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Cablegate: Deeper Digging Into Vietnam's Bauxite Debate Uncovers As

DE RUEHHM #0575/01 2221039
R 101039Z AUG 09




E.O. 12958: N/A

REF: A) Hanoi 417 B) Hanoi 537 C) Hanoi 413

HO CHI MIN 00000575 001.2 OF 005

1. (SBU) Summary: The issue of bauxite development in the
Central Highlands has fueled strong passions among diverse
sectors of the Vietnamese public, has most likely played a role
in the arrest of some "dissidents" who emerged as leaders of the
anti-mining crusade, and continues to generate lively national
debate. Concerns about bauxite have primarily revolved around
three key issues: economic viability, environmental impact, and
the level and nature of Chinese involvement. Based on a recent
trip to one of the mining sites and meetings with local
officials, it appears that the GVN is maintaining its support
for bauxite excavation and has ambitious plans for its
processing and export. There is, however, a wide chasm between
those plans and the realities on the ground. To date, only one
project has actually moved into the construction phase, while
another is pending permission to start construction. In
contrast to blog reports that cite thousands of Chinese workers
in the Central Highlands, the Ambassador observed little
evidence of a significant Chinese work force during his visit,
though the numbers of workers will likely increase as plans move
forward. Despite the assurances of provincial leaders and
project managers, there is still insufficient evidence that
current plans to manufacture alumina will be either profitable
or environmentally sound. In other words, it is all still up in
the air. End summary.

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A Poor Province's Prerogative...


2. (SBU) Vietnam is estimated to have 5.4 billion tons of
bauxite ore -- one the world's largest reserves -- and 4.4
billion of those reserves are in Dak Nong, one of Vietnam's
poorest provinces. Dak Nong People's Committee Vice Chairman
Tran Phuong told the Ambassador on July 25th, that the key to
Dak Nong's economic future lies in exploitation of its abundant
bauxite reserves. Mr. Phuong noted that the central government
had given a green light to Central Highland bauxite development,
as issued in Politburo Decision Number 245 in April 2009, and
that the Dak Nong People's Committee remains firm in its
commitment to develop bauxite. He added that "If a province is
blessed with mineral resources, it has every prerogative to take
advantage of those mineral resources".

Three out of Four Projects Stalled


3. (SBU) The Dak Nong People's Committee originally envisioned
four large bauxite projects that would export six million tons
of alumina per year, all of which would be completed by 2015.
Products of the processing factories would be transferred by a
railway to the Ke Ga seaport in Binh Thuan province on the
central coast, and the intermediate product, alumina, would be
exported abroad. The reality on the ground is that neither the
railroad nor the port projects have gone beyond the
pre-feasibility stage (Ref A). Mr. Phuong also admitted that
three of Dak Nong's four prospective bauxite projects are

4. (SBU) The projects' troubled history provides a glimpse into
why they are stalled and what must be done to get them moving.
According to local officials, the Aluminum Corporation of China
Limited (Chalco), the publicly-listed subsidiary of the
state-owned holding company Aluminum Corporation of China
(Chinalco), first showed interest in 2006, when there was a
proposal for excavating and transporting the raw ore bauxite by
pipeline to the central coast where it would be processed and
exported to China. Mr. Phuong noted, however, that negotiations
on that particular project proposal are indefinitely on hold
because such a venture would neither allow industrial
development nor contribute any value-added for Dak Nong
province. BHP Billiton had also expressed interest in another
project but has subsequently pulled out.

HO CHI MIN 00000575 002.2 OF 005

5. (SBU) The third company to express an interest was Alcoa.
Mr. Phuong said the firm was initially attracted to Dak Nong
because of the soil structure's similarity to Australia, where
Alcoa already has bauxite operations, and had planned to conduct
a series of feasibility studies. But Alcoa's enthusiasm appears
to have waned in the wake of Vietnam's bauxite brouhaha and it
is now idling on the sidelines (reftels). (Note: Per prior
conversations between the Ambassador and company
representatives, Alcoa is also concerned about the tax rate at
every stage of bauxite processing, since they will be subject to
a higher export tax if alumina is considered a "raw" rather than
a "refined" material. Mr. Phuong said Dak Nong province
supports the classification of alumina as a "refined" material.
End note)

5. (SBU) In Dak Nong, the only bauxite mine ready to start
construction is the Nhan Co project, but little is actually
going on there yet. While technically fully invested and
operated by Vietnam Coal and Mineral Corporation (Vinacomin),
the Chinese construction company Chalieco, another subsidiary of
Chinalco, was awarded the Engineering Procurement and
Construction (EPC) contract to build Nhan Co's aluminum
processing factory. On the wall of the makeshift project
management meeting room hangs a large, impressive map of what
the alumina processing complex will look like once construction
is completed. It features a factory with an initial annual
capacity of 650,000 tons, a coal-fired power plant, and a
bauxite refinery. Nhan Co's Chief of Staff, Mr. Nguyen Van
Hieu, said that the plant will be fully operational by 2011.
Despite this assurance, it has been one year since the project
began and thus far only the land has been flattened. Before any
further action can take place, Mr. Hieu said, Nhan Co must get
approval for the economic efficiency and environmental impact
reports it submitted to the Ministry of Planning and Investment
and the Ministry of Natural Resources and Environment.

6. (SBU) In contrast, the Tan Rai project, also wholly owned by
Vinacomin in Lam Dong province, has already had both its
economic and environmental reports approved. Like Nhan Co, when
complete, the full Tan Rai complex would include excavation,
processing and refining of bauxite ores into alumina (4.3
million tons of ores into 630,000 tons of alumina per year).
Tan Rai's Vice Chairman, Mr. Tran Duong Le, said that
construction (also by Chalieco) began last November and will be
completed in November 2010 when the contract ends. Vinacomin
will oversee the bauxite mining itself, which it considers the
"easy" part of the operation, while the more challenging parts,
such as transferring ores by conveyor belt from mines located 4
kilometers away from processing facilities and running the
refinery operations, will be offered to a Vietnamese firm by
domestic tender.

Crunching the Numbers


7. (SBU) The economic viability of the GVN's plan to excavate
and process bauxite is still an open question. Because
exporting raw bauxite ores would not allow for much industrial
development in the Central Highlands, the GVN is keen to
manufacture aluminum--the "value-added" product made from
alumina. But because aluminum processing requires a great deal
of water and energy--two resources in short supply in the
Central Highlands--the route forward is not clear. In Dak Nong
province, for example, Mr. Phuong said that 1,400 megawatts of
the province's 1,700 megawatt capacity are already dedicated to
meeting local demand. While more projects are under
construction, Mr. Phuong acknowledged that even after accounting
for new power plants under construction there would, at best, be
enough power available to produce no more than 200,000 tons of
aluminum per year.

8. (SBU) Given these limitations on the resources required to
produce finished aluminum, Tan Rai Vice Chairman Le said that
both the Tan Rai and Nhan Co projects will only be able to
produce alumina, not aluminum. Management at both projects
noted that while their factories could eventually expand their

HO CHI MIN 00000575 003.2 OF 005

alumina capacity, neither project could independently add the
capability to produce aluminum even if power and water were
available since the technology for aluminum production does not
yet exist in Vietnam. To bring in a suitable partner with the
technology, an international open tender would be required.
While Vinacomin maintains the lofty goal of producing 120-150
thousand tons of aluminum a year by 2014, it has not started
concrete planning for an aluminum plant, it does not know where
the power and water could come from, nor has it even decided on
where an aluminum processing plant would be located.

9. (SBU) Another potential economic viability concern is the
medium and long term trajectory for aluminum prices (and
correspondingly alumina prices). Short-term prices have
plummeted by more than 50 percent since last year when the
project was making headlines. While part of the drop is due to
the global economic downturn, analysts say China's
overproduction of aluminum may continue to drive prices down for
the long term. While China has already begun scaling back
production, closing at least three large factories in the last
year, there is still a global glut of aluminum, causing some
analysts to remain bearish on the 10 year outlook for aluminum
prices. This bearish outlook stands in contrast to the bullish
assumptions on which Vietnam's aluminum plans are built.
According to one report, TVK assumes an average alumina price of
$326 per ton (which is significantly above current market
prices) for the duration of the Tan Rai project. Even at that
price, TVK estimates that although it will take 13 years to
recover the investment, there will be positive economic benefits
over the 50 year life of the project.

Are All Sludge Pits Created Equal?


10. (SBU) Critics of the GVN's bauxite plans point to the
potential deleterious effects that bauxite excavation and
alumina processing could have on the environment. Of particular
concern is how "red sludge," the toxic byproduct of alumina
processing, would be handled. Mr. Phuong and managers of both
the projects assured the Ambassador that the plants will be
well-equipped to handle the red sludge safely. They explained
that disposal involves creating a pit, filling it with 20
centimeters of clay, and then layering it with a chemical fabric
so that the red mud can't penetrate into the soil. Although it
is not possible to reuse the red mud, it is possible to recycle
the water back through the refining plant, which both projects
intend to do. Mr. Hieu noted that in Australia, sludge pits
have been planted with trees and one has even been converted
into a Formula One racetrack.

11. (SBU) Mr. Phuong said he was initially skeptical about the
environmental impact of bauxite development, but after visiting
Australia and China's Kunming and Yunnan provinces and observing
the processing, procedures and environmental safeguards in those
countries, he was reassured that the damaging environmental
effects of bauxite mining can be minimized when projects are
carried out properly. He emphasized that the same expertise can
and will be applied in Vietnam. Conditions in Australia,
however, are significantly different than Vietnam. Australia
disposes its red sludge in remote outback areas with little
rainfall, thus mitigating the risk of waterway contamination.
Vietnam, which has a comparatively wetter climate and is more
densely populated, does not have the luxury of vast tracts of
unused land. The proposed mining and process sites are also
located in mountainous areas that serve as the water catchment
for much of the central and southern regions of the country. If
the toxic sludge were to seep into streams or the Dong Nai
River, the primary water source for all of Southern Vietnam, the
results could be catastrophic.

12. (SBU) Red sludge is not the only environmental risk. The
Director of Cat Tien National Park, Mr. Tran Van Thanh,
emphasized the serious consequences that building additional
hydropower plants on the Dong Nai River system would inflict on
the environment in and around Cat Tien. In addition to
destroying wetland areas, the hydropower plants would adversely

HO CHI MIN 00000575 004.2 OF 005

affect the aquatic ecosystems, and severely disturb the
endangered rhinoceros population. Mr. Thanh also said that the
Vinacomin's environmental impact studies are "unreliable"
because they are done by the government for the government, not
by an independent source. Vinacomin management at Tan Rai
project initially said that the reports are transparent and
available to the public, but when the Ambassador asked Vinacomin
where he could find a copy of the report, there was a lot of
uncomfortable commotion amongst the group, who ultimately said
that the Ministry of Natural Resources and the Environment
should have reports available.

Much Ado about China


13. (SBU) Perhaps one of the most controversial aspects of the
bauxite debate is the involvement of Chinese interests. Public
concern over protecting strategic national resources, unfair
bidding tenders for Chalieco, and worries about the influx of
foreign labor are consistent themes in Vietnam's media and
Internet blogs, with some blogs reporting thousands of Chinese
workers moving into the region and the Chinese military setting
up shop there to protect the workers. Mr. Phuong, however,
assured the Ambassador that the only Chinese workers currently
in Dak Nong province are "a handful" of Chalieco engineers
studying the soil. Before that, Phuong said about 60 to 70
Chinese workers had been in Dak Nong to build a biofuel project,
but all of them quickly departed after the project ended. He
believes the whole issue of Chinese labor has been hyped up and
blown out of proportion by "people with bad intentions."

14. (SBU) Indeed at Nhan Co, where construction is on hold, the
Ambassador observed no obvious Chinese presence (beyond pandas
painted on some of the bathroom tiles). Nhan Co management
would not give any projections about the number of Chinese
workers once the EPC took effect, however, stating only that it
would "vary depending on the phase of construction." They
emphasized that "anything that can be done by a Vietnamese will
be" and that at full capacity there will be about 1,600
Vietnamese employees. Meanwhile at the Tan Rai project, there
are currently "over 500" Chinese workers constructing the
alumina refinery, but the management emphasized that
construction of the facility and the transfer of technology were
the only parts of the project subject to international tender.
When the plant becomes operational, the entire workforce will be
Vietnamese, except during the start up phase when some foreign
experts (Chinese or others) will be employed as necessary.



15. (SBU) Although GVN and Central Highland provincial officials
are pushing ahead with bauxite plans, there is a sizeable gap
between their ambitious hopes and schedules and what is actually
taking place on the ground. This is likely due to a combination
of factors, including the GVN reassessing priorities in light of
the unexpected popular backlash and the assorted economic and
environmental complexities associated with such a massive
undertaking. The Nhan Co project is currently little more than
a pile of dirt and while Tan Rai is further along in the
construction phase, it takes a lot of imagination to see how
they will be able to excavate, refine and process 600,000 tons
of bauxite into alumina within the next 16 months - particularly
when a viable transport network for exporting the product does
not exist.

16. (SBU) Internet blogs and cocktail chat around Ho Chi Minh
City about a "Chinese invasion" certainly appear exaggerated, as
there is currently little evidence of an overt Chinese presence
in either province. That said, neither of the projects'
managers would provide any hard numbers about how many Chinese
workers they expect during the construction phase and beyond.
Questions remain about the fairness of the tender that Chalieco

HO CHI MIN 00000575 005.2 OF 005

was ultimately awarded, particularly given China's spotty record
on environmental protection and contract fulfillment in other
tenders and the vital importance of safe red sludge containment.
Unfortunate mishaps with toxic waste notwithstanding, the
development of power resources to support alumina (and
eventually aluminum) processing is likely to represent a serious
-- perhaps insurmountable -- obstacle that will also entail its
own significant environmental cost. Based on the evidence
available now, it is not yet clear that the economic benefits of
bauxite development are worth the high potential risks. End

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