develop and change over time and will the Jap anese continue to honour the terms of the contract? should shed light on the evolving nature of Japanese industrial policies. In the context of these questions raised, Chapters II and III of this analysis focus on the process and substance of the Japanese industrial policies and import strategies that culminated in the negotiation of the Northeast Coal Project. Three theses emerge from these chapters. First, Japan seeks to persuade foreign governments and industries to commit themselves to the development and export of resources through long-term contracts. Secondly, the government and firms within the steel sector coordinate their procurement of coking coal, acting as a single unit buyer to increase their bargaining position. Finally, Japan has been willing to pay a premium for ensuring the security of supply of those essential materials that fuel its economy. By following a policy of diversification, that is, multiple sourcing, Japan has striven to avoid the traumatic - 7 -interruptions of supply that became so evident during the 1970's. Yet Japan's heightened concern for security of supply during the 1970's and early 1980"s has been overshadowed recently by anxiety over access to foreign markets for its industrial products. Because of Japan's mounting bilateral trade surpluses and the perception that it has used unfair trading practices, Japan's manufactured goods have become increasingly unwelcome in many countries, especially in its largest market, the United States. The increasing interdependence of national economies and the emergence of more cost-efficient steel production in the newly-industrializing countries have caused the Japanese to be concerned not only with industrial competition and the rise of protectionism, but also with the negative social costs such rapid industrialization has had on the Japanese people and their environment. Consequently, and as a result of other factors to be discussed in Chapters IV and V, an industrial restructuring, a shift away from heavy to "hi-tech" industries is taking place. Two further theses may be posited. The first is that industrial restructuring and concern over protectionism will cause a lower demand for coking coal than forecast. The second additional thesis, developed in Chapter VI, is that while the Japanese seek low prices through multiple sourcing, they will not break existing contracts if they believe that will undermine their access to resources and export markets. In other words they will endeavor to maintain a balance between their needs for resources and their need for market access. 8 -The scant literature on Japanese procurement of Western Canadian coal raises conflicting and alarming arguments. As a corollary to the above propositions, the following con clusions are rejected. The first and most widely accepted notion is that "the Japanese government has attempted to create a buyer's market... by explicitly encouraging construction of new (export projects) via the simple expedient of exaggerating 3 Japan's future demand." Allegations have been raised that the Japanese have encouraged the development of major coal projects— such as the Northeast Coal Project in B.C. — in order to flood the coal market in hopes that prices would become depressed. It appears that there may be some credibility to the allegations, as Japan has cut metallurgical coal demand by up to 35 percent.of all import contracts in late 1982. Heather Gibb, in her study Re-Examining "Japan Inc.":  Japanese Coal Procurement and Western Canadian Coal, rejects this "conspiracy theory". "Such an argument implicitly assumes that there exists some monolithic government-business board of directors of Japan Inc. which determines long-term procurement strategy.""* Evidence will be provided in this case study to show that while there does exist a government-buisness monolith for coal procurement that could conspire to encourage over-expansion, this simply did not occur. The study of northeast coal will bolster the current belief, first posited by Joseph D'Cruz, that to sellers of - 9 -coking coal the Japanese steel industry, through a policy of coordinated procurement, represents a large monolithic buyer where there exists no possibility of playing one purchaser off against another. But conversely, the Japanese have historically taken advantage of the competition that exists between coal mining companies and coal exporting countries. The case study will convincingly disprove D'Cruz's second conclusion that, suppliers within a particular country were treated as a homogenous group and each country group received different treatment. The price paid to a supplier depended on the country in which the supplier was located. Because of the "special nature" of the Northeast Coal Project, it has received far different treatment than other coal mines in southeastern British Columbia. Other questionable conclusions have been drawn by the print media in British Columbia and have gained wide cur rency in the public mind principally, that the Japanese steel mills have broken the terms of the contract on the price of northeastern coal. Another unwarranted conclusion " is that the provincial government of B.C. "arm-twisted" the unenthus-iastic Japanese buyers into a deal and is guilty of "fraud ulent misrepresentation."7 This study is by no means meant to be an apology for the B.C. government's decision to back the Northeast Coal Project. But by analysing in depth the key decision-making period prior to the Japanese signing of the coal contracts, it is clear that both the Japanese and Canadian sides forecast not only an increasing need for met. coal, but - 10 -also ever-rising energy costs. Of all the now-lofty dissenters of the mega-project, on both sides of the Pacific Ocean, who argued that for various reasons the Northeast Coal Project should not go ahead, none foresaw its major current problem the slump in prices for raw materials brought about by the recession. - 11 -Chapter II Japanese Industrial and Import Policies  Introduction Japanese direct investment in Western Canadian coal production began in 1973. It appeared to come about more through chance than deliberate strategy. In 1968, Mitsubishi Trading Co. Ltd., representing nine Japanese steel mills, agreed to purchase from Kaiser Resources Ltd. of Vancouver forty-five million tons of coking coal over a fifteen year period.''" The coal was to be shipped from Sparwood in southeastern British Columbia, through the newly created bulk terminal at Roberts Bank. Since the Sparwood mine proved to be uneconomic due to low prices and high start up costs, Mitsubishi asked the Japan Steel Federation for an infusion of capital to save the project. As a result, in 197 3 Nippon Kokan K.K. led a consortium of Japanese steel and trading companies into a $27.5 million pur-2 chase of equity (30.2%) in Kaiser Resources Ltd. Since that time, investment in B.C. has followed a deliberate strategy. It has been to procure an alternate source of coal, not only to secure Japan's supply but also to create more competition with Japan's existing sources. Japanese participation has been essential to almost all coal mining operations in Western Canada. In several of these projects Japanese companies have provided loans and in - 12 -others they have held minority equity positions. B.C. coking coal mines exist solely because of Japanese demand for their product. "It is the purchase contracts, more tharr. the actual financing provided, which ensure the viability of the mining project. Japan's Ministry of International Trade and Industry has been the foremost ministry responsible for providing a policy framework for Japanese actions abroad. These strategies guide the Japan Steel Federation (the organization of Japanese steel companies) in their investments and purchases abroad. The Japanese steel industry is dominated by five producers who try to share equal access to raw materials overseas. Large trading firms like Mitsubishi, C. Itoh and Marubeni cultivate business ties with client steel firms by procuring raw materials for them. Utilizing their shrewd traders' skill and organizing ability, they procure resources around the world with the know ledge that they have guaranteed purchasers at home in the Japanese steel firms. Japan's industrial and import strategies shaped the industrial boom of the 1960's and 1970's, often termed "the Japanese Miracle." One aspect of this boom was Japan's overtaking the United States in free world steel production. Dani Rodrik has concluded that paradoxically, "Japan has been able to procure much of her raw materials during the 1960's and 197 0's at more favourable terms than has the United States, even though the latter country had tighter links to its supply sources." - 13 -The Government-Business Relationship and Industrial Policy Japanese policies concerning the acquisition of raw materials have been consistent through its modern history. They have placed a high national priority on supplying the resource needs of the homeland. A latecomer to the rank of industrialized nations, Japan has had to confront the entrenched positions abroad of the great multinationals of other advanced countries. Because of its latecomer status and group-oriented culture, Japan has developed a joint process of policy formulation between the government and the leading industrial/corporate groups. Government involvement in commerce has always been extensive. It took the form, in the late nineteenth century, of government subsidies and encouragement for infant strategic industries like steel and shipbuilding. Such industries were considered "trigger industries" because of their beneficial spin offs for other sectors like coal mining and electrical machinery. A few powerful zaibatsu (or vertically-integrated financial/ industrial cliques) rose to dominate the Japanese economy. Pro pelled by their growing need for markets and resources, the ex pansionary military government invoked the National Mobilization Law in 1938 to coordinate central planning of the domestic econ omy and the colonies. In 1945, the U.S. occupation forces dis banded the zaibatsu and enacted laws that would prevent such omnipotent corporations from ever again controlling the nation's economic life. Chaos ensued until the early 1950's when the - 14 -Japanese government initiated policies to rationalize key sectors of the economy such as the steel, coal, chemical, electrical power and synthetic fiber industries. Under "administrative guidance", the government — chiefly through the Ministry of International Trade and Industry (MITI) — encouraged cooperation among industries in pricing and the research and development of process technology. Mergers were encouraged; cartels were formed; and industries were subsidized and protected from competitive imports. Supply sources overseas and foreign markets were developed with a view to the long term. All this was done under the aegis of industrial and financial associations and the formal and informal control of MITI.6 Although the traditional zaibatsu had been disbanded, new reorganized industrial groupings arose. These groupings were comprised of massive corporations, horizontally and vertically linked. The corporations were usually centered on a bank, and many had such traditional zaibatsu names as Mitsui and Mitsubishi. Japanese corporations, or more specifically corporate executives, can influence government policies in both a broad and specific sense. The term zaikai refers to a power elite, a group of major industrial and financial leaders who represent the interests of the business community as a whole rather than the interests of the individual industries. Individual zaikai members devote considerable time to one or more of the larger economic organizations: The Federation of Economic Organizations (Keidanren); - 15 -the Japan Committee for Economic Development (Keizai Doyukai); the Chamber of Commerce and Industry (Nippon Shoko Kaigaisho); 7 and the Federation of Business Managers (Nikkeiren). Zaikai in concert with MITI and the Ministry of Finance formulate effective strategies to direct the economy as a whole. In contrast to zaikai, there are corporate executives called gyokai that represent specific industrial interests. Gyokai adjust competitive interests among individual corporations within their sector, forming a consensus so as to lobby the economic ministries with one voice. Administrative guidance is carried out at the gyokai level where the closest ties between the bureaucracy and individual industries exist. Gyokai collect and disburse political contributions. Publicly they contribute to the Liberal Democratic Party through a fund-raising organ ization (Konum Kyokai). Privately, gyokai contribute to indiv idual LDP politicians who are sympathetic to their industry's g interests or who are contenders for party leadership. "The most powerful and best established gyokai are steel, electricity and 9 banking." An informal aspect of MITI's control lies in the amakaduri (literally, descendents from heaven), the network of retired high-level bureaucrats that assist private corporations. During the 1950's and 1960's MITI, as organizer of the economy, informally controlled most industries to the extent that they needed approval to expand their capacity, develop new technology - 16 -or export overseas. MITI's formal sanction lay in its control over foreign exchange, credit allocation through the Japan Development Bank, tariff and non-tariff barriers, international investment, overseas markets, and research and development.MITI directly subsidized strategic and designated industries like steel. In 1970, MITI orchestrated a merger of Japan's number one and two steel companies to form the world's largest steel firm, Nippon Steel Corp. According to Lawrence Franko, :"since the debut of postwar Japanese economic planning, the steel industry has been the sector and Nippon Steel the company, closest to the Industrial Structure Committee of MITI."10 It appears however, that with the rapid internation alization and success of the Japanese economy, MITI's power and control over events has been weakened. Its original mandate to protect struggling companies from cheap foreign imports, to ration alize businesses so they may compete worldwide and to apportion select amounts of rare foreign capital is now out of date, part icularly with respect to the pace-setting industry of steel. With industrial structure moving from the traditional light and heavy industries to the newer service, information and "high-tech" industries, other ministries have become preeminent in their spheres of interest and now conflict with MITI. Ten to fifteen years ago, the Japanese became very concerned over the pollution and congestion heavy industry was causing. They demanded more social policy and less emphasis on the rapid economic growth - 17 -that was seen as destroying their environment,and endangering their quality of life. MITI responded by adjusting its policies and quickening industrial restructuring away from energy-intensive and polluting industries. Chapter V details the policies of restructuring that have occurred within the steel industry. Suffice it to say that coordination still exists between gov ernment and the steel industry.While the corporate component of the government-business relationship increasingly plays a greater role in trade policy, events such as the OPEC oil crises and the onset of glaring trade imbalances have regenerated much 12 of MITI1s power. MITI has used this power to intervene in business decisions and override any resistance to its policies. For example, in 1979, without invoking the authority of any explicit law or statute, the Japanese government suddenly imposed guide lines on the sogo shosha (trading companies) to prevent them from completing lucrative deals for imported oil from the inter national spot market. In another intervention, the government compelled the Mitsui conglomerate to maintain and eventually lose its multi-billion dollar investment in a vast Iranian petro-13 chemicals complex long after the firm wished to withdraw. On the other hand, Japanese firms on occasion can be divisive and willful, resisting "administrative guidance" and taking an independent course. Nevertheless, these episodes are far less common with respect to foreign issues than domestic ones. While - 18 -the Japanese bureaucracy exerts considerable power over industry, it is restrained by a tendency to reach decisions through a < national consensus. Ezra Vogel has described the relationship thus: MITI generally works in harmony with the consensus in an industrial sector or in the business community as a whole. In a given industrial sector there exists a social community of leading firms whose opinions carry great weight with polit icians, bankers, and other businessmen. Everyone assumes that the companies in an. . industrial sector and the corres ponding branch of MITI have sufficient continuity in personnel to maintain, in effect an institutional memory. Coop erative companies are eventually re warded, uncooperative ones punished.... Whatever implicit sanctions are convey ed in granting or withholding goodwill, it is the maintenance of goodwill that consciously motivates the company leaders. Since MITI generally acts in concert with the industrial sector organization of the business community, it can ordinarily count on the support of the majority of firms in disciplining an unreliable mem ber. Indeed, many decisions made by MITI might more properly be viewed as MITI enunciation of a consensus among the most significant actors. This approach to decision-making neither avoids nor circumvents opposition but allows all affected parties to participate. The process is quite often prolonged. When eventual consensus is achieved, it may be the result of a wearing down of the opposition, or, an ambiguous compromise. Nevertheless, consensus is an indispensable precondition for Japanese action. This national characteristic is found within both business firms and government agencies as well as in discussions and negotiations between them. - 19 -Generally the private sector respects the position and capacity of the governmental bureaucracy. The Federation of Economic Organizations, Keidanren, has been the key organ ization of the business side. Its membership includes public and quasi-public corporations such as the Bank of Japan, the Japan Development Bank and Japan National Railways. Primarily though, Keidanren is a private business organization. Several hundred of the most preeminent corporate executives from all key sectors comprise its directorship, and consultation with the government constitutes its central function. Informal con sultation occurs as a matter of course. Formal manifestation of the consultative process appears periodically in the reports of "deliberation councils". These reports, unlike the heuristic and investigative Royal Commissions of Canada, define the frame work within which Japanese business and government should ideally act. Most often, deliberation council reports spark legislation or steer key governmental agencies and credit institutions into "targetting" certain sectors and specific firms for support and other sectors or firms for "jettisoning". Jettisoning refers to the scrapping of ailing industries that suffer from excess cap acity, declining profits and loss of competitiveness. The dynamic nature of the economy permits strategies that exploit Japan's comparative advantage as it follows the ever-evolving international division of labour. Herein lies the quintessence of Japanese industrial policy. - 20 ~ Quasi-Integration Japan, the sole industrialized nation without significant domestic raw resources for its steel industry, leads the free world in production and exports of steel. The reason for this paradox is 'in part, the \ cooperation between industry, government and trading houses. This has created a distinct procurement system. Canadian, U.S. and even Soviet steel firms rely on upstream operations, which they own or control, for most of their raw materials In this way a vertically-integrated firm transfers products from one division or subsidiary to another without the mediation of the market. Japanese steel firms differ from these vert ically-integrated operations but do not, conversely,rely on open market purchases. Instead most coal and pig iron is bought from sellers with whom they have created a long term linkage of a quasi-integrative nature. To the degree that long-term contracts restrict the choice of trading partners, these contracts form a link analagous to vertical-integration. A critical difference, however, is that prices and volumes are set by inter-firm transfers of materials. Quasi-integration includes: (i) long term contracts that tie particular suppliers to Japanese steel firms for many transactions; (ii) technological integration through adaptation of a customised bulk logistical system to supply the Japanese steel industry; (iii) long-term "soft" loans from government-backed financial institutions in Japan to assist in port, mine and other infrastructure costs; - 21 -r and (iv) minority equity investment by steel firms and trading houses in overseas mining operations. As has been mentioned,MITI's interest in the steel industry antedates World War II. Through official papers and statements, MITI has indicated many times the central role of this trigger industry in its policy planning process. In 1946, the steel industry was earmarked as one of five major sectors to be accorded priority. MITI worked with the steel makers in matters of capital investment, production, exports, prices and the purchasing of resources.^ The success of the Japanese steel industry can be traced to various state-of-the-art refinements in procurement and production that began after the Korean War. The first step was the adaptation and improve ment of Western technologies in order to cut down the use of raw materials. These technologies were (and are) continually being improved. But suprisingly for a free market society, the technology was openly shared among firms through the mechanism of industry associations and through administrative guidance. By 1953, their rate of raw material usage became the lowest in the world, contributing significantly to an inter national comparative advantage in steel production. Soon after the steel firms approached a position of diminishing returns through economies in the use of raw materials, they began concentrating on reducing the shipping costs of these resources. The mills and their agents began insisting on an FOB price at the supplier's port (a significant feature in con tracts for B.C. coal). This procedure became policy. Secondly, - 22 -they moved away from chartering vessels and began building customized bulk carriers, thereby arranging for shipping to be independent of the supply contract. Next, customized bulk unloading facilities were erected close to the tidewater location of their mills. Equivalent bulk loading facilities and high volume internal transport networks were encouraged in the supplying countries. Initially the steelmakers provided financial assistance to developing countries supplying iron ore; coking coal imports came mainly from the United States which did not require financial assistance for this type of infrastructure. By the 1960's, however, the mills were providing similar assistance in coal port development to Australia. In many cases the Japanese provided long-term loans, technical assistance in project planning, or purchased minority equity interests in new coal and iron ore mining projects designed to contribute through the logistical system. This ensured the system operated at near constant capacity. The development of an integrated logistical system dealing with high volumes of materials enabled the mills to cut shipping costs in half. An added benefit of equity positions in mining operations in supplying countries was that it reduced the risk of national ization which became so prevalent during the boom years for commodities. Through quasi-integration there was sufficient residual control to avoid the need for full ownership. But the leverage that long-term contracts, integrated logistical systems and equity financing offered the Japanese was insufficient if a - 23 -supplier wished to flout the terms of a contract and bid up 17 various buyers when a "seller's market" existed. To combat this eventuality, the Japanese follow a policy of coordinated procurement. - 24 -Coordinated Procurement Encouraged by administrative guidance and facilitated by Japan's business and cultural environment, coordinated action amongst companies has become normal for some Japanese industries. This has been particularly true in the steel industry where inter-firm coordination for coal procurement has been so widespread that an apparent monopsony 18 has developed. Monopsony or buyer's monopoly is "an import ant characteristic probably unique to Japanese industrial 19 organization." Coal suppliers, particularly those that sell most of their output to Japan, view the steel industry there as a single entity, and for good reason. Over 95% of all steel production is concentrated in five firms, of which Nippon Steel Corp. alone produces 45%. Nippon Steel's top management consists of many former govern ment officials who were previously responsible for directing the steel industry. "Its leadership role is widely accepted in the steel industry, and few major decisions are made by the other four majors without obtaining informal approval from 21 Nippon Steel's management" This situation promotes inter-firm coordination. in his authoritative work, Negotiating Coal  Contracts with the Japanese Steel Industry: The Coordinated Procurement System, Joseph D'Cruz draws the conclusion that: the Japanese Steel industry operates as a single customer unit in its dealings with the overseas coking coal suppliers. Customer related factors are constant for all suppliers. - 25 -Quasi-integration by itself does not intrinsically create a situation of monopsony. Again peculiarly Japanese factors are at work. There are eight mechanisms that limit the ability of the coking coal suppliers to pit one steel mill against another. The most important of which is the use of "designated negotiators". One nominated firm negotiates with every supplier in a particular country as a representative for the entire Japanese steel industry. Nippon Steel is designated negotiator for Australia and the U.S.S.R., with the "assisting negotiator" being Sumitomo and Nippon Kokan Kaisha (N.K.K.) respectively. For the U.S., which supplies most of the industry's spot market purchases, Nippon Steel is the de facto negotiator in as much as its contracts set the benchmark price. Nippon Kokan Kaisha, assisted by Kobe Steel, is the designated negotiator for Canada of which more will be said in Chapter III. In other words, the same individuals are charged with exploiting competition among suppliers within a given country. This has the effect of harm onizing supply arrangements, the result being that all sellers of a given quality of coal receive the same price. A second arrangement is that each of the major steel firms uses coal from each major supplier. The Japanese mills blend various coals to achieve a constant and cost-effecient input for their blast furnaces. Each firm makes detailed reports - 26 -of the different coals and is encouraged to share these records with other mills, most often through professional associations. With a joint evaluation of the relative advant age of each brand of imported coal,the mills agree upon the tonnages and prices of each coal source to be procured by their designated negotiators. A third organizational arrangement is that of inter-firm consensus in decision making on what amounts should be purchased and from which countries. The suppliers' only spokes person at these crucial decision-making sessions is the des ignated coordinator, who must simultaneously make the pitch for the coal mining companies while defending or justifying any special concessions made on price, tonnages or contract terms. A fourth mechanism of the coordinated procurement system is the area of financial assistance. Using such funds as postal savings deposits, public pension contributions and insurance premiums, "Japanese style" government-backed financing 23 provides loans where project risk is high. Overseas invest ment projects often require enormous start-up costs or there may be considerable time before they yield~ a return. These cannot be financed adequately on the open market. If deemed to be in the national interest they will be financed by the Japan Development Bank, the Export Import Bank of Japan, and other governmental financial institutions. To perform this function adequately, these banks maintain departments devoted entirely to the analysis of the steel industry's purchase of raw materials. - 27 " Consensus has characteristically been strongest when a formally recognized designated industry is involved and foreign economies are to be confronted. When a special entrepreneurial push from the government has been seen to be necessary for foreign trade or investment, MITI has had little difficulty in authorizing and creating a new publicly controlled organizational tool. In the case of overseas coal procurement the New Energy Development Organization (NEDO) provides various forms of government assistance. In order to promote the development of overseas mines NEDO offers subsidies of up to 50% of the costs of locating projects and up to 66.7% of the expenditures for the basic survey, including drilling. Moreover, NEDO provides loans of up to 7 0% of exploration expenditures at a favourable interest rate, and provides loan guarantees for development costs up to 50% for Export-Import 24 Bank loans, and up to 100% of other bank loans. A fifth mechanism for coordinated procurement is the role played by MITI as already discussed. A Raw Materials Procurement Section for analysis and planning exists within MITI's Steel Industry Bureau. A joint government-industry committee was established in 1949 to formally coordinate the purchase of coking coal and iron ore. Besides the above-mentioned tools of administrative guidance — finance and subsidy — MITI has played an influential role in assisting the steel industry in negotiations with the governments of - 28 -supplying countries. Its role has been most obvious in dealing with the communist governments of China, Poland and the Soviet Union, where direct government-to-government relations are crucial. But during the last twenty years, western governments,particularly Australia,have increasingly become involved in what is termed "resource diplomacy". For example, during the 1970's, the Australian government through the Ministry of Industries became heavily involved in the negotiations for coal contracts in order to maximize the benefits of exports of non-renewable resources., In response, MITI has deflected much of the Australian government's pressure on steel firms by linking the outcome of negotiations to other areas within its sphere of interest. To this end, MITI was partly responsible in 197 6 for abolishing a two year old tax on Australian coal exports. Generally the govern ment prefers to remain behind the scenes in coal contract negotiations. Much of Japan's export success has been due to their ability to coordinate into cartels, like OPEC, which can plan strategy effectively. But such organizations suffer by not being able to make quick decisions. Because of the slow process of consensus building in Japanese decision-making, a sixth organizational arrangement is employed. The Japanese trading company or sogo shosha, with telex terminals in offices around the world, provide an invaluable service. Their mandate is to put into effect, promptly and effectively, the strategies hammered out in boardrooms and ministry offices. The trading houses actively seek out potential suppliers throughout the world. They monitor mining concessions, developments within mining firms, and new entrants in the coal mining business. While the designated negotiator works out the terms of contracts and annual price and tonnage requirements, the sogo shosha maintain overseas offices where they keep in frequent personal contact with the suppliers and handle the day-to-day paperwork. There is an informal arrangement between the sogo shosha and the steel companies. Once a trading firm has established a potential supplier, and has been appointed by the designated negotiator as the designated trading agent, rival firms will not compete for that business. If the designated negotiator feels the trading company is too small to conduct the supply arrangement effectively, a larger house will be asked to assist, though the former will remain nominally in charge. The naming of a trading firm is made formal when its appointment is included in the Basic Agreement and subsequently appears in long-term contracts. When a potential supplier visits steel mill executives and government officials in Japan for negotiations, all contacts are arranged by the trading house. The same is true when the designated negotiator visits the supplier's country. Generally, the trading firm pays the supplying coal companies on behalf - 30 -25 of their clients, the steel mills. Needless to say, under this formula, it is extremely difficult for a coal company to play off one trading house against another or even to switch firms. A seventh arrangement of coordinated procurement is in the field of technical assistance. Quite often Japanese mining companies and mining equipment firms are brought in under the auspices of the trading company to provide training, technical help or plant and equipment to the coal supplier. The sogo shosha supervises the relationship between the coal supplier and Japanese companies and reports on the relation ship to the steel mills. Finally, during the 1970's the Japanese government helped the steel industry set up a stockpile association by 2 6 lending funds at preferential rates. A drawback of quasi-integration is that it commits the buyer over a long period to some minimum quantity of purchases, irrespective of the buyer's need. While the U.S. created stockpiles in the 1940's in response to a perceived strategic need, Japan maintains its stockpiles explicity for stabilizing purposes. Accordingly the stockpile association may release coking coal or iron ore in times of high demand and may purchase these commodities when the steel industry is overcommitted. Stockpiles, along with the policiy of diversification, provide greater security of supply, a concern heightened during the tumultuous decade of the 1970's. 31 -Diversification In addition to quasi-integration and coordinated procurement, a third strategy is diversification. To under stand this policy it is necessary to mention Japan's geography and post-war developments. Given its small land area, poor natural resources, large population and the size of its economy, Japan can never become self-sufficient in resource supply. In addition to the obvious susceptibility of any nation with few resources and a large population, the Japanese economy developed a dangerously vulnerable industrial structure during the post-war period when raw materials were cheap. The rapid economic growth in the late 1950's and throughout the 196 0's came about through emphasis on the resource-hungry heavy and chemical industries. Japan became the world's largest importer of raw materials. Paradoxically this situation benefitted Japan. As a have-not maritime nation, Japan was not compelled to purchase costly or inferior domestic materials but could take advantage of the cheapest sources in the world. The U.S. export embargo on soybeans and the Arab cutbacks in oil in 1973 gave ample warning to Japan's policy-27 makers. When oil quadrupled in price that year, the cost of coking coal doubled by 1974. U.S. suppliers curtailed their deliveries far below contracted tonnages and instead sold their production on the spot market. In many cases, the U.S. mines' spot market sales were bought by their contracted buyer who was trying to overcome his shortfall. The Japanese steel mills - 32 -were stung by American duplicity. Similar events occurred with regard to other commodities forcing a Japanese response. The policy of diversification has two parts, both relevant to the demand for B.C. coal. In 1974, Japan initiated a diversification policy in order to lessen reliance on imported oil. In 1980, Japan began a diversification of sources. Like many other industrial nations, Japan responded to the crisis in price and supply stability of energy by searching for alter native fuels. What distinguished Japan, however, was the in tensity, breadth and determination of its response to internation al energy and economic realities. MITI instantly created new public corporations to oversee a shift to coal, nuclear power, natural gas, geo-thermal and solar energy as well as hydro electric power. Coal was seen as the easiest to implement and became the most successful alternative. Besides the question of supply, energy-saving techniques were put into effect for industrial production. But conservation efforts were not limited to industrial restructuring. Japan's export products became world-renowned for their energy efficiency. Japan's steel in dustry -began shifting from oil-fired to coal-fired blast furnaces, Similarily, electric utilities and the cement industry began switching from oil to thermal coal despite the latter's problems of bulk and dust. Soon after the second oil crisis and largely as a result of disruption in the supply of coking coal and the per-- 33 -ception of being over-dependent on Australia, Japan initiated a policy of diversification of source. South Africa had cheap coal but its mines were primarily locked into the European market and supply was therefore tight. Coal from China and the Soviet Union was cheap and close but was not viewed as secure. Coal from the eastern U.S. was expensive and suffered the drawback of high transportation costs. Coal from Western Canada offered the best alternatives. For a break-down of Japanese coking coal suppliers see Figure 2, Appendix 1. Japan (considers) diversification of the suppliers of natural resources as the key to the policy for resource security. It is not, however, a mere diversification having numerous suppliers, but the suppliers have been limited to three or four in order to realize the extensive-scale of development„and the economies of bulk transaction. Japanese investment in Western Canadian coal mine development offered the Japanese investors (i) potentially attractive price benefits; (ii) a hedge against sudden price increases or supply restrictions; and (iii) risk reduction through a collaboration with several enterprises. But what the Japanese were most interested in were new and separate rail and port facilities. - 34 ^ Chapter III The Negotiation of the Northeast Coal Project Introduction Successful performance in international negotiations, of "winning", results from an effective application of bargaining power. Bargaining power can be defined as the capacity to generate intended negotiating outcomes. Bargaining power and, by extension, "success" depend on a government's ability to shape the negotiating environment through selected strategies and tactics to suit its prearranged objectives. A negotiating strat egy is an overall bargaining design, a gen eral plan for advancing discussions through successive stages toward some desired con clusion . The techniques of the Japanese government — appeals for unity and maneuvering within the decision-makinc? structure inhibits speedy bargaining. This chapter focuses on Jap anese1, strategies in their application to the negotiation of the Northeast Coal Project. While the Japanese government has set up a particularly successful negotiating strategy for coal procurement, it remains largely uninvolved in any actual negotiat-2 ions. One reason for the behind-the-scenes stance of MITI is the Japanese desire to do business with reliable trading partners, while avoiding direct contacts between national governments. "The Japanese fear that direct government-to-government deals may inject disruptive political considerations into the economics of coal supply"? - 35 ~ The Negotiation of the Northeast Coal Project Japanese involvement in British Columbian metallurical coal began in 1968, when Mitsubishi and Kaiser Resources negotiated a long-term agreement. By 19 73 coking coal from British Columbia 4 and Alberta constituted about 20% of Japanese overseas supplies. From 1970 - 1982, Japan provided 87% of the market for Western 5 Canadian suppliers. Throughout this period the B.C. government tried unsuccessfully to persuade Nippon Kokan to build a large steel mill in British Columbia. In 1976, N.K.K. president Hisao Makita, the major spokesman for Japanese business in Canada, led a business mission which reported that Canada was a "paradise for lazy workers", had a small saturated market and costly restrictions on foreign investment^ Japanese financing and investment, the mission reported, should remain solely in resource development. When the British Columbian Social Credit Party returned to power in 197 5, it was anxious to promote the development of the northeastern sector of the province. The provincial govern ment looked to Japan to purchase some of the output of the vast northern coal deposits. During the 1976 Japanese business mission to Vancouver, NKK's Hiaso Makita stipulated that Japanese part icipation was contingent on the provincial government first build ing new transportation and townsite infrastructure for the pro posed new coal fields in the northeast. The Japanese steel makers were reluctant to commit themselves to any new B.C. contracts at this time as they were developing Australian coal on a large - 36 -scale. Since the Japanese appeared uninterested, and B.C. officials believed that ten million tons throughput per year was needed to make the project viable, other markets were courted. In 1979, Norco Resources Ltd. of Vancouver announced a billion dollar, twenty-five year contract with Taiwan Power Company. However, the federal Conservatives, temporarily in power, refused to start on the planned Ridley Island coal port at Prince Rupert until there was an assurance of at least four g million tons throughput a year. Despite an agreement for Quintette Coal Ltd. to supply the government of Rumania with twenty-five million tons of coal over twenty-five years, it became increasingly obvious that without firm commitments : from the Japanese, the ambitious Northeast project could not become a reality. The Quintette property east of Anzac, B.C. was initially held by Denison Mines Ltd. (38.25%), Mitsui Mining Overseas Company and Tokyo Trading Co. (22.5% each), and Imperial Oil (16.75%). In a letter of intent to Denison Mines, the two Japanese interests had agreed to purchase up to five million tons of coal per annum, but this was viewed as insuff icient to warrant the high infrastructure costs. In October 1979, Permier Bennett and Economic Development Minister Don Phillips visited Japan, but were unsuccessful in obtaining any further committment from the steel firms. In 198 0, a serious conflict of opinion emerged within the Japanese steel industry over further purchases of coking coal. - 37 ~ It became very difficult for NKK to acquire any undertaking from the mills with regard to the jiortheast megaproject. On November 13, 1979 the mills had decided to do nothing and ignored a January 1, 1980 deadline, imposed by both northeast mining companies, Bullmoose and Quintette. There was little'; pressure on the steel-makers as the projected upturn in steel demand for 198 0 was downgraded slightly. The mills had three further concerns; the price of the coal, the price escalation formula of the contract and,finally, the lack of details on the cost of the infrastructure. The Japanese offer stood at $75/ton as the guaran-teedinitial price for the coal shipments to begin October 1983. But Denison and Teck asked for "3 or 4 dollars more"7° The mills refused to go above $75/ton as they feared that would escalate world coking coal prices, especially those of south eastern British Columbia. The steel-makers felt they were leaving themselves open to severe price increases through the "price escalation clause" of the contract. The prevailing view was that there was insufficient technical data concerning the infrastructure costs. The data that was given to the mills was viewed with skepticism. For example,a "spur" track to connect the mines to the main Canadian National rail line was variously estimated to cost between $215 million (Victoria's appraisal) and $700 million (a sogo shosha's "guesstimate") 3-1 Higher than envisioned - 38 _ costs could make the Japanese pay dearly under the price escalation clause being offered by the coal mining companies. A number of the steel mills disliked the pressure from NKK and the B.C. government to sign a Basic Agreement. These mills wished to suspend all thought of signing a contract at least through 1981 and 198 2, until more in depth technical evaluations had been worked out with the mine operators. In January 198 0, at meetings of the steel-makers NKK expressed their concern about the repercussions which a postponement would have on Japan's commercial relations with Canada and particularly with British Columbia, in view of the federal and provincial efforts to line up the financing for the ambitious mega project. The steel firms considered two options: (i) make a counter-offer above $75/ton and resume negotiations, or (ii) reject the B.C. offers but leave the door open for fresh negotiations in the future. The Japanese steel mills chose the latter option for the following reasons. They were still very much attracted by a new long-term source of supply with an inde pendent rail and port facility. Other coking and thermal coal projects could be planned there. The Japanese appeared to lack consensus on the project and as one source put it, "they simply couldn't agree to scrap negotiations. There is a wide division . . 12 of opinion amongst the mills". Besides, the mills saw little gain in scrapping the negotiations. The opinion in Vancouver was that the Japanese were pursuing their usual negotiating tactic - 39 " of not breaking off negotiations altogether, but patiently 13 waiting for the other side to make concessions, a form of silent pressure. Nippon Kokan, to refute those claims, prepared and implemented a public relations campaign to seek Canadian understanding of the Japanese difficulties. Probably the greatest reason for the choice of option (ii) was the lack of pressure 14 on the Japanese because of a stagnant world demand for steel. However, forecasted demand reversed dramatically in the late winter months of 198 0 when report after report predicted 15 an upturn in 198 2. The revised demand forecast provided the necessary momentum for the pro-Northeast Coal factions within the industry. A high level mission from Japan, headed by Nippon Kokan, met with the B.C. provincial cabinet and stated that they needed a contract shortly for 5 to 8 million tons of met. coal per year. The Japanese reiterated that they were not dependent on B.C. and that it suited them to buy here only as long as the price was advantageous, delivery was reliable, and only as an alternative to other sources. Economic Development Minister Phillips emerged from the talks stating,"the coal deal now looks more positive than it has in the last three years." One NKK executive explained, "last year we were in no position to make any long-term commitments. Now we are, but it depends on the 17 infrastructure being there. Timing is crucial".. Negotiations reached a critical stage with a final agreement depending on a large federal subsidy, or some alter-- 40 -native such as Japanese financing, to finance transportation construction to tidewater at Prince Rupert. There was pressure from the mills to finalize the deal so that deliveries could be made by the mid 1980's in anticipation of the expected upturn in steel demand. The mills insisted that otherwise they would 18 not be interested for another five years, if at all. Teruji Nomura, executive Vice-President of Mitsui Canada Ltd., announced that "B.C. must act now", in offering an acceptable price, as the Northeast Coal project would be the last chance for a major met. coal deal. "The Japanese steel industry will grow by only 3 to 5 per cent per year because they have already hit the 19 peak and are levelling off". It is clear that neither the Japanese nor the Canadians wanted the negotiations to fail at this point. Yet neither wished to pay for the necessary but costly infrastructure. The situation was to be resolved by a high level summit meeting in Vancouver. Despite repeated invitations, successive Japanese Prime Ministers had voiced no interest in visiting Canada after the "fantastic breakthrough" of the Trudeau-Tanaka communique of 197 4 which ush-20 ered in a "new era in Japan-Canada relations". But in May, 1980 Prime Minister Ohira and Foreign Minister Okita held talks on northeast coal with Prime Minister Trudeau and External Affairs Minister MacGuigan. Optimism prevailed but each side attached 'tough strings"to their positions. Prime Minister Trudeau ind icated that the infrastructure problem could be solved if Japan - 41 -bought an $800 million CANDU reactor. Prime Minister Ohira replied that the independent Atomic Energy Commission had decided the previous year that it did not want to introduce CANDUs into Japan for the time being, but that the decision could be subject to change in the future. The "change" occ urred a mere twelve hours later when in Tokyo, MITI announced a $3.5 million renewed study of the CANDU. Prime Minister Ohira commiserated with Canadian calls for more manufactured exports to Japan, but he felt that the best way for Japan to assist in that area would be to increase its investment in Canada. For that eventuality to come about "Canada must further develop its roads, ports and harbour facilities and foster 21 stable industrial relations", he said. Thus the Ohira-Trudeau conference failed to end the stalemate over infrastructure costs. The British Columbian government felt betrayed by the federal government. Premier Bennett accused the Liberals of being "anti-western" and worse. For their part the Japanese announced a final deadline of 15th June 1980 and sat back and watched the federal and provincial governments wrangle over who should pay for the construction of a 115 kilometre spur-line linking the mines to the main CNR line. No price negotiations could take place until the spur-line was assured and freight rates outlined to the coal companies. The Canadian government agreed to contribute $100 - 42 -million to build the necessary facilities at Prince Rupert as part of its federal responsibility for ports and harbours. The CNR offered to contribute $210 million for eight new coal trains and $75 million to upgrade its main line from Chetwynd to Prince Rupert to handle the increased traffic. The federal and B.C. governments had reached a tentative agreement whereby the national government would increase their contribution by $70 million presumably for the rail link. What was at issue was Don Phillips' estimate that the massive tunnelling and rail construction would cost a mere $215 million. NKK and the coal companies estimated these "political figures" to be about 50% 22 of real cost. Moreover, Federal Economic Development Minister Bud Olson (on instruction from the Prime Minister) insisted that any added federal commitment would be linked to B.C. requests for 23 federal compensation for the Foothills natural gas pipeline. The provincial government was stalling this project, demanding $275 million for social and environmental damages created by the construction of the pipeline. Neither government would budge on 24 this issue and the coal talks broke down. In the few frantic days preceding the Japanese June 15 deadline, the following events took place. The CNR announced that in building the spur-line it would insist on a guaranteed 20% return on its capital investment in perpetuity. The Premier viewed this as usurious and vowed to "go it alone". Bennett boldly announced that the (heavily in debted) British Columbia Railway (BCR) would build the spur-line - 43 -with provincial financing to come from a provincial bond 25 issue. Further financing could come from natural gas revenues, although the U.S. market was drying up and the federal govern ment was proposing an export tax of 10 per cent. Such questions as what railway would build the spur-line, how much it would cost and who would pay for it, remained a mystery. But the coal companies were given figures by both governments so that they could present offers to Japanese steel mills. These figures included:(i) a $4/ton surcharge for the towns, roads and hydro; (ii) a $15 - $16/ton freight rate; (iii) \a $3.50/ton port charge;and (iv) a 3.5% provincial royalty on the minehead priced To understand /the subsequent price negotiations that took place in Tokyo, the pressures on the B.C. government and the context of the Japanese decision-making during this time deserve mention. Besides the constraints introduced by the CNR and the federal cabinet, the opposition in the Legislative Assembly and the Vancouver and District Labour Council were demanding that the coal deal be abandoned because there would 27 be "no return to the people of B.C." Edgar Kaiser, a prominent B.C. businessman and chairman and chief executive officer of Kaiser Resources Ltd., a southeastern B.C. coal company, announced to the press that the government would never subsidize the export of a non-renewable resource. He added that without even utilizing - 44 ~ their untapped reserves, southeastern mines could easily supply 2 8 the increased Japanese requirements and at a far cheaper price. Everyone concerned, including the Japanese, agreed with this view — but the Japanese wanted as well to promote the creation of a$ new supply line across northern B.C. A report by the South eastern B.C. Council of Mayors declared "the selling price (of N. E. Coal) would have to be heavily subsidized....At the moment they (the Japanese) are paying world prices which range from $50 - $7 0/ton depending on the quality of the coal. There is every indication that the Japanese are not prepared to pay a premium 29 in order to gam access to new supplies of coal'.' Because of high prices, this report argued, the steel mills had recently rebuffed Australian proposals for two new coal mines. This logic was flawed. The Japanese had rejected the new Australian pro posals, not because of price, but because they wished to lessen their dependence there. Coal and government officials in Aust ralia and Japan insisted that the steel firms would not pay more than current world prices ($50-$70/ton). Looking closely at this chorus of self-interested rhetoric one can conclude that the Australians and the southeastern B.C. coal mines were concerned to derail the northeast megaproject. The Japanese, for their part, were merely advancing their position in the B.C. press, a tactic they were to use effectively many times. (In contrast, B.C. negotiators often refused to make any comment to the press with the result that many public concerns about the project were not dispelled.) - 45 -But without saying so the Japanese were prepared to pay a premium for diversification of supply. And in addition to reducing dependence on the southeast of B.C., the mills would benefit from a new superport at Ridley Island that was 24 hours less steaming time to Yokohama than Roberts Bank. Japan Echo, a weekly industrial newsletter subscribed to by coal companies throughout the world, stated that the policy of the steel mills was now to negotiate contracts to the $80/ton 30 level. The Japanese lent China $U.S. 2 billion in 1979, half of which was to be used to develop new coal mines. As well, in 1980, the Japanese and Chinese negotiated a price increase of 31 25 per cent. The Japanese recognized that every coal producing country has some coalfields that could be developed easily and cheaply but that subsequent development, be it in Australia, Canada or China, would be more difficult and therefore more expensive. In almost all instances, because of high capital and start-up costs, the coal from new mines is more expensive than that from mature mines. The steel mills preferred to stagger the development of coal mines, not to wait until the low cost fields were exhausted before facing very high costs from the next generation of mines. After the June 198 0 summit where the major industrial democracies pledged to slash oil imports, MITI by 1981 had switched ten oil-fired power stations to thermal coal-fired plants. As a result of the second oil crises, the 1980 and 1981 forecasts for projected thermal coal use were excessively optimistic. Hideo Yokota, president of Sekiten Shigen Kaihatsu, a MITI-sponsered thermal coal procurement and 32 development company, gave figures for the predicted increase. He stated that thermal coal imports would jump from their 197 8 level of less than a million tons to around 16 million tons. in 1985, 42 million tons in 1990 and 66 million in 1995.33 By the turn of the century estimated imports would reach the 120-130 million mark. Yokota reiterated, "There is no way we will rely too heavily on one supplier. Diversification is our aim and this will include Canada, China, South Africa and the U.S." Hindsight shows that the steel mills and their coor dinator were committed to diversification, perceived the need for more thermal and met. coal and were pleased at the quality and technical data of B.C.'s northeastern coal reserves. While the Japanese were prepared to pay higher prices, they initially tried to lever the provincial government into opening up its higher-cost fields while selling the coal at the same price as that from the existing fields in the southeast. No doubt, it was their intention to pressure Australia and China to offer comparable prices for their new mines. But when the coal companies arrived in Tokyo on 26th June 1980, Teck and Denison offered NKK a price of $84 and $86/ ton, respectively. (NKK reported these proposals to the Japan Steel Federation which in August 1980 made a counteroffer of - 47 -35 $75 - $77/ton ). In discussions the steel firms had raised their concerns that the B.C. government was pushing ahead on political rather than on economic grounds. One steel industry source was quoted as saying "The Japanese don't want to be 3 6 whipping boys in any future election campaign'.' Questions raised by the mills were:(i) Why is the provincial government obsessed with developing the north when it is not clear it can recover costs?; (ii) Would the next election be fought on a subsidized coal issue?;and (iii) Would a change in government jeopardize the contracts? Moreover, the steelmen were not convinced that British Columbia could recover costs, let alone make a profit, and did not want shortfalls to be passed on to 37 them through hefty price increases. Economic Development Minister Phillips had intimated that, -in calculating the return on investment, he was looking at such revenues as personal and corporate income tax, sales tax and the whole economic multiplier effect of developing the coal fields. On 14 July 198 0, a consortium of four Brazilian steel firms and the nine largest Japanese mills led by NKK expressed their interest in purchasing "large amounts" of met. coal from Southeast B.C.'s Greenhills and Fording coal mines if the Roberts Bank superport could be expanded from its present 10 million ton 3 8 capacity to 40 million tons. The contention that the Japanese intended this proclamation as a pressure tactic on the Northeast project is dubious. It is more likely that it was a response to - 48 -the continued disruption in Polish supplies brought about by the Solidarity strikes. Nevertheless, Phillips declared the next day that expansion in the southeast would not affect the northern megaproject. Since the spur-line costs were raised from $215 million to $315 million, Phillips proposed a $5/ton rail subsidy ($3 and $2/ton from the federal and 39 provincial governments respectively). Ottawa rejected this notion restating that the current coal-cost quotes already reflected "significant taxpayer participation in transportation and other infrastructure and don't represent fully costed prices... (any)joint additional non-recoverable assistance... 40 is unacceptable to the the taxpayers of Canada". Moreover t even with a $5/ton subsidy, the coal companies would have to shave an additional $5/ton off their own margin to reach the $74 -76/ton range acceptable to the Japanese. Three times in the previous two years the steel mills had appeared ready to shelve the Northeast project indefinitely. In 1979, they continued negotiations because of their desire for an alternate source of supply and switch over to thermal coal power generation in the wake of the second oil crisis. In late January 1980, their interest in the project increased dramatically, despite the suspicious data on infrastructure costs, because of an extreme upswing in projected steel demand. Then, in August 1980 in spite of their concerns over the political complications of subsidized coal, they took a - 49 -more favorable approach to the megaproject. The reason was simply a disruption in supply. The Japanese had suffered a "shokku" (shock) from Australia at the same time as Poland's coal exports were interrupted. Two thirds of Australia's 47% share of Japan's coal imports came from Queensland; and the Queensland miners had walked off the job. They were striking for tax incentives for remote area living.) A few weeks later,dockworkers in New South Wales struck as well. Because of these strikes, the mills were forced to replenish their stocks by purchasing over two million tons of expensive spot market coal from Canada and the United States. The mills were bitter at having to bear all the costs of the Australian strikes. Further bad news came when the New South Wales mine-owners announced that regrettably they would have to reduce contracted sales volumes of both steaming and coking coal, including some covered by newly negotiated contracts, because the tonnages far exceeded the handling capacity of state ports. This prompted the Japan Steel Federation to lecture the government of 41 Australia on the importance of keeping its house in order. Such a rare move from the Japanese, who avoid confrontation, was tantamount to an ultimatum. In a supposedly confidential report the Fuel and Metal Department of Nippon Steel analyzed the structure of U.S.,Canadian 42 and Australian strikes. Nippon Steel found that Australian work stoppages were 'unpredictable and increasing at an alarming rate. - 50 -Australian unions felt they were in a strong bargaining position because of the resource boom. Conversely, Canadian and American stoppages were less frequent and usually tied to triennial revisions of labour contracts. The report concluded that Japan was dangerously dependent on Australian met. coal supplies, but had little chance to diversify. It was suggested that the U.S. could supply alternative coal but it would have to be shipped from the east coast thereby raising transportation costs. Imports from Canada posed problems of distance and lack of infrastructure that increased costs. The debate continued within the Steel Federation as to the extent Japan should buy more expensive Canadian coal, merely as insurance against strikes (eg. Australian), and risk the disruption of the global price network. The steel companies made three decisions in the summer of 198 0. They continued to spurn the pleas of the Australian coal companies to sign competitively priced long-term contracts. Secondly, they signed long-term agreements in principle for app roximately five million toms per annum with southeastern B.C.'s 43 Greenhills and Line Creek mines and Alberta's Gregg River mine. Finally, Tsuneji Nemoto, managing director of NKK, led another high level mission to British Columbia to see if the Northeast project could be resolved. The mills felt they could not wait any longer if coal was to be shipped by January 1984. The concern - 51 ~ of many steel mills about financing was resolved after talks with the coal companies and officials from Ottawa and Victoria. Other mills remained perturbed at the coal price and freight rate. Nemoto personally lobbied C.N. to reduce its freight rate without immediate effect. It appeared that the Japanese were prepared to accept the rock-bottom offer of $75/ton if this price were to be kept 44 stable for a reasonable time. The steel-makers were unhappy that the starting price of Quintette coal was only being pegged for the first 18 months of the proposed fifteen year contract and that the B.C. interests wanted 60% of the shipments to be covered by a cost escalation clause. The Japanese demanded a three year hold on prices, and a reduction on the escalation portion to between 40 and 50 per cent. Teck and Denison suggested informally that the initial price might be reduced or pegged longer if the Japanese were willing to take more of an equity 45 share in the development. The mills did not take up this offer despite the fact that the Japanese equity holders, as well as the trading firms involved in the deal (Tokyo Boeki and Nissho Iwai) were anxious that the project succeed. NKK, in an attempt to end the deadlock, tried to get an agreement on the minehead 46 price alone, leaving transportation costs to be settled later. As stated in Chapter H of this study, isolating minehead costs was contrary to procurement policy since the early 1970's. The move was unsuccessful. The deadlock remained, exacerbated by the end of Australian strikes and shrinking forecasts for Japan's 47 long-term steel production. The mills reverted to a hardline attitude on price. The pessimists among the blast-furnace operators (Kawasaki Steel and Sumitomo Metal) disagreed with MITI's optimistic projections of future steel demand. These critics foresaw an accelerated scaling down of the industry in line with international competition from newly industrializing countries (NIC's), where they had invested heavily in steel production. Moreover, they did not have faith in the policy of conversion to coking coal as a number of mills were success fully experimenting with an efficient oil-coal mixture. They were in favour of diversification of source but looked to China, which as a supplier had the added benefit of counteracting Japan's embarrassing bilateral trade surplus. According to Dick Hermann, Vice-President and chief negotiator for Denison Mines Ltd., the dissenting faction asked if it was possible for the deal to be postponed for two years. But Don Phillips said he could not guarantee the same conditions two years hence and that since the two levels of government had given their final position (no $5/ton 48 subsidy), the Japanese must abide by a 20 January 1981 deadline. Evidently the mills weighed the pros and cons and arrived at a consensus. Twelve steel and gas companies agreed, the day before the deadline, that they would purchase at least 49 94 million tons over a 15 year period starting in January 198 4. NKK's Tsuneji Nemoto confirmed later that the mills final figure was to be 115 million tons, far greater than the volume originally offered by the mines. This included an additional 1.38 million tons of thermal coal per•annum to be purchased from Quintette by Mitsui and Tokyo Boeki, a move intended to sweeten the deal for B.C. The added volume and the fifteen year term made it possible for Quintette'to agree to a $75/ton price (75.50/ton for Teck)f 53% of that being covered by an escalation clause. In total the Japanese had agreed to purchase 7.7 million tons of coal each year for fifteen years with the possibility of extending the term to twenty years. Citing this increased volume as the reason,B.C. Rail and the CNR announced that they would drop the freight rate from $15.86 to $13.86 per ton.50 3ecause of the seeming about-face and the quick decision by- the steel mills to sign a deal for northeast coal, the belief arose,perhaps fuelled by self-serving politicians, that the federal and provincial government's "ultimatum on public financing jelled (the) coal deal... Both Ottawa and B.C. dug in their heels and made it clear there was no more public money availabe... Once they (the mills) got that clear, the deal was made"?1 This was a mis conception. The majority of Japanese mills were eager to purchase Northeast coal at the current market price, but would pay more for diversification of supply. Allegations that they were all the while intent on striking a deal, but merely playing a stalling game so as to force Canadians to increase subsidies, ignores many of the steel-makers concerns. Their distress over the policit-icization of the project and their fear that it might not be economically viable were real concerns. They were real enough to persuade the Japanese to add an extra million tons per annum to the project. More likely the Japanese government and factions within the Steel Federation finally reached a national consensus (a prolonged process described in Chapter If,) . This was in line with their own deadline for receiving coal shipments by January 1984, for the expected upturn in steel production. Their final concern, cost overruns in the building of. the necessary infrastructure(especially the 17 kms. of tunnel ling needed for the BCR spur-line) was allayed in the actual con tract finalized in August 1981. At Japanese insistence the esca lated ;portion of the price of the coal was to be tied solely to a complex inflation-adjusted formula of labour, fuel and material 52 costs and reviewed every four years. This was a provision that would have staggering implications later when the escalated price far outpaced the market price. - 55 ~ Chapter IV Japanese Actions Since Signing the Contracts  Increased Japanese Involvement For the second half of 1981 and the first half of 1982, the Japanese steel consortium were enthusiastic about the Northeast Coal Project. They remained bullish over future thermal coal requirements and anticipated a hefty steel revival by 1985. The steel-makers were concerned that worldwide infra structure bottlenecks were "muffling the coal boom".1 Many coal ports were still operating in the pre-OPEC era, when the demand for coal was declining. Now, congestion in most leading coal ports had forced exporters to turn down potential customers. Those ports in Australia and South Africa that had expanded at considerable cost in the late 197O's were again operating at full capacity. Compounding this dilemma was the fact that many coal ports and the railways servicing them had little money to expand their facilities. Such was the case in British Columbia. The Japanese steel mills were concerned about the project's future in view of federal-provincial disputes over financing, the siting of 2 the coal loading port and mining methods to the adopted. More over Esso Resources Canada Ltd., citing cash flow problems dropped out of Quintette Coal, offering its six per cent equity to the remaining shareholders (Denison, Tokyo Boeki, Mitsui 3 and Charbonnages de France). - 56 ~ Steel officials in MITI were quoted as saying the government would promote "more active participation in the 4 project than merely being buyers of the coal produced". Accordingly, Nissho Iwai, the trading house responsible for Teck's Bullmoose mine and acting as the agent for the six largest steel mills, purchased a ten per cent stake in the mine for approximately $10 million. The sogo shosha announced that it planned shortly to increase its equity to 3 0%. In return for its investment the trading firm would gain a guaranteed right to coal in proportion to its equity interest Since Nissho Iwai would handle the remainder of the coal in any event, its cash infusion merely secured its current position and gave it additional access to a number of other yet-to-be developed coal fields in the northeast. Responding to questions about MITI's diversification policy concerning oil, coal and liquefied natural gas, an executive from Nisshb-Iwai stated, ''Western Canada is the place to be. B.C. and Alberta officials are more responsive to our requests for speedy resource devel-opment and infrastructure requirements than are most governments'.' In Chapter TL,xt was noted that the Japanese sogo shosha encourage mining equipment firms to bid aggressively for infrastructure construction contracts. This was the case with the Northeast Coal Project. Mitsubishi Heavy Industries (Canada) Ltd. was awarded a $19 million contract to build the stacker-reclaimers at the new Ridley Island superport despite a bid from a Canadian cortpany and much criticism of the lack of Canadian content. But the critics' wish for more Canadian Content did not apply to - 57 -financing. By June 1982, the rapid escalation in interest rates that occurred in Canada threatened to jeopardise the project. Capital costs in spent dollars for the first phase 7 of the project were $2.9 billion. The Japanese responded to the need for additional financing in two ways. Twelve Japanese companies took an additional 10% share in Quintette Coal raising Japanese equity holdings to 38%. Despite concerns over the economics of the project from the small dissenting faction(again Kawasaki Steel and Sumitomo Metal ), NKK1s Nemoto convinced everyone that B.C. had been generous in its dealing with Japan. Citing the Canadian and provincial governments' investment in infrastructure, the provincial appointment of a coal coordinator to facilitate the project, and the Japanese concept of giri (returning favours that have been received) Nemoto urged the investment in add itional equity to help the financing of the project. NKK attached a controversial demand. While Denison still held half the shares, it would actually have only a management role the equivalent of 30% equity. The Japanese would effectively control the project through their 38% holding. The mills insisted on this condition not only because they wanted a voice in future expansion, but more importantly to block Denison from raising the basic contract price of the coal to meet development cost overruns. Denison Mines agreed to this condition after Japanese assurances that it would remain the on-site manager during both construction and operation of the mine. - 58 -A further adjustment within the Japanese equity share occurred when a trading company , Sumitomo Corp., volunteered to purchase from Mitsui Mining and Tokyo Boeki a 5% investment in an effort to overcome the resistance of one of its affiliated companies, Sumitomo Metal, which was among the most g vocal in opposing the equity participation. In effect the Japanese Steel Federation not just Nippon Kokan, was now backing the project. This enabled Quintette Coal Ltd. to borrow an additional $950 million at a favourable rate from a consortium of seven banks (mostly Japanese). The long-term prime interest rate in Japan at that time was 8.5% about 9 half the Canadian prime rate. Interest payments were set low enough to make the Quintette project profitable. Or so it was thought. In the Fall of 1982, fifty-five international banks put in place an additional $1.7 billion of private permanent financing a considerable vote of confidence. - 59 -The Contracts From 1983 to 1985 the Northeast Coal Project became the centre of controversy between the Japanese steel industry and the coal companies, Bullmoose and Quintette. The focus of the dispute was the interpretation of the terms of the contracts signed by these participants in 1981. Because the Coal companies and the B.C. government have endeavored to keep the terms of the contracts secret they have not been easy to discover and much confusion has resulted. The main subject headings in coal contracts concern the time period, annual quantities, base price, price escalation formula, specifications for the actual coal and penalty schedules. Generally, there is little difference between the "old" contracts signed from the mid 1970's to the early 1980's with Southeastern B.C. and Alberta coal mines and the "new" contracts signed with the mines in the northeast of British Columbia. The contract period has usually been 15 years. In the early 1970's the Japanese paid a minehead price and negotiated freight rates separately with the CPR. The minehead price was negotiated in U.S. dollars with a set esca lation formula. In the mid 1970's, the Japanese changed the form of the contracts by putting the onus of negotiation acceptable rail rates on the mines. All new contracts contained an FOB port price in Canadian dollars. In 1977, the escalation formula was aban doned in favour of annual negotiation on prices and volumes. - 60-* But because of their "special nature", the Northeast B.C. mines reverted to the original practice of negotiating a base price and escalation formula before construction on infrastructure commenced. Quintette negotiated a base price of $7 5.00 per ton FOB Ridley Island as of 1 April 198 0. Teck received a base price of $75.50/ton. Of this original price 53% or $40/ton was allowed to e,scalate in accordance with an abstruse calculation based on government inflation indices for wages, materials and equipment. By April 1, 1982, the price had escalated to $89.98/ ton and by January 1984, when the first shipments were leaving Ridley Island it was almost $100/ton. (For a break-down of Quintette's contract see Appendix 2). Contrary to popular belief there are no "take-or-pay" clauses in any Japanese coal contracts. For the Northeast B.C. mines price reviews occur at specific intervals. For example, Quintette will have reviews on 1st April 1987, 1991 and 1995. Industry sources stipulate that while the agreements specify both price and volume, they are not firm, iron-clad contracts. The Japanese cannot be forced to accept quantities provided for in the contract. and the mines cannot be forced to ship those quantities. While the price for northeast coal escalates at set rates and is "guaranteed" until at least 1987, there are clauses ,!that exist that allow either side to open up the price for negotiation if the escalated price is out-of-line with that of other Western Canadian coals".10 Herein lies the ambiguity - 61 ~ that caused the recent straining of relations between the coal mining companies and the provincial and federal govern ment on the one hand and the Japanese steel consortium and MITI on the other. Recession and Renegotiation The contract terms would have continued to satisfy both sides if the underlying assumptions had held true. However, the assumption that energy prices would continue to rise in definitely did not hold true. The softness in world oil markets slowed down the rate of conversions from oil-fired to coal-fired furnaces for steel-making and power generation. Secondly, the assumption that international economies would continue to grow, or at least maintain existing levels of demand,.proved to be wishful thinking. Instead, a world-wide recession set in, the depth of which would have been considered unimaginable in 1980. Because of this recession, world-wide steel production plummetted Japan's steel output fell from 107 million tons in 198 0 to 93 million tons in 19827/''" In late 1982, the Japan Steel Federation cut its metallurgical coal demand by 35%, creating almost over-12 night a severe situation of oversupply. From April to Septem ber 1983, the "big-five" steel-makers in Japan recorded a loss of $U.S.43 million despite massive sales of their securities portfolios. Ironically, at the precise time when the Japanese steel industry was in an unprecedented slump and a glut of coal existed, the United States put heavy pressure on the Japanese to buy American coal. The U.S. was irritated by the perceived "dumping" of steel products and a glaring bilateral trade im balance. U.S. Special Trade Representative William Brock won a superficial commitment from the Minister of International Trade - 63 _ and Industry (MITI) Sosuke Uno "to increase purchases of U.S. 14 coal in the future". President Reagan in a meeting with Prime Minister Nakasone tied energy exports to Japan to inc reased U.S. imports of Japanese automobiles. Despite MITl's< statement, the steel industry was in no position to purchase U.S. coal over and above current con tracts. To combat its condition of overcommitment the Steel Federation took immediate action. It stopped purchases of coal from suppliers with whom it had no contractual obligation and equity participation (largely American and Albertan producers). With those mature mines with which they had long-term contracts with annual negotiations, the steel-makers bargained large reductions in tonnages (20 - 30%) and price (10 - 20%). Thirdly, the sogo shosha began to sell their excess coal on the inter national spot market, in some cases at a loss. In bitter negotiations with Australia's two "new mines", Qaky Greek and German Creek, Nippon Steel, as designated neg otiator, was able to roll back prices substantially. Because new mines have large start-up costs their coal is more expensive. Yet the Japanese were successful in reducing Oaky Creek's price 15 from $US60.32 to $US56.50. (The escalated price of the northeast B.C. mines was about $US 75.00 at this time). Added pressure was now put on the five new Western Canadian mines Quintette, Bullmoose, Greenhills, Line Creek and Gregg River. - 64 -In the southeast, despite a tough stance and pro longed bargaining, the mines were forced to accept price roll-backs. From a 1982 price of $82/ton, the Japanese won a series of annual price cuts so that by 1985 all south eastern mines were selling their coal at $69/ton. Each year the Canadians and Australians had informally banded together attempting to present a united bargaining position. However, the Japanese always negotiated first with the United States, whoj eager to increase their volume of sales, would settle for an inexpensive price, thereby undermining this makeshift cartel. In 1984 and 1985, most southeastern mines had de manded price increases to off-set their increased production costs, but to no avail. Lay-offs resulted as tonnages were cut (in some instances up to 50% of 1982 shipments)16 Joseph D'Cruz in his study of Japanese coal pro curement concluded that "suppliers within a particular country were treated as a homogenous group... The price paid to a supplier depended on the country in which the supplier was located". Writing in 1979, D'Cruz's thesis was correct. However, the case study of northeast coal shows clearly that the Japanese have treated this project differently, not only in order to guarantee themselves a diversified source,but also because of the politicization of the project. Writing in 1983, even the authoritative H.N. Halvor-son agreed with the D'Cruz thesis: - 65" This study forecasts existing North east B.C. shippers will obtain the contracted price of about $95/ton FOB for 1983 only for political rea sons and because shipments will be small. The prices in subsequent years will be the same as^hose pre vailing in the southeast. As the northeast coal shipments commenced on schedule 7th January 1984, the Japanese made no secret of the fact that they regarded the $100/ton price as exhorbitant. However, they, made no formal request for a price reduction for fear of the storm it would create. Coal company execut ives and Economic Development Minister Don Phillips repeat edly declared to an attentive public that "coal prices will never be reduced". One Japanese steel executive was quoted as saying, We will have to proceed caut iously because this cannot be allowed to develop into a major political issue. All we can do is convince the Canadians of the very good reasons behind our de sire to renegotiate the price for mula to conform withprevailing business conditions. It was the Japanese consortium that had insisted on the actual price formula, a point not lost on Nippon Steel. After much infighting within the Japan Steel Federation, Nippon Steel succeeded in shuffling off the chief supporter of north east coal, Tsuneji Nemoto of NKK, to a lowly subsidiary. In a parallel move Nippon Steel appointed in his place its tough coal price negotiator, Mr. Teranishi, who had just returned - 66 from Australia. Teranishi was appointed president of Nitt-etsu Shoji, a Nippon Steel trading company subsidiary that was to become the import agent for 10% of the output of the 20 five new Western Canadian mines. Despite having only a 10% stake, Nippon Steel, would now have added leverage in coal price negotiations with the northeast mines. The first tactic of the Japanese was to make their position widely known to the western Canadian public. Ken Bell, business writer of the Province newspaper observed later, Funny isn't it, that most of the doom and gloom stories about north east coal seem to originate in Tokyo... But that1s the way of coal negotiations with the Japanese. The stage is set in the press before negotiations even begin. It's no wonder that a country with no resources of its own can be so success ful with those of other countries. The public position taken by the mills was that there was an understanding between the provincial government, coal comp anies and the steel-makers that the escalated price was tent ative, pending final settlement of a $14/ton rollback (half the difference between the escalated price and the market price). But the reduction to $84/ton would be retroactive to the date of the first shipments and be settled as soon as politically feasible . As for volume, NKK indicated to Quin tette that because of their overcommitment the mills could only accept 170,000 tons/month for March and April 1984, despite the fact that the contract called for 200,000 tons/month. - 67 -This caused a public furore in British Columbia and the provincial government was put on the defensive. Under questioning from the New Democratic Party in the legis lature, Don Phillips responded, "I can tell you that we will be getting our royalties and that I have been ass ured by the Japanese steel industry that there will be no 22 cutbacks in tonnages','. The issue became moot when it was found that because of production problems Quintette could only ship 60% of the 170,000 tons requested. The production problems at Quintette related to the unanticipated levels of rock found with the coal, high levels of ash within the coal and the need to purchase additional machinery to solve these problems. While these difficulties would eventually be sorted out by late 1985, the media, and by extension the public, were not assuaged by Quintette Coal Ltd.'s assur ances in 1984. in February 1984, securities firm Midland-Doherty Ltd. released an overly^pessimistic report that projected that Northeast Coal would lose over a billion dollars by the time the contract period was half over. The projection was based on volumes that were 70% of the contract and at a price of $84/ton. By 1990, Quintette would lose $717.31 million and Bullmoose $223.46 million. Even if the mines were to run at capacity and sell their coal at the full escalated price, the report stated, Denison would lose about half as much - 68 -money and Teck a third as much — but they would still lose. Any cuts in price and tonnages would have a devastating ef ~ feet on royalties and rail revenues for the governments and their crown corporations, the Canadian National Railway and the British Columbia Railway. The report concluded that the 24 B.C. government must "invoke its take-or-pay clause". It is here that much of the confusion over the coal contracts arose. While there existed no take-or-pay clause between the coal companies and their Japanese buyers, there did exist a take-or-pay clause in the contract between the coal comp anies and BCR. In the months to come both Don Phillips and Premier Bennett reiterated that this clause would protect the railway's return. Since the steel mills were equity holders in the two coal companies, they were in effect com -mited to northeast coal. Bob Hallbauer, vice-president of Teck responded to the Midland-Doherty study calling it, a load of garbage. We are not going to accept a price cut. That requires an act of God or an earth quake. The contracts are valid un less we agree to negotiate.25 Clifford Frame, chairman and president of Quintette Coal concurred, whenever you have an agreement there is always an opportunity to discuss prices, but there is no requirement for us to give a price reduction and we have no intention of giving a price reduction. ° - 69 -Ironically, the report, actually an amalgamation of worst-case scenarios and factual errors, helped switch public anxiety from the B.C. government and the coal companies to the steel-makers. The Japan Steel Federation sent a team of negotiators, including Nippon Steel's Teranashi, but ostensibly led by Nemoto's replacement, Ko Ono, managing director of the raw materials department of Nippon Kokan. The mission left Tokyo amid an intense debate within the federation "over the advisability of trying to continue the the negotiations at a time when prospects for a settlement 27 appear so dim". As predicted, the negotiators returned to Tokyo after winning no concessions from the mining companies. Because of the recession (and other events to be described in Chapter V) the steel-makers needed to reduce both the volume and price of their coking coal supply. Negotiations with their other suppliers were "difficult" when they continued to pay such a high price for northeast coal. Because of trade friction, the U.S. was demanding more coal sales. Yet while Japan's coal suppliers were clamouring for more, not less, sales, they were also watching Northeast Coal to see whether the Steel Federation would keep to its word. In June 198 4, Ko Ono returned to Vancouver where he held a press conference; (we) will take 100% of the contracted tonnage even though our production is not quite up to what we had expected a few years ago when we decided to open the mines. We are asking some of the other mines, not only in Canada but in other countries, to ship less tonnage... In accordance with the pro visions in (this) contract, we are - 70 -asking for a price review.... A contract is a contract, I think it's the sane all over The discussions are going on now. Our differences are not far apart. The Japanese became encouraged when Teck offered a $7/ton markdown to $93/ton. However, Teck tied its offer to a quantitative increase in tonnage of 300,000 tons/year. The Japanese replied that the last thing they needed was more coal and over-priced coal at that. But the steel-makers were anxious, not only about the exhorbitant price of north east coal at a time when severe austerity measures were needed to remain competitive, but also over the precedent such high prices (by now 45% over the market price) would set with other suppliers. Consequently,the Steel Federation and Teck sat down to "tough but courteous" negotiations. Teck eventually agreed to a $10 price reduction to $90/ton for a two year period in return for the increased volume. Keith Steeves, vice-president of Teck, stated later, "when we sat down to re negotiate, we knew they were suffering, and they realized we had 29 a problem financing a mine". According to Teck's annual report, the 15% increased tonnage "virtually offset the impact of the price reduction of the mine's earnings"In fact, Teck boasted a $5 million profit for fiscal year 1984. Now NKK squared-off against trouble-child Quintette. But Quintette officials insisted on the current price of $100/ton until at least 1987, when they would face possible renegotiaion under the terms of the contract. In this case, volume could not - 71 -be added to induce a reduction in price as Quintette was suff ering from production shortfalls (22% in 1984). In purchasing the necessary equipment that allowed itl:to increase its pro duction to contracted levels, Dennison technically defaulted on its loans. A clause in Quintette Coal's credit agreement with a consortium of international banks specified a debt-to-revenue ratio. In February 1985, it was exceeded. Quintette's lenders granted a reprieve as without it they would have ended up owning the mine. But the international banks now became privy to any price negotiations. In 1985, interest alone acc ounted for $25/ton of production. It cost another $25 to get the coal to port and about $3 to load. This left only $41 for mining, hauling, washing, depreciation and further devel opment. From this latter amount, the steel-makers had asked 31 for a $10/ton reduction and the banks needed debt-repayment. Both Dennison and the international banks agreed that major price cuts would have to be tied to a low-interest, yen-denom inated refinancing package to be put forth by the Japanese Steel Federation. It was at this point that rumours began surfacing in the media that Quintette was not paying its royalties and sur-32 charges to the B.C. government. Premier Bennett categorically 33 denied this accusation. Then Clifford Frame and Dick Hermann (president and vice-president of Dennison Mines Ltd.) resigned amid speculation that they were scapegoats to assuage the Jap anese steel-makers. - 72 -Finally, in March 1985, after a year of negotiat ions, the Japanese succeeded in winning a price reduction of $8.50/ton to $91.72/ton. But the revision was not to be retroactive and would last only 30 days. On April 1, 1985, because of the price escalation clause in the original con-34 tract, the price rose to $94.15/ton. The price of thermal coal remained constant at $36/ton. Of the $125 million the Japanese will save by the price reductions with Teck and Quintette; considerable sums have gone back into the Quintette 35 project in the form of new equity. Currently it appears that more money may be needed to keep Quintette from faltering. Opinions of the future of northeast coal range from those pessimists who believe the only thing that will save the megaproject is government subsidy, to those optimists who believe it is far too early to judge the coal development project. Whatever the case the Northeast Coal Project is irr evocably entwined with developments within the Japanese steel • A 4. 36 industry. For example, the only new coal supply contract to be signed in Western Canada since 1981, was a 1985 agreement for "weak coking coal". In 1985, technological breakthroughs in the Japanese steel industry permitted a far higher propor tion of this less expensive coal in the coking blend. Weak coking coal is only a slightly better grade than thermal coal. Nippon Steel, NKK, Sumitomo Corp. and Kawasaki Steel contracted - 73 -to purchase a firm 4 00,000 tons of weak coking coal at $US 39/ton, for one year only, from Westar Mining Ltd.'s 37 Balmer mine in southeastern B.C., Japanese enthusiasm for the Northeast Coal Project has wained since mid 198 2. Members of the Canadian public and some academics believe that the Japanese steel industry deliberately dreated a glut of coking coal to depress prices. But viewing Japanese performance solely by their tough negoti ations with Western Canadian coal producers, does not give a full —appraisal of the motivations behind the Japanese steel industry's actions. Chapter V - 74 -Japanese Industrial Policies and Their Implications for Northeast Coal  The present recession has caused the steel mills like other corporations, to recognize a new economic reality. The recession has severely curtailed steel demand and the medium-term projection is for this to continue. As a result, a continuing glut of coking coal is expected. There are six factors other than a prolonged recession which will affect Japanese met. coal demand. These are: (i) the policy of the Japanese steel industry to contract for excess coal supply; (ii) the substantial inter-firm competition within the Japanese steel industry which has resulted in an over-expan sion of capacity; (iii) accelerated restructuring within the industry and targetting of "new materials"; (iv) competition from the NIC's; (v) the end of the undervalued yen; and (vi) the inc reasing protectionism of world markets. Before northeast coal came on stream, coal shipments from B.C. to Japan had never reached their contracted volumes. The highest rating was in 1978 when 96% of the agreed quantity was shipped from Western Canada. But from 1970-1982, the average volume delivered was 82% of the contracted tonnage? Labour disruptions and production problems were the most prevalent causes for under-shipment. The Japanese responded by over-ordering by as much as 30% as a margin of safety. The severe and costly disruptions in 1980 and 1981 brought about by strikes in Aus-- 75 -tralia, the United States and Poland and infrastructure bottlenecks in Australia and South Africa forced the Japan ese to contract future over-commitrrients. It appears that the current glut and economic uncertainty has calmed labour's demands significantly, but this only adds to the problem of over-capacity. "Even if existing contracts are not renewed, Japan still has too much coal under contract until at least 1990"? During the 1970's, the Japanese and world situation in steel was one of surplus capacity (see figure 1, Appendix 3). Yet vigorous efforts to conserve energy, to switch from oil-fired to coal-fired furnaces and to undertake capital invest ment for the rationalization of operations enabled the Japan ese industry to maintain its "competitive edge" in international markets. This was at a time when other materials industries in Japan were suffering a structural recession and U.S. and German steel companies were abandoning their ailing industries and 3 diversifying into "growth sectors". But by 1985, despite continued technological improve ments and major rationalization efforts, the Japanese steel industry was still suffering from severe overcapacity. One major reason was that unlike the case with coal procurement, there are no coordinated production agreements among the pro ducers. "Excessive competition" has decreased steel prices, but demand has not risen correspondingly. The demand structure of the Japanese steel industry is approximately 7 0% domestic - 76 -and 30% overseas sales (largely to the U.S.)1- Domestically, the shipbuilding industry is beginning to be jettisoned and the automobile industry has been demanding thinner, higher-alloyed steel sheet, (see Figure 2, Appendix 3). With the long-term movement from the steel-consuming heavy industries towards the service and "downstream industries" in the United States and Japan "large volume growth cannot be envisaged in the 4 foreseeable future." The Japanese steel industry has recently become structurally depressed. In recent years Japanese industrial policy has been to jettison the excess capacity of mature industries after their product cycle or comparative advantage has diminished. That is to say, many resources (such as capital and labour) are with drawn from industries which are no longer achieving export growth so that those resources may be targeted to other areas designated by MITI to be future growth sectors. Examples of industries that were once accorded top priority and then jettisoned include products which required an excessive labour component home ceramics, toys, garments and basic textiles and most recently, products which required excessive raw materials and energy pulp and paper, petrochemicals and aluminum. However, these industries do not completely wither away. While their export potential ends, the government often protects "jettisoned" in dustries through tariff and non-tariff barriers so they may con tinue to supply the domestic market unchallenged by foreign . . 5 competxtion. - 77 -In 198 5, Yoh Kurosawa, President of the Industrial Bank of Japan said, various industries in Japan will continue to diversify into down stream businesses, and the society as a whole will be more energy-saving, thus changing the nature of our industrial structure.... Structural change in Japanese ind ustry will have much impact on the structure of Japanese trade with Canada. The steel industry's recent restructuring efforts have included the building of "mini-steel" plants that use steel scrap, steel billets or pre-reduced iron pellets. These plants use electric energy rather than iron ore and coking coal. Technological improvements have allowed.those remaining coal-fired furnaces to use an increasing proportion of weak coking coal (as mentioned in Chapter IV). Huge quantities of steel scrap are available in any "post-industrializing" country. In Japan sufficient scrap exists to support a growing propor tion of steel production. Steel produced from scrap and elect-trie furnaces requires a small capital investment and now yields lower costs and higher productivity rates than conventional 7 blast furnace operations. Kawasaki Steel Corp., one of the two opponents of the Northeast Coal Project within the Steel Federation, has invested heavily in Brazilian steel production. Besides marketing the finished product to other countries, Kawasaki Steel will import semi-processed steel billets for their home market, thereby avoiding the need for iron ore or met. coal. The government - 78 " of Brazil is also tying its export of iron ore to Japan to its export of finished steel. Other countries like Venezuela which are rich in iron ore and natural gas are exporting pre-reduced iron pellets to Japan. The trend is clear. Because transportation of bulky primary resources from their source to the processing nation comprises a large proportion of the total cost of the finished product, this is seen as an area where cost-effective savings can be made. Therefore, more semi-processing is being done closer to the source of iron ore, especially when that country possesses abundant energy and/ or lower wage rates. Another trend is the targeting by MITI of so-called "new materials" such as fine ceramic and high-molecule compounds which are expected to have wide applications in the traditional markets of steel, such as automobiles, construction, civil engineering and machinery industries. For those steel firms whose production remains in Japan, "the trigger of the coming age — and the key to surviving it — is technological inno-8 vat ion'.' "The pattern of steel demand has changed from one of 9 quantitive growth to one of qualitative improvement" (see Fig. 4, Appendix 3). Smokestack industries such as steel are diversif ying, taking advantage of "high-tech" advances with new sub stances that are lighter, stronger and more resistant to temp erature, pressure and corrosion. Japan's steel industry is exp ected to be a leader in this field, on the strength of its technological expertise in evaluating the physical properties of basic materials. A massive research and development effort has been implemented under the aegis of the industry associations and MITI. The Japanese have been far and away the leaders in marketing energy-saving technology, and sell to firms in both the industrialized and newly-industrialized countries (UICs). Japanese producers still have the lowest cost position in existing mills. However, in newly built plants, firms in the NIC countries of Asia are the lowest cost producers (see fig. 3 Appendix 3). Japanese steel firms have widespread equity ownership and involvement with the NIC's steel firms. Emphasis has been on licensing and technological assistance, equipment sales, engineering services and management contracts. Nippon Steel alone had 134 engineering, technology, management or equipment supply contracts with 71 companies in 26 countries (in 1979). That same year, Nippon Steel's engineering division employed 4,000 people and accounted for 10% of total company i 10 sales. The policy of NIC promotion carried out by Nippon Steel is clearly in line with MITI's declared long-term policy of jettisoning the surplus capacity of the energy-consuming and polluting steel industry. (One problem in jettisoning surplus capacity is that those assets provide collateral to an industry that has historically had a high debt-equity ratio.- ) In 197 0, the strategy was a 20 year plan to "ride the inter national product life cycle", then disengage as products and - 80 -technologies matured and standardized to the point where NICs, with access to the capital and resources would become more competitive. By investing in the NICs, especially its former colonies of Taiwan and Korea, Japan gained access to cheap labour, which it could not get at home. It manufactured goods in these countries for export to other countries of the world. For the NICs, Japanese investment meant a transfer of capital as well as production and management technology, effectively providing what these societies lacked. As this process continues, the NICs1 industrial structures increasingly resemble those of Japan. Their products have begun to compete with Japanese products in the international market, causing some considerable anxiety at home, not only at "being caught up with" by its neighbours, but also by the so-called "boomerang" effect. This refers to the symbiotic relation ship between a dominant and a receiving society which eventually redounds to the advantage of the formerly weaker partner. When the economies of Japan and its neighboring NICs were in a com plementary relationship Japan's labour intensive industries, such as textiles and various manufactured goods, gradually lost their markets to these countries. But at the time, during the 196 0's and 1970's, Japan itself was growing rapidly and could cope with competition by readjusting its industrial structure. "The ex perience of South Korea, Taiwan and Japan serves to demonstrate - 81 -the validity of Joseph Schumpeter's notion that the more dynamic economic expansion is, the more cyclical economic activity becomes. But Japan's economy, reaching maturity, can no longer be readjusted as flexibly as in the days when it en joyed a high growth rate. The OECD (Organization for Economic Cooperation and Development), MITI and the leading banks in Japan have all predicted that Japan's yearly growth rate will remain between 2-5% until 1990. Growth in steel is predict-12 ed to decline 1-2% annually after 1986. Those industries being developed by the NICs, such as steel, petrochemicals, machinery, shipbuilding and cars, have been the major pillars of the Japanese economy. There are fewer new production areas which can replace them in the future. Very soon the capital cost of the newly-built plant and equipment of the NICs will be depreciated. Along with cheaper labour, this will ensure a sizeable, comparative advant age over Japan. Moreover, NIC and third world producers tend to "dump" steel on world markets for cash flow and employment purposes. The advancement of the Asian NICs in major fields of industry now pose a threat to Japan. Japanese steel-makers fearful of more competition from Korean mills they helped build, are holding back on further technical exchanges, and are believed to have pressured domestic buyer; ^ against taking Korean steel. - 82 " Indeed, sogo shosha have set up specific long-term import arrangements, a sort of rear guard action, to ensure that Korean steel imports will stay below an informal market-14 share of 10%. Steel imports, in general, will undoubtedly continue to rise (see fig. 1, Appendix 3) because extreme international pressure is being applied on Japan to open its market to more foreign goods. A major tenet of this study is that during the period when the Japanese Steel Federation was deciding to invest in the Northeast Coal Project, securing long-term access to supplies of raw materials was their premier concern. That is no longer the case. The paramount concern of Japanese economic policy today is securing long-term access to markets in which it can sell its products. According to the Japan Steel Federation the major reason for the continued slump in steel exports during 1985 was decreased shipments to the U.S. brought about by a voluntary export restraint in the face of 15 protectionist sentiment in the U.S. Congress. This is a sen timent unlikely to diminish in the near future because of Japan's record U.S. $50 billion plus bilateral trade surplus. Economist Charles Kindleberger has declared, " free trade is the hypocrisy of the export interest, the clever device of the climber who kicks the ladder away when he has attained the summit of great ness". Many development theorists, "new economists", and U.S. congressmen now share Kindleberger's view1^ - 83 ~ To combat growing world pr-otectionism, Japan1 s government and steel industry have embarked on two strategies relevant to demand for Japan's steel and hence relevant to Japan's coking coal demand. In September 198 5, the Bank of Japan and four of the world's largest central banks inter vened in the international currency market in a concerted effort 17 to strengthen the yen against the U.S. dollar. The Japanese motive was to structurally inhibit their exports and mollify protectionist sentiment in the United States. While the Bank of Japan has maintained high interest rates to increase the value of the yen, it is too early to tell what the exact long-term effects will be. What is significant is that the post war era of the artificially devalued yen, a catalyst to their export growth, seems to be over. With an inflated yen, demand 18 for steel exports will drop. Secondly, Japan's concern for "harmonious international-economic relations" has prompted a reappraisal of traditional industrial policy. No longer will the great proportion of world production occur solely within the countries benefiting from a comparative advantage. Access to markets is the major reason why one-third of Japan's total overseas industrial investment is now being channelled into the United States. Today every major U.S. steel-maker has a technology-sharing agreement with one or more Japanese steel firms. Gigantic rescue operations have taken place whereby Japanese steel firms have purchased 50% equity and management rights to reopen obsolescent U.S. steel works (eg., Kawasaki Steel and California Steel Industries, NKK and National - 84 -Steel and Sumitomo Metal and LTV). In each case, two reasons were cited by the Japanese companies. These were "the con viction to resolve trade disputes" and "the chance to make an important contribution to the local economy through new 19 jobs created by the reopening" (sic). Increased production in the U.S. represents a decline in demand for northeast coal, as it is safe to assume American coal will be used. This chapter has detailed Japanese policies such as: (i) over-contracting of coal supply; (ii) rationalization of steel capacity in line with industrial restructuring; and (iii) overseas investment in the NICs as a result of compar ative advantage and in the United States as a result of trade friction. A reduced and shrinking demand for Japanese steel has been the result. With a glut of coking coal and such inexpensive alternatives, one wonders if the Japanese will remain committed to northeast coal and honour the terms of the contracts they signed in 1981. - 85 ~ Chapter VI Will the Japanese Honour the Terms of the Contracts? It is difficult for quasi-integration to remain unchanged if market conditions depart dramatically from the assumptions on which they were made. Such agreements will normally require mechanisms for adaptive sequential renegotiation in order to remain stable. The history of long-term contracting shows few instances where quasi-integration has broken down because of the reluctance of one party to renegotiate. In Japan's domestic context, when the terms of a contract depart dramatically from market conditions, litigation is rarely the result. Most often/ suppliers are within the corporate family of their buyers; that is, they have some mutual stock holdings. In such a case the situation is resolved harmoniously. When there are no investment linkages, the stronger company, that is, the one with the superior bargaining position, wins1 In the 1970's, the Japanese renegotiated copper and iron ore contracts when cyclical changes in supply and demand as well as inflation and currency fluctuations caused friction between Japanese importers and their contracted foreign exporters. Since 1972, at various times the Japanese have reacted to steel overcapacity and negotiated reductions in contracted tonnages with Australia. -Australian producers have had little choice but to capitulate to Japanese demands, in the face of the latter's - 86 " monopsony bargaining power. As the Economist suggested with heavy irony, "beggars cannot be choosers, unless, of course, 2 they are Japanese". Nevertheless,in none of these cases did Japanese actions bankrupt their suppliers. In 1976 - 1977, a noteworthy case involved the pro-3 curement of sugar from Australia by Japanese trading companies. The Japanese sogo shosha signed standard-form commodities contracts which were subject to British law and to terms set by the London Sugar Exchange. The Japanese signed a standard multi-year contract and appended a note stating that the contract price and tonnages would be reviewed every year. The contracts were signed at a time when the price of sugar was at an all time high. Subsequently, sugar prices declined drastically. The Japanese companies discovered that their competitors, who were not tied into long-term contracts, were underselling them in the domestic Japanese market. The trading companies after accepting some deliveries attempted to renegotiate the contract with the Australian suppliers. The suppliers claimed they had legal and valid contracted prices and refused to lower prices or tonnages. Moreover, as the contracts were on a CIF basis, they continued sending ships loaded with sugar which began to crowd Yokohama Harbour. The sogo shosha, apparently confident of their bargaining power, refused to accept or pay for the sugar until a new price was agreed. The Queensland government, whose political support consisted largely of agricultural - 87 -interests, vigorously took up the cause of the Australian sugar companies, effectively countering the bargaining power 4 ' of the Japanese. Both the Japanese and Australian federal governments then entered the dispute. But even at the government-to-govern ment level no agreement was reached. The situation became acrimonious and it was agreed that the matter should be taken to arbitration and be decided by the International Chamber of Commerce under the terms of the "London contracts". It was resolved there. The contracts were set aside. But in return, the trading companies paid the full price for the delivered sugar in addition to paying heavy compensation. The lesson:, for the Japanese from this case was that the injection of the Australian state and federal governments into the commercial setting effectively countered the benefit of coordinated procurement. The same may be said to be true with the case of Northeast Coal. In the present controversy there are two issues — tonnage and price. With regard to tonnage, the Japanese realize that on the strength of the long-term coal contracts the provincial and federal governments invested public funds to create the necessary infrastructure. In many other resource-extracting projects around the world, particularly Australia, the Japanese had to finance infrastructure construction. Japan's monopsony power was accentuated in Australia because of the fragmented political system of that country. The state governments of Australia, whose revenues derived from royalties related to quantities produced and not to overall profitability were concerned about the volumes purchased by the Japanese. Consequently they were less likely to put up a fight against low coal prices, to the 5 dismay of the federal government which levied taxes on profits. In the Canadian case, the direct pay-back to both governments is by way of capital surcharges, royalties, freight costs and port throughput charges. All these are irrevocably tied to the volume of coal shipped from the minesite to the waiting ships at Ridley Island. Any discussion about reducing the minimum guaranteed volume, that is reducing the pay-back to the two governments, will immediately involve those governments. Both governments will do their utmost to protect the public funds they have invested. As stated in Chapters II and III, the Japanese dislike involving foreign governments in such a commercial venture because they "inject disruptive political considerations into the economics of coal supply". In the Teck case, when the price was reduced the Japanese compensated with volume. The volume of coal contracted from the northeast does not represent an acute long-term problem for the steel industry per se. In any case, northeast coal is blended with other coals. Despite the fact that in 1984 the Japanese had contracted about 80 million tons of coking coal, they needed only 60 million tons6 Nevertheless the sogo shosha were able to sell the excess coal to countries to which they have trading links and whose steel industry was expanding, notably Taiwan, Korea and Brazil. If in the future, the glut of met. coal continues,the steel mills can reduce tonnage from certain other mines whose resulting lower volumes will not place them in financial jeopardy. Unfortunately, it is clear that Japanese electric power companies favour liquefied natural gas over nuclear energy and thermal coal. But even if the optimistic projections of thermal coal use are realized, thermal coal will not be a panacea for the northeast project. Thermal coal prices are very low (about $30 - $35/ton) and the margin of profit even lower. Moreover, there is an abundant supply of better quality thermal coal at cheaper prices with lower freight rates avail able in southeastern B.C., Australia and South Africa. South Africa with its low wage component effectively sets the world spot market price and sets it very low. Even after the world economy has had an extended period of growth, marked increases in prices are unlikely because of burgeoning national stock piles and the enormous oversupply of capacity — from existing, newly-constructed and temporarily-closed mines. For this reason, France, the second largest importer of thermal coal after Japan, has not renewed any contracts for supply. Feeling no long-term threat to price or supply, they have opted to depend entirely on the spot market. "World prices are so low that eastcoast U.S. utilities are purchasing offshore rather 7 than U.S. coal". Needless to say, the Japanese will now consider - -90 price as the determining factor in any new purchases of either met. or thermal coal. With regard to price for northeast coal, the Japan ese established a contracted price as a result of private commercial negotiation between buyer and seller. Because of their concern for cost overruns they established their own formula for escalating the price of the coal. The steel-makers negotiated the contracts with full knowledge of the potential costs of the project, which actually finished under budget. No one was taken by surprise. On the strength of the contract terms, governments, international banks and many companies invested in northeast coal. The problem was that in the scramble to secure supplies of met. coal for the prosperous days to come, both the Japanese and Canadians had been overly optimistic. Ap pendix 4 shows the Japanese and Canadian forecasts for Japanese steel production (hence met. coal demand) in relation to actual production during the period when the mega project was being negotiated. It is interesting to remember that at that time the Canadian government was predicting that by 198 5 the price of oil would be $80/barrel and gold would be over $2000/ounce. Despite their mistake, the Japanese will not continue to pay a price for northeast coal far above the market price, when the contract stipulates that they may renegotiate "when the escalated price is out of line with other Western Canadian coal.. This does not mean that they will force a price that will endanger - 91 " the project or their own investment in it. As Northeast Coal coordinator Ron Basford has stated, "that clearly is not in 8 the Canadian interest — it is not in the Japanese interest." The Japanese strategy has been explained in game theory terms. By committing capital, Japanese invest ors are in effect reducing their ex post incentives to back down from long-term contracts, given their interest in earning an adequate yield on their in vestment. This self-inflicted limit ation on their freedom of action narrows down the negotiation set and makes a cooperative outcome more likely. This in turn increases the ex ante incentives of the other players (banks and exporting countries) to participate in the game. Currently there are added incentives for the Japanese to maintain their commitment to volume and price. Ironically, the same problem that has caused the steel industry to invest overseas will help save the Northeast Coal Project. Trade friction has caused the most serious rift ever within the zaikai. The mature heavy industries such as steel and chemical, whose export dependencies are now relatively light and who pride them selves on placing the nation's interest before their own, have come out in favour of broad-ranging voluntary export controls. Yoshihiro Inayama (chairman of Keidanren) has announced a philosophy of orderly marketing. But Eiji Toyoda (chairman of Toyota and vice-chairman of Keidanren) and Takashi Ishihara (chairman of Nissan and Keisai Doyukai) have broken ranks arguing that "the rule should always be free trade. Voluntary controls are an act of suicide.. Like opium, voluntary controls weaken not only the controllers' economy but also those of importers."10 The auto industry has championed the cause of other growth sectors such as communications and electronics that depend on free and clear access to Western markets. The desire of these growth industries to continue their lucrative exports to Canada has given the Canadian government increased bargain ing leverage in dealing with the Japanese. The protection of Japanese auto imports was presumably the reason for recent Japanese investment in Canada's "auto belt". The Minister for External Affairs, Joe Clark, has already hinted at a close relationship between the Northeast Coal Project and auto imports. The Japanese know that for the North east Coal Development project and others to collapse (it) would under cut those in this country who have argued so successfully for the open ing up of Japanese-Canadian Trade — would provide the voices of pro tectionism in this and other countrj^s with the very ammunition they want. In the course of the recent Japan-Canada trade friction over automobiles, Don Phillips lobbied federal Trade Minister Ed Lumley on behalf of the Japanese. He said, "the B.C. government believes it is unreasonable to expect Japan to cut export volumes 12 just because total auto sales are down in Canada." Japanese industries have invested millions in central Canada to gain market access and to win new political friends. It is unlikely they will desert their old friends. The Japanese will continue to pay a premium for north east coal if world prices remain depressed. It is clear that their desire for a cooperative outcome is at least as important as the ambigious terms of the northeast coal contracts. The - 93 -ultimate price will almost certainly depend on the lowest level needed to maintain the viability of the project. In the last analysis, the project will not be sacrificed to market price. - 94 -Chapter VII Conclusions At the outset of this study a number of questions were raised. For instance, how do the Japanese seek secure supplies of coal? Do they seek low prices by creating an excess supply? What conditions have changed since the coal contracts were signed and how do they affect northeast coal? Finally, will the Japanese abide by the terms of the contract? In answer to the first question, the Japanese seek secure supplies of coal through the strategies described herein as coordinated procurement, quasi-integration and diversification. Coordinated procurement is a Japanese business method of grouping together for the benefits of monopsony purchasing, joint bargaining and risk sharing. The government of Japan, chiefly through MITI has been instrumental in guiding this concensual approach in coal procurement. It is suggested here that Japan ese multi-national steel companies have not acted as true multi nationals but as "nationalistic" companies operating world-wide. The decisions of the steel companies to invest in production in the U.S. steel sector despite its low productivity was motivated by a desire to assuage American protests at Japanese trading practices. This case study confirms the current belief that in times of low demand the Japanese give special consideration to those suppliers with which they are quasi-integrated, especially if they have an equity investment. Diversification will continue to be a cornerstone of Japan's policy of security - 95 -of supply. In 1985, a rail strike in New South Wales was a deciding factor in purchasing weak coal from southeastern B.C. However, the Japanese will now pay more attention to price as the key factor in any further purchases. Because of the glut, the pendulum has now swung from concern over supply to concern over price. One can expect future purchases to be either on the spot market or from suppliers with whom quasi-integration already exists because new mines which suffer from higher capital costs are more expensive. Indeed no new contracts for regular coking coal have been signed by the steel-makers since 1981. Any future contracts will be of a short-term duration, they say. This study contradicts the conspiracy theory that the Japanese plotted to promote the Northeast Coal Project in order to create a glut of coking coal to depress world prices.1 This conspiracy theory is refuted on a number of grounds. The Japanese, like other resource purchasers, have always over bought by a margin of about 20% because of chronic delivery shortfalls. None of the parties involved, including the Canadian governments, the international banks or the coal companies, foresaw a prolonged recession. The glut of coal was caused not by overexpansion, but by reduced steel demand. The Japanese continued to pump money into the project even after the recession started and a glut existed. It was the continued recession that brought lower steel demand and hastened industrial restructuring, especially after the projected upturn in 1985 - 96 -failed to materialize. Whenever MITI has increased its demand forecast it has given greater bargaining leverage to its suppliers. In 1983, when MITI forecast a sharp recovery for 1984 (which did not materialize), Australian and Canadian suppliers (except for northeast coal) success fully rebuffed Japanese demands for a cheaper price. If the intent of the Japanese had been to create a glut of coal they could have merely encouraged additional projects in Australia and southeastern B.C. thereby avoiding the cost liness to themselves of the northeast development. Although Japan has benefitted from the over-supply in metallurgical coal in terms of price, the glut has not been entirely without cost. Japan's competitors, the NICs, which are not tied into expensive long-term contracts have benefitted and have in creased their competitive position vis-a-vis the Japanese. Ironically, the formula which has pushed the price of northeast coal far above the market level was put into the contracts at the insistence of the Japanese. If the Japanese had really expected a glut of coal to exist in the mid 1980's, they would not have insisted on the precise escalation formula that would cost them millions of dollars and make them less competitive. Heather Gibb also does not accept the conspiracy theory but offers as an explanation the Japanese desire for diversification and the proposition that the Japanese are incapable of coordinating a deception. She concludes that, - 97 -by examining Japan's approach to procuring metallurgical and thermal coal, the "Japan Inc." appellation is a misleading description of the nature of decision-making in Japan. The view that a triumvirate of top business, political and bureaucratic officials effectively determines policy, 'ignores the obvious: each sector is not a monolith. Gibb states that, contrary to past Western perceptions, Japan does not act like one giant corporation, and details examples of business-government differences in general. In one celebrated example in the 1960s, Sumitomo briefly refused to forego a portion of its share of the steel export market for the "common good" despite administrative guidance. However, Chapter II of this paper, supported by the case-study in Chapters III and IV, clearly shows that for coal procure ment, coordinated action reminiscent of the Japan Inc. stereo type sill exists. Gibb does not refute this. Instead, she cites disagreements between MITI and individual steel companies about their market proportions for finished steel products as well as debate within the Steel Federation over coal procure ment. Despite the often intense debate among steel companies, in every case a united position is put to the coal mining companies in the end. In short, while the Japanese Steel Federation has the ability to conspire to overcommit itself to coking coal, it simply did not in this case. In fact, the Japanese do not generally wish to strain the relationship with - 98 -their trading partners for fear of undermining crucial access to their markets. For this reason, Japanese companies have invested billions of dollars overseas. Why then did the Japanese invest in northeast coal? The case study has shown that during the key decision making period just after the second oil crisis, diversification was the most fundamental concern. In deciding where to invest, the mills settled on northeastern B.C., feeling confident enough to sign a long-term contract with sufficient volume to make the project viable. The reasons were: (i) the mills would not have enough coking coal by 1983, forcing them to work below capacity; (ii) they would acquire a separate port and rail infrastructure with a different rail company and a port closer to Japan than Roberts Bank; (iii) other ports were over-extended by the increased demand for coal; (iv) strikes in Australia, Poland and the U.S. were disrupting their supply; (v) strikes in Canada were rarer and more predictable; (vi) the provincial government was now involved in southeast B.C. through B.C.R.I.C.; ( vii) U.S. coal would likely have to be shipped from the east coast with high transport costs; (An investment now in northeast coal might allow the mills to deflect U.S. pressure to buy its coal later as the steel mills would already have enough coal under contract); (viii) greater potential supplies in the northeast could be used as a lever against other suppliers in price negotiations; and (ix) the mills could not agree to scrap the negotiations as NKK and Kobe Steel were - 99 -convinced of the project's merit. It seems so easy to criticize the coal project now that changing market conditions have pushed it to the brink of insolvency. The most crucial period for any new resource project is when production begins, when debt servicing and start up costs are the most onerous. North east coal faced both the recession and production problems at Quintette during this vulnerable period. The recession and the resultant protectionism that swept the world in the mid 1980s has forced the Japanese to adapt by accelerating a restructuring of their steel industry and scrapping much of their overcapacity, thereby reducing their coal demand. Decreased world demand for steel has cut into Japan's market-share while the competitive steel industries of the NICs are maintaining positive growth. Currently, two other storm clouds, not as yet mentioned, loom on the horizon. The very real prospect of a break-up of OPEC and a substantial reduction in the price of oil will further pressure the price of northeast coal. Secondly, the Mining Association of Canada has warned of the negative impact a Canadian-American free trade agreement might 4 have on British Columbia's coal industry. They argue that if Canada were to place itself under the American protectionist umbrella, or if it decided to buy more goods from the U.S. - 100 -than from Japan, then Japan might retaliate by reducing its purchases of coal. Two other areas need to be explored by further study. The first is the degree to which governments of resource-exporting countries can mitigate the pressures of Japan's monopsony power. This study has shown that in some cases, governments can add to the bargaining leverage of their resource exporting companies. A second important question is the extent to which the newly-industrializing countries will absorb the slackened demand for northeast coal. It has been suggested that some NICs may bypass the "iron-age" and target new materials. Some NICs have coal deposits of their own. Japan will continue its ambitious industrial restructuring and the market for northeast coal will continue to become severely depressed. New purchasers must be sought out by 1987, when the Japanese will review the northeast coal contracts. But finding new coal buyers will remain extremely problematic as long as the world price remains low and world demand for steel stays depressed, a situation this study finds to be the most likely scenario. How good are the contracts? This case-study has shown them to be slightly ambiguous because they did not make sufficient provisions for renegotiations in the event of a prolonged recession. But as Jean Sorensen, analyst for - 101 -the Canadian Mining Journal, has said, the contracts are as good an any agreement in today's rollercoaster world of high finance... The casual newspaper reader may see (the con tracts) as one of the main con tributors to the woes of the coal industry. In fact, as any astute observer can tell you, the contracts are precisely the reason the industry is probably the healthiest in B.C.'s troubled mining sector. Imagine the plight of a new met. coal producer witb. no such contract to fall back on. Equally as important as the contracts is the desire of each side to reach an equitable outcome. The balance sheet shows that quasi-integration has been far more beneficial than detrimental for the Japanese steel industry especially for securing coal supply. In general, over the last 30 years, Japan has procured its raw materials (including coal) at a more favourable rate than the other advanced western nations. Thus Japan may wish to maintain the conventions of a system which protects one side or the other during price fluctuations. During 1980 when the decision to invest in the Northeast Coal Project was made, securing another source of supply was the major incentive. Supposedly, that still applies. As one Mitsui executive told the author, "the (extra) $21/ton is for insurance premium." Nevertheless, there is a limit the Japanese are willing to pay for diversification. The Northeast Coal Project, conceived in boom times, will continue to be troubled in low growth, protectionist times. Of necessity, those troubles will continue to be - 102 -tackled by the Japanese and their Canadian counterparts in a spirit of cooperation. The Japanese will back out of the project, destroying its economic viability, only if the high cost of purchasing northeast coal as opposed to lower cost alternatives comes to outweigh both their equity investment and the political repercussions that would follow. Currently, that is highly unlikely. - 103 -FOOTNOTES Chapter 1 Footnotes from pp. 1 - 9 1. Government of Canada, Department of External Affairs, Canada's Export Development Plan For Japan, (Ottawa, Queen's Printer, 1982), p. 28. 2. Province of British Columbia, Ministry of International Trade and Investment, Pacific Rim Export Markets, (Victoria, Queen's Printer, 1985), p. 58. 3. Quoted from P. Nemetz and I.Vertinsky, Japan and the Inter  national Market for LNG, (Vancouver, Institute of Asian Research, U.B.C. Feb. 1984), p. 11; see also P. Nemetz and I.Vertinsky, "The Japanese and LNG; Looking for the Real Market", Equity, (June 1985), p. 20; P. Nemetz, I. Vertinsky and P. Vertinsky, Japan's Energy Strategy at the Crossroads, (Vancouver, Institute of Asian Research, U.B.C, Nov. 1983), p. 11; Jacqueline Maund, "The Implications of the Japanese Resource Procurement Strategy for Staple Resource Regions: An Examination of Coal Mining in Southeastern B.C.", (MA Thesis, Dept. of Geography, U.B.C, April 1984), p. iii; and K. Baylis and S. Handelsman, "International Trade in Coal", (Los Angeles, Society of Mining Engineers, Feb. 1984) p. 2. 4. Kristi E. Varangu, Development Options for B.C. Coal, (Calgary, Canadian Energy Research Institute, 1983), p. 43. 5. Heather Gibb, Re-Examining "Japan Inc.": Japanese Coal  Procurement and Western Canadian Coal, (Vancouver, Institute of Asian Research, U.B.C, 1984), p. 54. 6. Joseph D'Cruz, Negotiating Coal Contracts with the Japanese  Steel Industry: The Coordinated Procurement System, (Van couver, Institute of Asian Research, U.B.C, 1984), p. 62. - 104 -Footnotes from pp. 9 - 15 7. Marjorie Nichols, "Mega Gamble Hasn't Paid Off", Vancouver Sun, January 26, 1985, p. A4; see also Stan Persky, Benneitt  II, (Vancouver, New Star, 1983), Chapter 5. Chapter 2 1. Frank Langdon, The Politics of Canadian-Japanese Economic  Relations, (Vancouver, U.B.C. Press, 1983) p. 126; and "Kaiser-Mitsubishi Coal Project in West Canada Said in Trouble", Japan Times, July 25, 1972, p. 3. 2. "Japan Steps Up Canada Investment", Japan Times, May 2, 1973, p. 6. 3. Richard N. Wright, Japanese Business in Canada, (Montreal, Institute for Research on Public Policy, 1984), p. 69. 4. Dani Rodrik, "Managing Resource Dependency: The U.S. and Japan in. the Markets for'Copper.,. Iron Ore and Bauxite", World Development, Vol. 10, No. 7, (1983) p. 542. 5. Chikara Higashi, Japanese Trade Policy Formulation, (New York, Praeger, 1983). 6. See the authoritative Chalmers Johnson, MITI and the Japanese  Miracle: Growth of Industrial Policy, 1925 - 1975, (Stanford, Stanford University Press, 1982). 7. Sadako Ogata, "The Business Community and Japanese Foreign Policy", R. A. Scalapino, The Foreign Policy of Modern  Japan, (Los Angeles, Calif. Univ. Press, 1977), pp. 175-205. 8. While the LDP has held power continuously since 1955, the bureaucratic-industrial complex which is essentially its - 105 -Footnotes from pp.15 - 23 power base, will be the focus of this paper. 9. Ogato, p. 17 6. The steel and electricity industries are the sectors which import coal. 10. L. Franko, The Threat of Japanese Multinationals, (Toronto, John Wiley, 1983),p. 113. 11. Toshimasu Tsuruta, "A Criticism of Cartels in Ailing Industries", Economic Eye, Vol. 4, No.2, June 1983, pp. 6-9. 12. Chalmers Johnson, "The Internationalization of the Japanese Economy", California Management Review, Spring 1983, pp. 5-6. 13. Raymond Vernon, Two Hungry Giants: The U.S. and Japan in  Their Quest for Oil and Ores, (Cambridge, Mass., Harvard University Press, 1983), p. 84. , 14. Ezra Vogel, Japan as Number One, (New York, Harper. Colophon Books, 1979), pp. 75 - 76. 15. See Chalmers Johnson, MITI and the Japanese Miracle. This work puts Japan's industrial policy in historical perspective. 16. Freight charges "as a share of the landed cost of Japanese iron ore fell by more that 50% between 1956 - 1976, although the average shipping distance increased by almost 1,000 miles in the same period." Dani Rodrik, "Managing Resource Dependency", p. 550. 17. Most of the information contained in this section on quasi-integration and the following section on coordinated pro curement is an amalgam of the above-mention works by Vogel, Franko, and Johnson and especially Vernon, Rodrik and D'Cruz. - 106 -Footnotes from pp. 23-30 18. See the section "A Peculiarity of Japanese Industrial Organization - Monopsony", in Miyohei Shinohara, Industrial Growth, Trade and Dynamic Patterns in the  Japanese Economy, (Tokyo, Tokyo University Press, 1982), pp. 40 - 45. 19. Ibid. p. 43, Shinohara was President of the Economic Research Institute of the Economic Planning Agency of the Japanese government. 20. Nippon Steel News, No. 156, (Nippon Steel Corp. Tokyo, April, 1983), p. 2. 21. Joseph D'Cruz, Negotiating Coal Contracts with the Japanese  Steel Industry: The Co-ordinated Procurement System, 49^ 22. D'Cruz's other conclusion, which will be contested in Chapter IV of this paper, is that: suppliers within a particular country were treated as a homogenous group and each country group received diff erent treatment. The price paid to a supplier depended on the country in which the supplier was located. Ibid. p. 62. 23. Hiromitsu Ishi,"Reforming Japan's Government-Backed Financing/" Economic Eye, March 1984, p. 20. ' 24. International Energy Agency, Review of I.A.E. Countries: 1983 (Paris, OECD, 1984), pp. 263 - 264. 25. Interestingly, the trading firms make an almost inconsequential commission on coal imports. From 1946 - 1970, the commission was 100 yen per ton (approx. 40 cent US),-see D'Cruz, p. 55. However, their exists a linkage, an informal agreement with the steel mills whereby the sogo shosha's share of the - 107 -Footnotes from pp. 30 - 34 highly lucrative export of steel products would be in proportion to their share of raw material inputs. The sogo shosha are thus encouraged to develop new sources of imported raw material because of this linkage between marketshare for imports and exports. For an interesting analysis of Japan's corporate preoccupation with market share, see S. Schlosstein, Trade War; Greed, Power and  Industrial Policy on Opposite Sides of the Pacific, (New York, Conqdon & Weed, 1984), pp. 158 - 164. 26. See Vernon, -'Two, Hungry Giants, p. 103. 27. One can easily understand Japan's concern over these supply embargos. Japan relied on the United Statesfor 85% of its soybean imports. In 1972, 7 6.3% of Japan's energy require ments were met by oil, of which 99.7% came from sources abroad. see Terutoma Ozawa, Multinationalism Japanese Style; The Political Economy of Outward Dependency, (Princeton, Princeton University Press, ,1979), p. 162. 28. Ibid. p. 163. Chapter III 1. Michael Blaker, "Probe,Push and Panic: The Japanese Tactical Style in International Negotiations", in Robert Scalapino, ed., Foreign Policy of Modern Japan, p. 55. 2. The Japanese government's involvement in overseas investment "takes the form of administrative guidance. While the extent of economic cooperation with foreign entities is dictated and sanctioned by the Japanese government and its respective ministries, these governmental agencies do not play and active role in actual negotiations... It could be assumed, however, that the respective ministries are briefed about the progress of such negotiations". See Rosalie L. Tung,"How to Negotiate with the Japanese", '.. California Management Review, Summer 1984, p. 65. - 108 -Footnotes from pp. 34 - 39 This was the conclusion of a WESTPO (Western U.S. Governor's Policy Officer) ,, Report. . . "Western States Planning Japanese -Style Coal Company", Vancouver Sun, July 10, 1980, p. D7. Frank Langdon, "Problems of Canada-Japan Economic Diplomacy in the 1960's and 1970's", in Keith A.J. Hay, ed., Canadian  Perspectives on Economic Relations with Japan,(Montreal, Research on Public Policy Institute, 1979), p. 77. H.N. Halvorson Consultants Ltd., Forecast of Coal Mining  Activity to 2002, (B.C. Hydro and Power Authority, March 1983), p. 20. Klaus Pringsheim, 'Comment" in Keith A. J. Hay, ed., Canadian Perspectives, p. 93. George Froehlich, "Coal.... Is Japanese Connection Faltering?" Vancouver Sun, Nov. 17, 1976, p. 36. Frank Langdon, The Politics of Canadian-Japanese Economic  Relations 1952 - 1983, p.129. Ibid. p. 128. Rod Nutt, "Japanese Let Deadline Pass in Coal Talks", Vancouver Sun, Jan. 2, 1980, p. Dl. The actual cost of the spur-line was approximately $500 million. See Appendix I for a map of the area and proposed spur-line. Geoff Murray (Tokyo), "Steel Mills Consider Options", Vancouver  Sun, Jan. 16, 1980, p. D6. According to coal company executives and coal consultants See Ibid. p. D6. - 109 " Footnotes from pp. 39 - 42 14. Governmental forecasting as to projected demand is extremely problematic and will be discussed more fully later in Chapter VI, 15. Japanese steel production for 1979, was the third highest ever at 111.75 million metric tons. Vancouver Sun, Jan. 21, 1980, p. Cll. 16. "Phillips Says Japanese Coal Deal Hinges on Rail Lines", Vancouver Sun, April 29, 1980, p. D5. 17. Ibid. 18. Rod Nutt, "Japanese Coal Deal Awaits Rail Subsidy", Vancouver  Sun, May 3, 1980, p. CI. 19. "Pieces of Coal Deal 'Falling into Place1", Vancouver Sun, May 17, 1980, pp. Al, A2. 20. Klaus Pringsheim, "Comment"p. 93. 21. "Tough Strings Attached to Coal Deal with Japan", Vancouver Sun, May 7, 1980, pp. Al, A2. 22. Rod Nutt, "PM Willing to Help B.C. on Coalfields", Vancouver  Sun, May 10, 1980, p. CI. 23. "Bennett Denies Trouble in Talks on Coal Deal", Vancouver Sun, May 9, 1980, p. A2; and "Coal Deal Called Pipe Dream", Vancouver  Sun, May 9, 1980, p. Fl. 24. Keith Spicer, "Behind the Coal Deal: Blackmail", Vancouver Sun, June 6, 1980, p. A5; Der Hoi Yin, "Ottawa Subsidy of Coal Accord 'Improbable'", Vancouver Sun, May 8, 1980, p. E10; and "Trudeau, Bennett Can't Agree on B.C. Coal Field Development", Vancouver  Sun, May 6, 1980, p. Al. - no -Footnotes from pp. 42-47 25. The B.C. government was also concerned that the CNR planned line would go through the flood reserve of the proposed B.C. Hydro MacGregor Valley dam. See "Confusion Surrounds Coal Deal", Vancouver Sun, June 16, 1980, pp. Al, A2. 26. "$71 - $75-a-ton Coal Bait For Japanese Deal", Vancouver Sun, June 18, 198 0, pp. Al, A2. 27. Peter Comparelli, "Labour Council Objects to Coal Deal", Vancouver Sun, June 18, 1980, p. A10. 28. "Southeastern Coal Production Divorced From N.E. Project", Vancouver Sun, July 15, 1980, P. A8. 29. "$71 - $75-a-ton Coal Bait For Japanese Deal", Vancouver Sun, June 18, 1980, pp. Al, A2. 30. Ibid. 31. Rod Nutt, "An Extra $11 a ton Would Suit Canada Fine", Vancouver Sun, May 9, 1980, p. Fl; see also Michael Valpy, "Buying Dear and Selling Cheap", Vancouver Sun, June 19, 1980, P. A4. 32. Geoff Murray, "Japan Endures Chaos in Switch From Oil Power to Coal", Vancouver Sun, July 8, 1980, p. D 8. 33. Ibid. By 1982 the projections of thermal coal were even greater (e.g. 56 million tons in 1990), see Institute of Energy Economics Energy and Japan, (Tokyo, April 1982), p. 35. 34. Ibid. 35. Rod Nutt, "Ottawa's Refusal to Aid Coal Project Draws Fire in B.C.", Vancouver Sun, August 7, 1980, p. C5. - Ill -Footnotes from pp. 47 - 50 36. Rod Nutt, "B.C. Coal Talks Off To A Shaky Start", Vancouver  Sun, June 26, 1980 37. "Northeast Coal Development 'Really a Super Deal' for B.C.", Vancouver Sun, Aug. 1, 1980, p. A12; "Coal Company Seeks Cash Aid Over Pricing", Vancouver Sun, July 9, 1980, p. A2; and "High Rail Rates To Blame if Japanese Coal Deal Fails", Vancouver Sun , July 10, 1980, p. A10. 38. Pete McMartin,"Japanese and Brazilian Steel Giants 'Very Interested' in Kootenay Coal", Vancouver Sun, July 14, 1980, p. Al. 39. Rod Nutt, "Ottawa's Regusal To Aid Coal Project Draws Fire in B.C.", Vancouver Sun, Aug. 7, 1980., p. C5. 40. Rod Nutt, "$200 Million Subsidy Bared", Vancouver Sun, August 13, 1980, p. F6. 41. "Cool Aussie Wind Turns Japan to B.C.", Vancouver Sun, Aug. 19, 1980, p. C5. 42. "Japanese Review Coal Policy", Vancouver Sun, Sept. 14, 1980, p. D7. 43. The mills became extremely concerned about the takeover by British Columbia Resources Investment Corporation (BCRIC) of Kaiser Resources, which controlled the Greenhills and Balmer Mines, the largest producers in the southeast. The Japanese consortium of mills and trading companies that owned 40% of Kaiser Resources, decided to keep their shares. While BCRIC was nominally a publicly-traded company, the Japanese felt it would be susceptible to political pressure. They feared Victoria might influence future expansion in the southeast; see "Mills Seen Keeping Kaiser Shares", Vancouver Sun, Sept. 9/80 p. D5. - 112' -Footnotes from pp. 51 - 53 44. Der Hoi Yin, "Coal Mine Officials Expected in Tokyo to Conclude Talks, Vancouver Sun, Sept. 9, 1980 , p. D 5; and "Squabbling Over Coal Delaying Investment", Vancouver  Sun, Sept. 16, 1980, p. Fl. 45. Geoff Murray, "Government 'Not Interested' in Japanese Equity in B.C. Coal", Vancouver Sun, Oct. 16, 1980, p. Hi. 46. Rod Nutt, "Fate of Coal Development Hangs in Balance", Vancouver Sun, Sept. 25, 1980, p. Hi. The designated shosha for Quintette were Tokyo Boeki and only later Sumitomo (30%) . For Bullmoose it was Nissho Iwai. 47. Geoff Murray,"Production Drops Spark Japanese Rethink of Coal Needs", Vancouver Sun, Oct. 12, 1980, p. D3; Geoff Murray, "Japanese Said Considering Shelving Coal Talks::, Vancouver Sun, Nov. 25, 1980, p. D2; and "Japanese Rebutt In Coal Contract Talks", Vancouver Sun, Oct. 1, 1980, p. HI. 48. "January Target Date Reported for Japan-B.C. Coal Contract", Vancouver Sun,Dec. 24, 1980, p. A2; Rod Nutt, "Coal Firm Negotiator Gives an Insider's View", Vancouver Sun, Feb. 20, 1981, p. CI. 49. Rod Nutt, "Early Signing Seen For B.C. Coal Pact", Vancouver  Sun, Jan. 24, 1981, p. A2; Ros Oberlyn, "Phillips Announces Deal With Japan", Vancouver Sun, Jan. 23, 1981, pp. Al, A2; and Geoff Murray, "Japanese Firms Confirm 94 Million Ton Coal Deal", Vancouver Sun, Jan. 26, 1981,p. B9. 50., "Lower Freight Rates for B.C. Coal", Energy Analects, April 3, 19 81, p. 6. - 113. -Footnotes from pp. 53-56 51. See "Ultimatum of Public Financing Jelled Coal Deal Perrault says", Vancouver Sun, Jan. 27, 1981, p. A2. 52. Rod Nutt, "B.C. Coal Pact Based on Complex Formula", Vancouver Sun, June 12, 1981, p. DI. Ironically, the two major tunnels (9 kms. and 6 kms.) through the Rocky Mountains that caused the greatest concern, came in on budget and ahead of schedule. Chapter IV 1. "Special Report: Infrastructure Bottlenecks Muffle Coal Boom", Energy Analects, April 10, 1981, p. 5. 2. Alan Daniels, "Harbors Board 'Jeopardizing' B.C. Coal Deal", Vancouver Sun, Sept. 16, 19 81, p. Dl; and Rod Nutt, "Denison Breaks Off Talks on Coal Port Ownership", Vancouver Sun, Sept. 16, 1981, p. Dl. 3. Rod Nutt, "Esso Quitting Quintette", Vancouver Sun, July 17, 1981, p. Dl. 4. "Japanese Firm Buys Stake in B.C. Coal", Vancouver Sun, October 26, 1981, p. F6; see also Rod Nutt, "Trading Houses Link West's Resources and Japan", Vancouver Sun, November 21, 1981, p. H2. 5. "Signs of a Japan-Canada Resources Honeymoon", Energy Analects, Oct. 9, 1981, pp. 1-3; During this same period Nissho-Iwai agreed to invest $150 million in an LNG project undertaken by Dome Petroleum at Grassy Point, B.C. to be built by Kawasaki Heavy Industries (Canada) Ltd. Dome later withdrew. 6. Rod Nutt, ''There's No Turning Back, Phillips Says of Coal Plans", Vancouver Sun, Feb. 27, 1982, p. C3;"Pepin Insists Coal Port - 114 Footnotes from pp. 57 - 6 3 'Will Be 53-PCT. Canadian'", Vancouver Sun, March 2, 1982, p. C9; and Rod Nutt, "Mitsubishi To Discuss Sharing of Work", Vancouver Sun, March 5, 1982, p. B5. 7. According to a report by Price-Waterhouse Associates see "Study Projects Costs and Benefits of Developing North east B.C. Coal", Energy Analects, May 15, 1981, p. 3. 8. Geoff Murray, "Japanese To Run B.C. Mine", Vancouver Sun, June 23, 1982, p. Dl. For a list of Japanese participation in Quintette Coal Ltd. see Appendix 2. 9. Rod Nutt, "Japanese Concept Saves NE B.C. Coal Deal", Vancouver Sun, July 3, 1982, pp. Al, A2; and Ros Oberlyn, "Profit Forecast on Coal Deal Misleading", Vancouver Sun, July 15, 1982, p. Dl. 10. Ff. N. Halvorson Consultants Ltd., Forecast of Coal Mining  Activity to 2002, (B.C. Hydro and Power Authority, March 1983),p. 96. 11. "Prices Down, But King Coal Keeps Expanding", Energy Analects, June 10, 1983, pp. 1-2. 12. "Study Examines B.C. Coal Development Options", Ibid. p. 7. 13. "Surplus Coal Worries Japan's Steel Mills", Vancouver Sun, Oct. 25, 1983, p. Dl; see also "Less Coal Needed: Japan Plans Energy Cuts", Vancouver Sun, Oct. 13, 1983, p. D8. 14. "The main purpose of P.M. Trudeau's visit to Japan this year (1983) was to plead with Nakasone not to give into U.S. pressure for major purchases of coal" Andrew Horvatt, "Japan-U.S. Auto Pact Threatens", Vancouver  Sun, November 2, 1983, p. C9. - .115 " Footnotes from pp. 63-68 15. Rod Nutt, "Japan's Coal Deals Under Fire", Vancouver Sun, November 25, 1983, p. B6. 16. "Workers Shocked", The Province, Oct. 21, 1985, p. 3; see also |:U.S. Terms Key to Coal Accords", Vancouver Sun, November 20, 1984, p. D3. 17. Joseph D'Cruz, Negotiating Coal Contracts, p. 62. 18. H. N. Halvorson Consultants Ltd., (Op. Cit.), p. 52. Halvorson is referring to the 250,000 to 300,000 tons of coal stockpiled at Ridley Island in late 1983. Japanese tankers did not actually take away their coal until Jan. 7, 1984 see "Japanese Tankers Load First Ridley Coal", Vancouver Sun, Jan. 9, 1984, p. B10. 19. Geoff Murray, "B.C.'s Hard Coal Line Upsets Mills in Japan", Vancouver Sun, Sept. 21, 1983, p. C8; see also Geoff Murray, "Japanese Agree To Pay B.C. Coal Price For Now", Vancouver Sun, Dec. 27, 1983, p. D7. 20. Rod Nutt, "Nippon Steel To Get Say in Canadian Coal Prices", Vancouver Sun, August 9, 1983, p. Dl. 21. Ken Bell, "Coal Rumours Suit Japan",The Province, March 18, 1984, p. 32. 22. "Northeast Coal Sales 'Assured'", Vancouver Sun, Feb. 1, 1984, P. • B5. 23. Rod Nutt, "$1 Billion Loss Forecast For Northeast B.C. Coal", Vancouver Sun, Feb. 3, 1984, p. B7; see also Rod Nutt, "Report On Loss Helps Coal Mines In Japanese Talks", Vancouver Sun,. Feb. 7, 1984, p. CI. 24. Ibid. -116 -Footnotes from pp. 68-71 25. "Gloomy Coal Report Called 'Garbage'", Vancouver Sun, February 4, 1984, p. HI. 26. "Japanese Steel Leader Claims Talks Progress To Cut Coal Price", Vancouver Sun, June 8, 1984, p. B7. 27. "Japanese Send Coal Price Team to Vancouver", Vancouver Sun, February 4, 198 4, p. A2. At this time, in as attempt to diffuse Western criticism over Japanese trading practices, MITI invited foreign businessmen, including some southeastern B.C. mining executives, to become expert witnesses to the deliberation councils that help set Japanese industrial policy. Rod Nutt, "Foreigners to Gain Voice on Japan's Policies", Vancouver Sun, March 15, 1984, p. F7. 28. "Japanese Steel Leader Claims Talks Progress to Cut Coal Prices", Vancouver Sun, June .8, 1984, p. B7; see also "New Mines Must Cut Prices", Vancouver Sun, June 4, 1984, p. B8. 29. Jean Sorensen,"Contracts for B.C. Coal; The Japanese Have a Tradition of Sticking By Them — With Some Adjustments, " Canadian Mining Journal, (Don Mills, Ontario), June 1985, p. 21. 30. Ibid., pp. 20-21. 31. "Trouble Plagued Quintette Reaching Targets", in Ibid., p. 24; see also "Debt Threat Shakes Quintette", Vancouver Sun, Feb. 1, 1985, p. C6. 32. Marjorie Nichols, "Mega-Gamble Hasn't Paid Off", Vancouver Sun, Jan. 26, 1985, p. A4. 33. "The Coal Hole", Vancouver Sun, March 23, 198 5, p. A4; and Brian Lewis, "Quintette 'Is Paying'", The Province, Mar. 21, 1985, p. 24. - 117 ~ Footnotes from pp. 72 - 76 34. "Coal Price Peace", The Province, April 2, 1985, p. 17. 35. " Denison pondering Quintette Future As Japanese Force Coal Price Cut", Energy Analects, April 1, 1985, pp. 1-2. 36. See M. Nichols, (Op. Cit.), and Ken Bell, "N E Coal Too Early to Bury", The Province, May 10, 1985, p. 33. 37. "Westar Signs First Canadian Deal With Japanese For Weak Coking Coal", Energy Analects, March 11, 1985, p. 4. Chapter V 1. K. N. Halvorson, Forecast of Coal Mining Activity to the  Year 2002, p. 20. 2. Ibid., p. 38. 3. See S. Schlossstein, Trade Wars;Chapters 4, 17, and 18 and Ruprecht Von Dram, (Director of German Steel Federation), "German Steel Industry Bears the Brunt of the Crisis", Journal of Japanese Trade and Industry, November, 198 2, p. 37. 4. Hideo Yagi, "Steeling to Maintain Lead", Journal of Japanese  Trade and Industry, January 1985, p. 22; see also "Steel Export Prices Drop; Profits Inevitably Follow", Oriental Economist, July 1985, p. 28. 5. See Jon Woronoff, World Trade War, (New York, Praeger, 1984), p. 197; Hiroya Ueno, "Industrial Policy: Its Role and Limits", Journal of Japanese Trade and Industry, July 1983, p. 36; and Richard Samuels, "The Industrial Destructuring of the Japanese Aluminum Industry", Pacific Affairs, Fall 1983; and Robert Urio, ,;The Declining Industries of Japan: Adjustment and Relocation", Journal of International Affairs, Summer 1984. - 118 -Footnotes from pp. 77 - 81 6. Yoh Kurosawa, "Patterns of Canada-Japan Trade; The Impact of Industrial Restructuring", Speaking of Japan, March 1985, p. 27; For similar remarks regarding Australia - Japan trade see Katsuo Otsuka, Economic Growth and Changes in the Industrial  Structure: Australia and Japan, (Tokyo, International Dev elopment Centre of Japan, Tokyo, 1983). 7. 'Capital Investment Trends in the Japanese Steel Industry',' Steel Today and Tomorrow, (Tokyo), Sept. 1983, p. 1. 8. Kazuo Matsunaga, "Technological Innovation and the Industrial Structure", Journal of Japanese Trade and Industry, Jan. 1985, p. 20; see also "Steel and the Advent of New Industrial Materials", in Japan's Iron and Steel Industry 1984 Handbook, (Tokyo, Japan Steel Federation, 1984), p. 86- and MITI, Vision of International Trade and Industry Policies For The Future, (Tokyo, 1980), p. 62, and "Out-Roared by MITI", The Economist, January 19, 1985, p. 66. 9. "New Steel to Meet Changing Needs", Steel Today and Tomorrow, March 1983, p. 2. 10. L. Franko, p. 113. 11. M. Shinohara,Industrial Growth,p. ix; see also Bruce Cummings, "The Origins and Development of the Northeast Asian Political Economy: Industrial Sectors, Product Cycles and Political Consequences", International Organization, Winter, 1984; and Nagatoshi Suzuki, "Economic Relations With The NICs", Journal  of Japanese Trade and Industry, March 1982. 12. Thomas Walkom, "Economic Growth is Slowed in Effort to Curb Trade Surplus", Report on Japan, Globe and Mail, Oct. 28, 1985, p. C3. - 119 -Footnotes from pp. 81-84 J. B. Treece, "Japan's Protectionism Diverts Asian Goods to / the U.S.", Wall Street Journal, March 4, 1985, p. 25. Ibid., Treece mentions that some importers have been caught unloading Korean steel at night into unmarked trucks. The U.S., well-seasoned on this issue, somewhat effectively inhibited the sale of steel plant and technology by U.S. firms by cutting-off U.S. Export-Import Bank credit and invest ment insurance against political risks. Ironically, it was Japan that filled the vacuum. "Steel Exports Slump", The Province, Oct. 29, 1985, p. 30; and Stuart Auerbach, "Japanese Warned to Open Up Markets or Face Trade War", Manchester Guardian Weekly, March 17, 1985, p. 17 Charles Kindleberger, The World in Depression 1929-1939, ( Berkely, Univ. of Calif. Pres_s,. 1973) , p. 25; see also Ronald Anderson, "Japanese Ought to Get Credit For Seeing Where Interest Lies", Globe and Mail, Nov. 1, 1985, p. B2; Taisuke Usami (Vice-President of Kawasaki Steel) "The U.S. Steel Industry and the Japanese Steel Industry", Steel Today, June 1985, p. 10; Art Pine, "The Dollar Boon; Big U.S. Trade Deficit is Proving a Bonanza For Many Countries'', Wall Street  Journal. March 1, 198 5, pp. 1 and 7; and "Japan to Introduce Program to Open Markets", Globe and Mail, July 30, 1985, p. B8 Thomas Walkom, p. 63. Relative exchange rate is a major reason why the Japanese prefer Australian to Canadian coal. Japan's interest rates have been kept artificially high in relation to their in flation rate. They are not high compared with current (Dec. 1985) interest rates in Canada and the U.S. "Direct Investment in U.S. Enterprises", Steel Today and  Tomorrow, March 1983, p. 11; see also Charles Bradford, - 120 -Footnotes from pp. 85 - 87 "U.S. Steel Industry at Crossroads", Japan Journal of Trade and Industry, Nov. 1982, p. 37. Chapter VI 1. Commenting on the lack of corporate litigation in Japan Derek Bok, President of Harvard University said, "In Japan, a country of half our size, 30% more engineers graduate each year than in all the U.S. But Japan boasts a total of less than 15,000 lawyers while American universities graduate 35,000 lawyers every year. As the Japanese put it so succinctly:'Engineers make the pie grow larger. Lawyers only decide how to carve it up'". New York Times, April 22, 1983, p. 6; see also, S. Schlossstein, Trade Wars, pp. 150-153; Much of the information in this section derives from interviews the author held with Malcolm Smith, Professor of Japanese Law at U.B.C. Law School, Don Fraser, President of Balfour Guthrie (Canada) Ltd., Ron Basford, former coal coordinator for Northeast Coal , James Matkin, president and CEO of the Business Council of B.C.; and Glen Skolby and Wally Malkinson of the Ministry of Industry and Small Business Development in Victoria. 2. "Japan Inc. Goes Shopping", The Economist, Oct. 2, 1976, p. 92. see also Dani Rodrik, p. 551. 3. Hidetatsu Furutate, "Japan and Australia Expand Trade with Some Problems", Business Japan, (Tokyo) November 1977, pp. 22-25. 4. According to Malcolm Smith,the Queensland government had coaxed many farmers to switch from sheep to beef so as to take advantage of the lucrative Japanese market. Soon after, the Japanese imposed a tariff on imported beef from New Zealand and Australia. The Queensland government was spoiling for a confrontation. - 121 " Footnotes from pp. 88-96 5. "The Japanese government had MITI as its sole negotiator, whereas six "Australian" governments cut each others' throats in offering the best deal to Japanese buyers" see E. Gough Whitlam, (former Australian Prime Minister), A Pacific Community,(Cambridge, Harvard University Press, 1981), p. 83. 6. Jean Sorensen, Contracts for B.C: Coal, p. 25. 7. H.N. Halvorson, Update: Forecast of Power Consumption By  the B.C. Coal Mining Industry, (Vancouver, B.C. Hydro and Power Authority, 1984), p. .19. 8. Ron Basford, "Northeast Coal Development: Some Lessons and Conclusions", (speech to the Canadian Club of Vancouver, February 8, 1984) p. 10. 9. Dani Rodrik, p. 559. 10. "Rift in the Zaikai Monolith", Oriental Economist, Aug. 1985, p. 3. 11. Ron Basford, p. 11; see also "Clark Urges Japan To Keep Canadian Coal in Mind", Globe and Mail, Dec. 20, 1984, p. 8. 12. Brian Kieran, "B.C. Opposes Surcharge on Japanese Vehicles", Vancouver Sun, April 12, 1982, p. B9. Chapter VII 1. see Chapter One Footnotes 3 and 4 for list of studies that prescribe to this theory. 2. Ashley Ford, "Raking Over The Coals; The Japanese Steel Industry Has Opted For Political Caution in a Resources-Price Dispute with Canada", Far Eastern Economic Review, Nov. 8, 1984, p. 89-90. - 122 -Footnotes from pp. 97 - 101 3. Heather Gibb, Re-Examining Japan Incorporated, p. 51. 4. Special Joint Committee on Canada's International Relations, Interim Report Pertaining to Bilateral  Trade with the U.S., (Ottawa, Queen's Printer, August 1985), p. 29. 5. Jean Sorensen, Contracts for B.C. Coal, p. 20. - 123 -SELECTED BIBLIOGRAPHY Blaker, M. Japanese International Negotiating Style, New York, Columbia University Press, 1977. Bradford,C. "U.S. Steel Industry at Crossroads", Japan Journal  of Trade and Industry, November 198 2, pp. 35 - 40. Cumming, B. "The Origins and Development of the Northeast Asian Policital Economy: Industrial Sectors, Product Cycles and Policital Consequences", InternationalrQrganization Winter, 1984, pp. 10 - 46. D'Cruz, J. Negotiating Coal Contracts with the Japanese: Steel  Industry: The Coordinated Procurement System, Vancouver, Institute of Asian Research, U.B.C. 1984. Ford, A. "Raking Over the Coals; The Japanese Steel Industry Has Opted For Political Caution in a Resources-Price Dispute with Canada", Far Eastern Economic Review, November 8, 198 4, pp. 89 - 90. Franko, L. The Threat of Japanese Multinationals, Toronto, John Wiley & Sons, 1983. Gibb, H. Re-examining "Japan Inc.": Japanese Coal Procurement  and Western Canadian Coal, Vancouver, Institute of Asian Research, U.B.C. 1984. Halvorson, H.N. Forecast of Coal Mining Activity to 2002, Vancouver, B./C. Hydro and Power Authority, March 1983. — Update: Forecast of Power Consumption ByzThe B.C.:Coal Mining Industry, Vancouver, B.C. 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MITI Vision of International Trade and Industry Policies For The Future, Tokyo, MITI, 1980. Nemetz, P., Vertinsky, I. and Vertinsky, P. Japan's Energy  Strategy at the Crossroads, Vancouver, Institute of Asian Research, U.B.C, November 1983. Otsuka, K. Economic Growth and Changes in the Industrial Structure: Australia and Japan, Tokyo, International Development Centre of Japan, 1983. Ozawa, T. Multinationalism Japanese Style; The Political Economy of Outward Dependency, Princeton, Princeton University Press, 1979. Rodrik, D. "Managing Resource Dependency: The U.S. and Japan in the Markets for Copper, Iron Ore and Bauxite", World Development, Volume 10, No. 7, (1983). Sekiguchi, S. Japanese Direct Foreign Investment, New Jersey, Allanhead & Company, 1979. Scalapino, R. ed. The Foreign Policy of Modern Japan, Los Angeles, Los Angeles University Press, 1977. Schlossstein, S. Trade War: Greed, Power and Industrial Policy  On Opposite Sides of the Pacific, New York, Congdon and Weed, 1984. Shinohara, M. Industrial Growth, Trade and Dynamic Patterns in The Japanese Economy, Tokyo, Tokyo University Press, 1982. Sorensen, J. "Contracts for B.C. Coal; The Japanese Have a Tradition of Sticking By Them — With Some Adjust ments", Canadian Mining Journal, June 1985, p. 20 - 27. Suzuki, N. "Economic Relations With The NICs", Journal of "Japanese. Trade and Industry, March 1982, pp. 31 - 36. - 125 -Tsurumi, Y. Multinational Management: Business Strategy and Government Policy, Cambridge, Mass., Ballinger Publishing Co., 1977. Tsuruta, T. "A Criticism of Cartels in Ailing Industries", Economic Eye, Vol. 4, No. 2,(June 1983) pp. 6 - 10. Tung, R. "How to Negotiate With the Japanese", California  Managemeht Review, Summer 1984, pp. 49 - 75. Ueno, H. "Industrial Policy: Its Role and Limits", Journal of Japanese Trade and Industry, July 1983, pp. 23 - 28. Urio, R. "The Declining Industries of Japan: Adjustment and Relocation", Journal of Internaitonal Affairs, Summer 1984, pp. 67 - 84. Varangu, K. Development Options for B.C. Coal, Calgary, Canadian Energy Research Institute, 1983. Vernon, R. Two Hungry Giants: The U.S. and Japan in the Quest for Oil and Ores, Cambridge, Mass., Harvard University Press, 1983. Vogel, E. Japan as Number One, New York, Harper Colophon Books, 1979. Woronoff, J. World Trade War, New York, Praeger, 1984. Wright, R. Japanese Business in Canada, Montreal, Institute for Research on Public Policy, 1984. Yago, H. "Steeling to Maintain Lead", Journal of Japanese  Trade and Industry, January 1985, pp. 20 - 23. **** Besides the above books and journals,the following periodicals and daily newspapers provided an abundance of information on this topic: Nippon Steel News Vancouver Sun Energy Analects Globe and Mail Steel Today and Tomorrow Wall Street Journal Oriental Economist - 126 -Appendix 1 Fig. 1 - Map of Northeast Coal Project Fig. 2 - Imports of Coking Coal by Area, 1973-1983 Australia USA Canada Others * 1973 A3.3% 30.5% 19.1% 7.1% 1979 45.7% 24.8% 18.9% 10.5% 1980 A1.A% 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 South Africa, USSR , Poland, PRC others Source: The Japan Iron and Steel Federation, The Steel Industry of Japan 1984, (Tokyo), p. 12. - 127 -Appendix 2 15-Year Contract of Quintette Coal (Basic Agreement Signed in January 1981, Final Agreement in August 1981) Mine Operator: Quintette Coal Co. (capitalized at C$23,874,290 as of June 30, 1982). Denison Coal Ltd. 50.0% Mitsui Mining Overseas Development Co. 12.5% Tokyo Boeki Ltd. 10.5Charbonnages de France 12.0% Sumitomo Corp. 5.00Nippon Steel Corp. 3.84Nippon Kokan K.K. 1.62% Kawasaki Steel Corp. • 1.50% Sumitomo Metal Industries Ltd. 1.49Kobe Steel Ltd. 0.88Nisshin Steel Co., Ltd. 0.29% Nakayama Steel Works Ltd. 0.20Godo Steel Co. Ltd. 0.07% Mitsubishi Chemical Co. 0.11Managing Co.: Denison Mines Ltd. Japanese Importer: Tokyo Boeki Ltd. Contract Period: 14.5 years from October 1, 1983 throuah March 31, 1998. Contract Tonnage: Total 69,550,000 M/T for 14.5 years, - 1,050,000 M/T in fiscal 1983 (October 1983 - March 1984), 3.5 million M/T infiscal 1984, and five miilion M/T yearly from fiscal 1985. Note: ±5%. Guaranteed Sp ecifications: T.M. 8.0% niax. ; Ash 9.5% (tolerance 0.5%); V.M. 20 - 26%; T.S. 0.50% max.; C.S.N. 5-7; Size 50 mm x 0. Note: Penalties = C$1.40 per one percent ash; C$1.00 per 0.1 percent sulfur. Start Price as of April'1, 1980: C$75.00 F0BT Ridley Island per M/T. As of April 1, 1982, the price stood at C$89.98 F0BT (C$82.98' F0BT as of April 1, 1981). Escalatable Portion of Start Price: C$40.00 (about 53%). Escalator Components: Wages at mines and railways, materials and equipment costs, royalties, fixed asset taxes, port dues, etc. Escalation Formula: Escalation amount of mine and railway costs is calculated from the predetermined amounts of escalator components multiplied by the rate of increases in the government's indices of wages and materials and equipment costs announced every three months. Royalties, port dues and other components are escalated by the amounts actually, increased, respectively. Time for Reviewal of Start Price: April 1, 1987, April 1, 1991, and April 1, 1995. Coal Terminal Charge at Ridley Island: C. S3'. 00 per M/T (till 1987), as of April 1, 1980. Source: H.N.Halvorson, Forecast of Coal Mining. J^cjtjLyJLty, to 2 002. Appendix 3 - 128 -F.CJ.-4 Production Indices for Ordinary and Specialty Steel Products (1973 = 100) - 150 r 140 120 -Existing - -Newiy-built-•500 United 400 States WZA United w Germony/ States Benelux 300 200 •100 -0 W Germany/ Benelux uzm Japon VZZA SCO-Other Asia 400-Integrated plants produ cing hot rolled products. For existing plants no allowance made for depreciation and interest. 1970 '71 72 73 74 75 76 77 78 79 '80 '81 Figure 3 Production costs in existing and newly built steel plants (1978 S per tonne). Fig. l Trend of Crude Steel Supply and Demand and Output Capacity 2 160 140 Iri1-i-i!wi -i-v^i\A; _?,°B' manufacturing capacity _ 120.^ 100 20 -Z:^:-;•••>• -v-^^>^v/^v" ~:'J*-• .-^iii^^y; Crude .steel prodi«ettoj¥^5Wbsl?S;- l!Si-j??^v - V" v.. ' Apparent consumption of crude steel ^-Ip--;..;'. i r.' (domestic demand) i^^'-v-i'?'.' Imports __->? AV X? A*> A* A* & & .<£> Fig. 2 Ordinary Steel Consumption Demand by Industry Sources:Journal of Japanese Trade and Industry;Steel Today PRODUCTION 180-COMPARISON OF ACTUAL JAPANESE CRUDE STEEL PRODUCTION WITH FORECASTS BY JAPANESE AGENCIES AND THE B.C. AND CANADIAN GOVERNMENTS -r ACTUAL -• JAPANESE FORECAST B.C. AND CANADIAN GOVERNMENT FORECAST VICTORIA/OTTAWA JAN 1977 JAPAN,, FEB 1983 ACTUAL —r-73 -1— 79 I 1 80 81 FISCAL YEARS 82 84 !972 74 75 76 77 78 83 85 86 87 88 I 89 1990 Source: H.N.Halvorson 


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