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New Caledonia - Economy

In the 1980-90s, it was believed the nickel mines would fund New Caledonia’s independence. New Caledonia’s economy is driven by three key sectors: the mining industry - nickel (around 20% of GDP), magnesium, iron, cobalt, chromium and manganese, fiscal transfers from France, and tourism. New Caledonia has the world's second largest nickel reserves, representing 11% to about 25% of the reserves on the planet. Only a small amount of the land is suitable for cultivation, and food accounts for about 20% of imports. In addition to nickel, substantial financial support from France - equal to more than 15% of GDP - and tourism are keys to the health of the economy.

By spring 2024, the French Pacific territory of New Caledonia was gripped by deadly riots that left many businesses in ruin. This, in turn, aggravated its already crippled economy. The nickel industry, the archipelago's primary resource, was already facing setbacks before the riots, forcing many employers to lay off swaths of their workforce. Nearly bankrupt at the start of 2024, the New Caledonian government is facing massive unemployment caused by the destruction of businesses, shops and public infrastructure since the insurrection began on 13 May 2024. The archipelago of 270,000 inhabitants, withannual GDP of $9.6 billion (2022 est.), faced a cataclysm, forcing almost 24,000 New Caledonians into unemployment in the very short term. This representeds more than a third of the 68,000 employees in the private sector.

New Caledonia covers 18 576 km², with an Exclusive Economic Zone of 1.45 million km², placing it among the giants of the South Pacific. In June 2023, New Caledonia adopted a draft law for a ten-year ban of deep-sea mineral resource exploration and exploitation within the territory’s Exclusive Economic Zone. While this was an admiral act of environmental conservation, it further limits options for New Caledonia’s economy.

New Caledonia has a long-established nickel industry, making it one of the world's leading nickel exporters, primarily to China. New Caledonia also has a well-established tourism industry, that caters to high-end, eco-driven and cruise tourism. The Government of New Caledonia is encouraging ongoing diversification of potential exports and enhanced economic integration in the Pacific region. New Caledonia has the third highest GDP per capita in the region (after Australia and New Zealand). There is a significant disparity in wealth distribution and a high cost of living, partly owing to heavy market protection.

After nickel, it relies heavily on tourism, exports of vanilla and honey to France, and jasmine and sandalwood to China and Japan. Among the population there is also a large divide between wealthy and poor which has contributed to an ethnic divide. Many of New Caledonia’s urban dwellers are of French origin while the indigenous Kanaks live mostly in outer urban and rural areas. The price of goods is markedly more expensive in the country and there are limited indigenous employment and higher education opportunities. Noumea is a wealthy and well developed city which is the epicentre of economic activity across all sectors, including the location of New Caledonia’s largest nickel refinery – SLN, which represents approximately 50% of total output.

In New Caledonia the climate is pleasant and without any great extremes. Fish, game, and other foods were easy to get. The island was sparsely settled, with room for all. So when white men wanted to hire the New Caledonia natives for hard labor in the mines, they replied they were getting along all right the way they were and didn't want hard labor. Because the native New Caledonians could not be interested in working in the mines, the mine owners imported labor from other parts of the Pacific, from more crowded lands where it was difficult to make a living.

The local currency (French Pacific Franc) is underwritten by the Bank of France and effectively pegged to the euro, ensuring price stability and liquidity. The economy is dominated by thirteen mainly local family-owned holding companies as well as some major French companies (Engie, Total, Renault, Vergnet etc). French supermarkets including Casino, Carrefour – all of which are heavily stocked with French brands – are often owned by those holding companies.

During 2009-10, France sent more development assistance to New Caledonia than to any of its other overseas territories. In October 2014, French Prime Minister Manuel VALLS confirmed financial support to New Caledonia totaling $500 million for the period 2016-20. The new government, which inherited a $112 million deficit in 2013, is expected to focus on bringing the territory’s budget back into balance. Financial transfers from France are also an important source of income accounting for another 20% of local GDP. This covers expenditure on defence, domestic security, primary and secondary education, and public services as well as the salaries, social security contributions, and pensions of state employees.

Following the COVID-19 pandemic, New Caledonia’s government debt ballooned to 210% of GDP. On 30 June 2023, New Caledonia’s Finance Minister Yannick Slamet announced the government had six working days of cash remaining and needed a bailout. In September 2023, France announced budget support providing 37 million Euros to the Government of New Caledonia to avoid the territory from defaulting on pension and welfare payments.

France, Australia, and New Zealand are important for New Caledonia’s tourism sector. the territory’s high regulatory complexity, strong preference for French products and standards, and language barrier are sizeable challenges, particularly for consumer goods. New Zealand commercial presence in the market is limited. Beca is one of the few New Zealand companies with a physical presence in market.

Australia is the second closest country geographically with flights from the east coast taking 2-3 hours. Approximately 80% of the nearly 323,000 cruise ship passengers who visited New Caledonia in 2023 were from Australia. New Caledonians also visited Australia in numbers, particularly the Gold Coast, which has a sister city relationship with Noumea. Tourism is buffering the economic impact of the faltering nickel sector, which makes the recent civil unrest even more damaging. In May 2024, the International Airport was closed for over one month due to violent protests and looting.

There are an estimated 1,700 Australian companies doing business with New Caledonia. Australian exports to New Caledonia include coal, civil engineering equipment and parts, tourism and education services. New Caledonia's merchandise exports to Australia include salts of inorganic acids and metals. Australia is also a significant investment destination for New Caledonia.

Nickel mining constitutes approximately 86% of exports and 20% of GDP. Roughly 15% of the world’s Nickel is from the small island group. Nickel was discovered in New Caledonia shortly after the French annexed the territory in 1853. The first mining operations began in the 1870s and rapidly expanded as the global demand for nickel grew. Engineer Jules Garnier began mining nickel mineral ore in 1894. It was only from 1960 onwards that the boom years of nickel production played a major role in boosting New Caledonia's economic development. There are now three metallurgy companies in the local nickel sector that provide over a quarter of jobs for New Caledonians: SLN (Eramet), KNS (Glencore) and Prony Resources (locally owned). Société Le Nickel is the country’s largest private employer. Based in Noumea, it is owned by a mix of Metropolitan French, New Caledonian, and Japanese interests. Ore is shipped to the refinery from mines around the country.

In the 1980-90s, it was believed the nickel mines would enable the country to sustain itself without financial assistance from France. However, none of the three smelters have turned a profit for some time due to the volatility of the London metal exchange which had been in freefall for nearly 10 years. High electricity prices required to mine the nickel, transport, and labour costs are also contributing factors to the industry’s decline. The question of who should own the mines and the revenue has also been a contentious issue with the indigenous Kanak population claiming they have been disadvantaged.

Given its wide use in advanced alloys and defence applications, New Caledonia’s nickel resource is potentially an important strategic asset to France and the EU, providing it can be made commercially viable. The cost of transporting the ore to Europe, a lack of local processing capabilities, and political disruption has bought the industry to a stand-still.

Substantial new investment in the nickel industry, combined with the recovery of global nickel prices, brightens the economic outlook for the next several years. With the gradual increase in the production of two new nickel plants in 2015, average production of metallurgical goods stood at a record level of 94 thousand tons. However, the sector is exposed to the high volatility of nickel prices. In April 2016, PM VALLS committed $180 million to support New Caledonia’s main nickel company, Societe Le Nickel.

By 2017 SLN said it wanted to lower production costs by a third within three years to ensure the business survives. The commodity slump of late had incurred SLN onging losses of almost one million US dollars a day, prompting a restructure which calls for a longer working week and job cuts. SLN said its target was to reduce the cost of producing one pound of nickel from $US6 in 2015 to $US4 in 2020. To achieve this, the workforce was to be cut from 2,000 to 1,700 within three years while changing work practices. This would entail changes to management and reducing the teams from five to four, who would then be made to increase their hours to 42 a week.

This came at a time when China was in control of approximately 80% of the world’s Nickel production and processing. As well as nickel, China also controls approximately 70% of all lithium and germanium production required to produce batteries. With Indonesian and Philippine nickel mines saturating the market and able to meet a large portion of Chinese demand, the price of nickel on the world exchange has reached crisis levels. This has left New Caledonia’s economy in a precarious position.

Refining nickel is energy intensive. Each refinery uses approximately 100-200MW of power – nearly all from fossil fuels. Replacing these with renewable energy is a common priority. New Caledonia’s energy mix is approximately 40% renewable generation (solar, wind, and hydro). This is enough to service most of the residential/ public grid. The three nickel refineries however account for around 70% of New Caledonia’s energy use (approximately 500-600MW collectively). The vast majority of this is generated by fossil fuels. Given nickel’s importance as an input to electric vehicles and other battery technology, all refiners are keen to be able to build the ‘green’ credentials of their product.