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Russia: Silent Mining Giant
Although Russia accounts for about 14% of global mining, most professionals in the industry know very little about Russian mining. Apart from a few large steel companies most large Russian mining firms are unknown in the market, and few people could name the most important Russian mines or mining districts. However, driven by the huge potential of its reserves and the modernization of its industry the country is slowly gaining a more prominent position on the international mining stage.
This article explores the current situation of the Russian mining industry and identifies two key trends that will shape it in the next decade: a struggle for competitiveness; and internationalization of the key players.
Russia’s Reserves & Production
Figure 1 - Russian mining production and reserves
Russia has been blessed with a large variety of mineral reserves across the country. The peninsulas in the northwest, the Ural mountains, Siberia, and the Far East all house important mining districts. Crucial inputs for economic development, like iron ore and coal, are abundant. The country holds 15-20% of the world’s reserves for these resources. The country’s position in reserves of gold and diamonds is very strong too. For a few minerals with only a small global market, like palladium and magnesium compounds, the country even has the potential of dominating the market. The most important observation when comparing the share of world reserves and the share of current global production is that for almost all key minerals the share of reserves exceeds the share of production (See Figure 1). In other words; it is likely that Russia will become more important in the global mining industry.
Current production in the country is more than sufficient to satisfy domestic demand, making Russia a net exporter of mineral goods. The country’s net export balance for ores, slag & ash was $1.3bln and for iron & steel over $14bln in 2010 (Source: ITC), with China being the largest trade partner for ores and Italy being the primary (initial) destination of Russian iron & steel.
Balancing domestic supply and demand
Russia is growing, and mining is needed to fuel this growth. Russian annual GDP growth varied from 4.7% to 8.1% in the period 2001-2008, outpacing growth in the western world (Figure 2). The economic crisis has hit Russia hard, making the economy shrink by almost 8% in 2009; recovering by 3.8% in 2010. However, growth is expected to outpace western growth in the coming years.
As a result of the high growth of the domestic economy, various industry development could take shape. If productivity increases, the potential of Russian reserves will enable a combination of exports and domestic sales, enabling rapid growth. However, if the Russian companies do not succeed in significantly increasing capacity, productivity will be too low to support both domestic and foreign growth. In this case export restrictions to protect the national growth could be instituted.
Corporate Landscape
The structure of Russia’s current mining production is largely shaped in the Soviet period. Mining districts were set up to provide the country with mineral self-sufficiency decades ago. After privatization in the ‘90s most of the state owned assets have been combined in the current private companies. The privatization and the poor financial situation of the Russian government at the time has led to a typical characteristic of the Russian mining industry: the importance of tycoons. Many private companies are owned and controlled by one or a few founders. These founders were at the right place at the right time and knew the right people at the time of privatization. Their position has further been strengthened by the government’s desperate need for funds, resulting in large amounts of debt being issued to the tycoons.
Figure 2 - Russian and global GDP growth
Whereas company owners in the rest of the world typically try to gain control over companies via the stock market, the large ownership stakes held by the tycoons in Russia lead to frequent power struggles among major shareholders. The struggle for control over Norilsk Nickel is the most recent example: Interros, controlled by Vladimir Potanin, and Rusal, controlled by Deripaska,both try to gain the majority in the board of Norilsk Nickel, one of the world’s largest suppliers of nickel and copper. In the last years the power struggles have led to the emergence of clear domestic champions for most of the key commodities: Rusal for aluminium; Norilsk Nickel for nickel and copper; Suek and Mechel for coal; Alrosa for diamonds; TVEL for uranium, etc. For steel and gold the landscape is (and probably will stay) more fragmented.
Attracting investment
Alcoa: Aluminium demand will outstrip supply
“Aluminium supplies will struggle to meet surging global demand over the next decade, leading to price rises, according to the head of Alcoa, the world’s largest producer of the metal.
Over the past 20 years, aluminium demand grew an average 3.4 per cent a year, made up of 15 per cent annual growth in China and 1 per cent in the rest of the world. Alcoa believes that over the next decade, even with slower demand in China, global demand can grow 6.5 per cent per year, doubling total use by 2020.
Later in the decade, he adds, it is likely to be increasingly difficult to find new high-quality mines to produce bauxite – aluminium ore – and sites for new refineries and smelters.
‘The constraint will not be capital – the money will be there – but the availability of these high-quality assets’ he says.”
Source: Financial Times, November 17 2010
Observations:
- Aluminium is growing in importance as building material and in parts for transportation because of the low weight characteristics. However, polymers and composites might become available as low cost substitutes, increasing the risk of aluminium investments in the long term.
- Mr. Kleinfeld, Alcoa’s CEO, is one of the persons in the industry that is most active in commenting on capacity issues in the industry. Last year and early this year he warned for potential overcapacity in the short term, warning for undercapacity in the long term in his latest conversation with the Financial Times.
Implications:
- Timing of development is going to be the key to success in the bauxite mining industry. The competitive move of building production capacity early will discourage competitors to increase capacity in fear of overcapacity and low prices. However, increasing capacity too early might cause losses in early years of operation. Securing access to potential capacity will be the focus of business development in the next years.
- The comments of mr. Kleinfeld can be seen in the light of the underperformance of Alcoa’s shareprice. Convincing investors of the long term prospects of the industry is crucial for the executives.
©2010 | Wilfred Visser | thebusinessofmining.com
The Rise of China in Mining
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.
India Bars Mine in Big Ruling
“In a landmark decision that could bode ill for dozens of other mining and steel projects in India’s remote forests, the country’s environmental minister Tuesday blocked Vedanta Resources PLC from mining in an area considered sacred by its tribal population.
A law passed in 2008 says companies can only locate on forest land after first obtaining the permission of tribal people living there. The committee report says Vedanta was illegally occupying tribal land and the company had failed to obtain the consent of the locals for the planned operation.”
Source: Wall Street Journal, August 25, 2010
Observations:
- Vedanta planned to invest $1.7bln in development of the mine. The processing plant has already been constructed at a cost of $5.4bln. The company is also charged for buying ore from illegal mines in order to use the processing plant at efficient capacity.
- This week miners in Vedanta’s Zambian operations called off protest actions against an outsourcing program, because the company decided to halt the program “for the sake of industrial harmony”.
Implications:
- Delhi announced strengthening the ethics law for mining companies in May of this year. Although the discussions at that time focused on education and development for the region, this ruling shows land rights are on the government’s radar too.
- The state of Orissa, which has supported Vedanta in the development so far, has various other bauxite deposits. Vedanta is likely to receive access to alternative deposits quickly, as the state will benefit significantly from increased employment and higher tax revenues.
©2010 | Wilfred Visser | thebusinessofmining.com
Chalco drops $2.4bn Australian bauxite plan
“Chalco, the second-largest aluminium producer, has pulled out of a A$3bn (US$2.4bn) deal to develop a bauxite refinery in Australia, blaming a drop in aluminium prices and difficult global conditions.
The Hong Kong-listed subsidiary of Aluminium Corporation of China won a permit to mine the high-quality Aurukun bauxite deposits in northern Queensland on condition it build a processing plant.”
Source: Financial Times, July 2 2010
Observations:
- When Chalco, a Chinalco daughter, won the permit for the bauxite deposit aluminium prices were $3,000 a tonne compared with below $2,000 today.
- Condition for the development was the construction of a smelter in Australia, to prevent the ore from being shipped directly to China. In this case the benefit for the Australian citizens would be significantly lower than with domestic smelting.
Implications:
- The Australian government is likely to reopen the permitting process for the deposit, giving other firms a renewed option to develop the deposit. However, only few firms currently have the funds to undertake the project.
- Today’s announcement by the new Australian prime minister that the super profit tax will only cover coal and iron ore operations does increase the feasibility of the project.
©2010 – thebusinessofmining.com
Norsk Hydro buys Vale assets
“Norsk Hydro has agreed to buy the aluminium assets of Vale, the Brazilian metals and mining group, in a $4.9bn deal that will secure the Norwegian company’s raw material supplies for decades. The move will give Norsk Hydro control of Paragominas, the world’s third-biggest bauxite mine, as well as Vale’s alumina refining and aluminium production facilities in Brazil.
Norsk Hydro, Europe’s third largest aluminium maker, said the deal would boost its competitiveness by providing a long-term supply of high-quality, cost-efficient raw materials. The Oslo-based company, 43.8 per cent owned by the Norwegian government, will pay Vale $1.1bn in cash, with the remainder in new Norsk Hydro shares and $700m of assumed net debt.”
Source: Financial Times, May 3 2010
Observations:
- Norsky Hydro ensures access to large resources of bauxite, thus reducing the risk of price volatility between miners and processers.
- Vale’s cash position has improved after the combination of this transaction ($600 million cash now + $200 million in 2013 and $200 million in 2015) and last week’s acquisition of the Simandou assets, for which it had to pay only $500 million immediately.
- Vale gives as a rational that “its participation in the primary aluminum metal industry is small, and has no growth potential due to the lack of access to low-cost sources of power generation, as energy is a key factor for the competitiveness in this business. “ (Source: Vale press release, May 2 2010).
Implications:
- Vale transfers the risk of electricity costs (and potential associated carbon emission costs) to Norsk Hydro.
- Vale appears to be focusing more on the iron and steel market. However, in order to reduce dependency on the iron ore price targeted acquisitions of companies with good resources of zinc, chromium & nickel or precious metals (given the current operating margins) are likely.
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