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The Rise of China in Mining

October 4, 2010

China is rising as a global superpower in the mining industry. Ore from mining companies all around the world is shipped to Chinese ports to fuel the growth of the economy. Building relationships with Chinese government and customers is a top priority for many business leaders. However, few people in the industry know that China itself is a major producer of many minerals. This article explores the Chinese rise of production, the rise of demand, the rise of Chinese mining firms and the rise of investment and sketches the implications for the mining industry of the changing role of the country.

 

1. The Rise of Production

China’s mining industry is the world’s largest in many aspects: the country has 200,000 collectively owned mines1, employing over 10 million miners; it is the world’s major producer of coal, lead, zinc, tin and rare earth minerals and also ranks high in output of iron ore, gold, bauxite and other minerals.

The country has been a major producer for decades, but the enormous demand, the opening of the market to private investors and the introduction of modern mining techniques has boosted the productivity and production of the industry. Significant reserves of most minerals allowed China to grow the market share of mining output for all major minerals in the past 15 years (Figure 1). The growth of the iron metal content output share is even more remarkable when considering that Chinese iron ore typically has a very low metal content: while share of iron content grew from 14% to 15% since 1995, the share of gross weight grew from 24% to 37%2.

Figure 1 - Chinese share of world mining output

The largest part of worldwide reserves of rare earths, titanium, tungsten & molybdenum are in China. These minerals are crucial in the production of many high tech products, giving China a powerful position in international trade. Recently the country has demonstrated this power by implementing export quota for rare earth minerals, favoring the domestic high tech industry.


2. The Rise of Demand

China hardly exports any minerals; all domestic mine production is absorbed by the domestic. Value of total mineral exports in 2009 was a mere $0.2bln, 60% of which was molybdenum3. Until a few years ago the country was a net coal exporter, but the growing demand from the utility and steel industry has turned it into an importer. Though the country does not export ores, it has been building a large iron and steel industry, exporting at a total value of $53bln in 2008. In the same year the production of 500Mt of crude steel accounted for 38% of the world production2. In 2009 the imports exceeded exports, as steel companies responded to the crisis by cutting production. Stepping up production will turn the country into a net exporter of steel again.

The large domestic mine production is not enough to satisfy the appetite of the manufacturing industry. As Chinese growth outpaces the growth of the global economy, China accounts for an increasing part of the global imports of ore, slag and ash. Ore imports grew from 30% of global imports in 2005 to 50% of global ore import in 2009 (Figure 2).

Figure 2 - Chinese part of global ore, slag and ash import

Total value of Chinese ore imports in 2009 was $70bln, accounting for 6.9% of the country’s total imports (up from 3.9% in 2005). Iron ore is by far the most important of the imported ores at 72% of the total product value. Copper ore provides another 12% of the value. The growth of iron ore imports in China has been the main driver for the growth of the world’s international diversified miners. Their home countries – Australia and Brazil – accounted for 65% of the total iron ore imports in 2009 (Figure 3). Notwithstanding the crisis, the volume of imports increased significantly from 2008 to 2009. Changes in price levels prevented this increase to translate into an increase in the value of imports.

Figure 3 - Chinese Iron Ore & Concentrates Imports


3. The Rise of New Giants

The Chinese mining industry is highly fragmented. However, a consolidation trend is starting in the energy and steel businesses. The opening of the capital market, emphasized by the growth of the Hong Kong stock exchange, has allowed many Chinese companies to exploit economies of scale and synergies. In 2001 not a single Chinese mining firm was listed in the Financial Times Global 500 (FT Global 500), the list of the world’s largest companies in market value. This year’s list features 4 Chinese mining and steel companies: China Shenhua Energy; Aluminium Corporation of China (Chinalco); China Coal Energy and BaoShan Iron & Steel4. The combined market capitalization of these 4 firms is $149bln, 11% of the total value of mining and industrial metals firms in the list (Figure 4).

Figure 4 - Chinese entry among the largest companies

Global consulting company Accenture has done extensive research into “The Rise of the Emerging Market Multinational5. The consultancy mentions three key conditions facilitating the emergence of multinational companies in the developing world: increased economic liberalization and openness; new global markets and cheaper sources of capital. Each of these conditions is met in the Chinese mining industry. The government is increasingly allowing the mining companies to look take strategic decisions on international activity; the domestic market gives the companies a sufficient scale to grow; and the stock markets have been opened to many formerly fully state-owned companies, providing access to the capital required to expand.

It is likely that real multinational companies will emerge from China, but will this be the current champions? To what extend will the government be involved in picking the winners? Following the model of Brazil and given the structure of the resource base in China, the government would benefit most from ending the consolidation period with 2 or 3 new giants: an energy champion managing the country’s coal resources; and 1 or 2 diversified miners, supplying the country’s steel industry and achieving economies of scale in mining of iron ore and other ferrous metals.

Potential energy champions

China Shenhua Energy, subsidiary of Shenhua Group is best positioned to become the country’s energy champion. The company has already entered the global top 5 of largest mining firms in terms of market capitalization. It produced 210Mt of coal in 2009, second only to Peabody Energy of the USA. Potential rivals, and at the same time acquisition targets, are Shanxi Xishan Coal, Yanzhou Coal Mining Co. and China Coal Energy Co.

Potential diversified mining champions

The production of China’s low grade iron ore deposits has not yet resulted in a national diversified mining champion. Several diversified companies are competing for the position, but most of them are weak or not present in iron ore mining. A merger of Zijin Mining Group, Jiangxi Copper Corporation or the Jinchuan Group might result in a national champion. Obviously a champion competing with the other global miners will be complemented by junior mining companies exploring and developing in China. The Toronto Stock Exchange alone lists 10 mining companies focusing on China, some of which with market values of several billions of dollars. Many more junior firms, both controlled by Chinese and Western managers, are listed in Hong Kong and elsewhere.

The diversified companies will need to align their operations with the country’s major mineral processors. Both the steel companies and Chinalco, the aluminium champion, have build in international reputation for strategic investments and partnerships, which could be leveraged by the diversified miners.

 

4. The Rise of Investments

Many Chinese mining firms have deep pockets. Aided by high domestic revenues and at times by government aid the companies are accounting for a major part of international investment in the mining industry. For the time being, domestic investment is much higher than international investment, but Chinese firms are increasingly looking abroad for opportunities to grow.

Domestic Investment

Domestic mining investments rose by almost 20% to $75bln in 20096.  As demand for coal is outstripping current domestic production capacity, the energy companies are attempting to develop coal reserves quicker and increase capacity. At the same time, the Chinese government is selectively opening up the country for FDI. The government wants to attract foreign firms to develop low-grade, hard to mine, reserves.

Foreign Investment

Foreign investment rose by over 70% to $24bln in 20097. The foreign investments of Chinese companies are the subject of many debates. The companies, sometimes aided by development banks, try to secure long term access to deposits abroad. Many of these deals involve infrastructure investments. Although investments in Africa have been in the spotlight a lot, two thirds of foreign investments in the period 2005-2009 were done in Asia and Australia (Figure 5). Chinese investment in 2009 made up 22% of all global mining M&A activity8.

Figure 5 - Direction of Chinese Foreign Mining Investment

The Chinese investments broadly fall into two categories: capacity investments and strategic competitive investments. Capacity investments, often by buying non-controlling stakes of western companies, are mainly done in neighbouring countries and Australia. CIC’s investment in Teck, Chinalco’s failed acquisition of a major stake of Rio Tinto and Sinochem’s attempts to frustrate BHP Billiton’s acquisition of PotashCorp of Saskatchewan fall in the category of strategic competitive investments. These investments most often aim to prevent further increase of the power of the global leaders in the industry.

 

5. Conclusions

China is rising and the Chinese mining companies are here to stay. This will have both short term and long term implications for the global mining industry.

Short term implications:

  • Global mining investment will increasingly be Chinese investment. With the domestic production falling behind demand, the foreign investment shares will follow the demand shares. China’s share of FDI in mining is likely to grow to 50% of the total, spread across all minerals.
  • China will continue to lead the growth of demand. Global mining players will need to strengthen the relationships with both Chinese clients and government to benefit from this growth. Some western mining firms will enter the Chinese market by responding to the government’s call to develop technologically challenging deposits in China. Forming partnerships with Chinese miners will become a common practice.
  • Suppliers to the mining industry will discover the Chinese mining industry. As the Chinese miners are trying to increase productivity, they will increasingly turn to Western suppliers for access to technology and know how.

Long term implications:

  • Two or three Chinese mining champions will arise, competing head to head with the incumbent global diversified mining companies.
  • The Chinese government will need to strengthen the environmental regulation to bring environmental performance of the domestic industry up to par with international standards. Stricter regulation, as currently being implemented in India, is likely to temporarily slow down the growth of productivity of the industry.
  • China will grow into the key influencer of global commodity prices. By stockpiling commodities the government can manipulate global supply of crucial minerals, preventing price spikes in growing spot markets.


References

1. Austrade, Australian Government; Mining to China, Trends and Opportunities; August 2009

2. US Geological Survey; Mineral Commodity Summaries; January 2010

3. International Trade Center; Trade Statistics Database; October 2010

4. Financial Times; FT Global 500; April 2010

5. Accenture; Multi-Polar World 2: The Rise of the Emerging Market Multinational; 2007

6. Jack Chadwick; China Mining Conference Report; International Mining; Feb 2010

7. Heritage Foundation; China FDI database; October 2010

8. PriceWaterhouseCoopers; Mining Deals, 2009 Review; 2010

©2010 | Wilfred Visser | thebusinessofmining.com

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