Chinese Mining Industry Is Facing Globalization



Chinese Mining Industry Is Facing Globalization

As a basic industry in national economy, mining industry is playing an important role in the evolvement of industrialization and urbanization. After over 50 years of development, China has developed into a global mining giant, whose mineral resources output and consumption rank the 1st in the world. On striding into a new era, Chinese economy is making progress in a quality way, which means China is gradually transforming from a giant to a power, which also makes us exposed to a big change in global politics, economy and diplomatic pattern. In such a case, what greatly matters to mining practitioners is what the prospect will be for Chinese mining industry and if this industry will see a big turn for its development progress.

1. Developing history of Chinese mining industry

(1)1949~1978: Chinese mining industry was in incubation period

At the founding of New China, Chinese mining industry was rather backward. In 1949, China’s coal output was only 32430 kilo-tons, oil output only 118 kilo-tons, iron ore only 560 kilo-tons and mine copper only 5 kilo-tons, respectively accounting for 1.8%, 0.2%, 0.3% and 0.2% in global market. However, China’s population at that time represented 21% of global population. After the founding of New China, a lot was to be developed in Chinese economy, and mining industry, as a pillar industry, attracted great attention. Before 1978, China’s gross output value of mining industry was RMB 77.56 billion. The output of coal, oil, iron ore and mine copper was respectively 620 million tons, 110 million tons, 58.9 million tons and 160 kilo-tons, accounting for 17%, 3%, 6.5% and 2% in global market, while our population represented 22% of global population. It is apparent to tell that Chinese mining industry was still restricted to its small scale after those 30 years of development.

(2) 1979~2012: Chinese mining industry was making rapid development

The reform and opening up policy has been making contributions to the rapid development of Chinese mining industry since 1978, which can be divided into three parts. 1979~1994, it was when China’s gross output value of mining industry increased from RMB 28.9 billion to RMB 326.5 billion, a ten-fold rise and annual growth of 11.3%, which was more satisfactory than the-same-period economic growth of our country. 1994~2003, it was when western countries completed their industrialization and the whole world was experiencing depressed economic development. Our country saw a slower growth in its export volume and a downward trend in the proportion of secondary industry. The consumption of mineral resources remained depressed. 2003~2012, China was making significant progress in its industrialization and urbanization. Rapid economic development led to huge demand of mineral resources and our mining industry took on an unprecedentedly strong development momentum. 2003~2011, gross output value of our mining industry increased from RMB 735.7 billion to RMB 5.86 tillion, a seven-fold rise and annual growth of 29.6%. Apparently, in this period, our mining industry took on an unprecedentedly strong development momentum.

2 Development trend of China’s mining industry

On striding into a new era, Chinese economy is making progress in a quality way, when traditional demand of bulk mineral resources slowed down while emerging strategic demand of mineral resources continuously went up. Industries related to coal, oil, nonferrous metal and building materials have walked into a plateau, which has also led to a turning point for mining industry, i.e., 2012~2025. It is estimated that our mining industry will enter a “declining phase” after 2025 and by then our mining industry will become a “sunset industry” in China.

(1) Bulk mineral industry has reached a plateau due to demand slowdown and environment factors

Our country is in the mid-late period of industrialization, when rapid economic development is generating less driving effect on mining industry. The demands of strong supporting bulk minerals like coal, iron, aluminum, cement rock, manganese and zinc have leveled off and minerals have seen a big decrease in price. It’s a plateau for these mineral industries. For instance, due to reasons like demand decrease, environmental factors and water resource constraints, our country has already seen a slowdown in the growth of coal output. Based on China’s planning for coal and some analysis researches related to coal supply trend, coal output will reach the peak by 2020, with the estimated maximum output of 4~4.5 billion tons. The demand of steel in China has reached a peak and there is an oversupply of iron ore in the world. Weak international competitiveness in China’s iron ore resources has caused a difficult circumstance for domestic iron ore industry that will possibly always be in decline. Manganese and zinc and other Mineral industries related to steel industry are also going to present a significant decline, which is irrevocable.

(2) Oil and some non-ferrous industries are getting close to plateau due to resource constraints

Demands of minerals like oil, uranium, copper, nickel, chrome are growing but these are what our country lacks. For instance, there is an oil shortage in our country whose oil output is just about 200 million tons. It is mainstream view that China’s oil production capacity won’t go above 220 million tons and our oil industry has encountered a plateau. China is also in short of uranium, copper, nickel and chrome, of which the output is growing very slowly and the future supply capacity growth is rather limited. These mineral industries are also already in their plateau.

(3) China’s building material mineral industry has also reached its plateau due to the constraints of demand and environmental protection.

Meanwhile, in our country, the urbanization rate is 58% and urbanization progress is slowing down. The development of building industry and infrastructure industry has leveled off, which leads the demand of building material such as sandstone and clay to a plateau so the development of relevant industries will also level off.

(4) Overall sustainable mineral resource supply capacity in China is decreasing and mineral scale is hitting the top

After 10 years of intensive development, many of our mineral resources see a decrease in their basic reserve, thus resulting in a decline in domestic sustainable supply capacity. In 2003-2015, 13 types of minerals (among 27 types of analyzed minerals) saw an obvious decline in their basic reserve. Generally speaking, overall sustainable mineral resource supply capacity in our country is decreasing and mineral scale is hitting the top.

(5) Major mining industry is in downturn but unconventional oil and gas and part of strategic emerging mineral industries are still enjoying rapid development

In China, natural gas, unconventional oil and gas and part of strategic emerging mineral industries like lithium, beryllium, niobium, tantalum, fluorite, graphite will continue to make progress as demands grow. However, those minerals who account for 80% of gross output value in mining industry such as coal, oil, iron, manganese, zinc are in downturn, so is our entire mineral industry.

3 Globalization is inevitable for Chinese mining industry

(1) Our country greatly relies on overseas import for domestic supply so we have to go global to acquire resources

Due to constraints on natural resources, our country will make very little progress in output growth in respect to oil, uranium, copper, nickel, chromite, cobalt, platinum family, niobium and tantalum, wherein domestic supply capacity of oil and nickel will be more likely to decline. In the future 10 years, our country will further rely on overseas import in respect to oil, natural gas, uranium, copper, nickel, chromite, cobalt, rhenium, platinum family, lithium, niobium, tantalum, boron and high-purity quartz. We will less rely on overseas import in respect to iron, manganese and zinc. As for conventional superior minerals like tungsten, antimony and fluorite, due to long-term exploitation in the country, the reserve and production ratio is getting decreased and if nothing helpful is done, China is very likely to become a net resource importer from a net resource exporter. In the coming 10 years, our overall resource dependence on overseas import is getting extensive and we will have to largely import important mineral resources from overseas, which is a predominant factor for the globalization of Chinese mining industry.

(2) Mining industry globalization is the foundation to build a resource power

So far, from a global perspective, mining resource powers form a pyramid, on the top of which lies USA, the biggest beneficiary of global mineral resource value stream and geopolitical benefit stream. USA is the largest supplier and demander of mineral resources in the world, who holds global quality resources as well as pricing power in the form of controlling large mining companies and exchanges by Wall Street capital interest groups. That’s how it firmly holds global mineral resources and benefits.

By analyzing the structure of mineral resource demanders, we can tell that except for USA, demanders can be categorized into three levels. The first level is Japan, right after USA in the pyramid. The main reason is that Japan steadily follows USA to be engaged in equity participation in global large mining companies and exchanges so it is a stakeholder of western world. Japan, a country that enjoys the least mineral resources, is now a mineral resource power. Right after Japan are Korea and principal European mineral resource consumer countries. At the second level of consumption end, they, together with USA and Japan, are the core level representing western benefits. China and India are at the bottom level. China is the largest mineral resource consumer country but doesn’t hold the initiative in this field and finally became the biggest payer among all mineral resource demanders.

From the perspective of mineral resource supply side, the structure also consists of three levels of stakeholders. The first level involves Australia and Canada that are close to USA and who own big international mining companies and are monopolists in global mineral resources; the second level involves mineral resource countries like South Africa, Chile and Peru, who are also deeply influenced by western countries especially USA; the bottom level in supply side involves those mineral resource countries who are against USA such as Russia and Iran, which are abundant in mineral resources but are deprived of diplomatic discourse.

Apparently, USA is a power of mineral resource, staying at the top of the pyramid of global mineral resource, which is the inevitable result of its comprehensively wielding political, economic and military means to make everyone engaged and become stakeholders. China is developing into a power from a giant and mining industry globalization is not only the inevitable course for its development but also the necessary foundation for its goal to become a power.

(3) Under the requirement of ecological civilization construction, the focus of mining industry development has to be diverted to overseas countries

Long-term intense exploitation and utilization of domestic mineral resources have accelerated the resource consumption. In the meantime, the accompanying environmental problems are getting worse and sustainable development of economy and society are being threatened. Upon entering new era, we have seen many policies issued for environmental protection so ecological civilization construction has been deepened and more constraints on mining industry development are working. Ministry of Land and Resources issued a regulation to clear all mining rights in all reserves. The Supreme People’s Court issued judicial interpretation to strengthen legal constraints on mineral exploration and exploitation in natural reserves, tourist attractions, important ecological areas, ecological environment sensitive and fragile areas. Xinjiang, Inner Mongolia, Qinghai, Hunan and more and more provinces have published regulations to steadily implement the clearing of mining rights in natural reserves.

As more mineral-exploitation-related policies are coming out for ecological environment protection, China keeps raising its requirement for ecological environment protection and environmental cost of mineral exploration and exploitation is rising; supervision on ecological environment is getting more rigid and environment constraints on mining exploitation are getting intensified. In this case, what we should do is to ease domestic exploitation in order to protect domestic resources and make maximum use of overseas resources, thus ensuring domestic resource intergeneration and favorable domestic environment. Under this circumstance, development scale of domestic mining industry will be brought under control and if we want our mining industry to go further and become stronger, we have to divert developing focus to overseas countries.

(4) Initial success achieved! China’s overseas mining investment has involved many countries and many types of minerals

After years of efforts, Chinese mining companies have succeeded in making global arrangements and some types of minerals have been performing very well. However, the internationalization of Chinese mining companies isn’t so excellent although China is an important country in the world. As of the end of 2016, the quantity of overseas China-invested mining projects had been 345 projects, mainly covering Oceania, Africa, Central and South Africa, Northeast Asia (Russia and Mongolia), Southeast Asia and Central Asia, respectively with the quantity of holding mining projects of 140, 65, 34, 30, 29, 24 and 17, totally accounting for over 98% of all overseas invested projects. These projects are mainly distributed in below countries: Australia, Canada, Mongolia, Zambia, Kyrgyzstan, Peru, Russia, South Africa, Chile, Congo King and Indonesia. Invested minerals involve coal, metal minerals, non-metal and other minerals, with iron ore, copper, gold, coal and uranium as predominant minerals and nickel ore, lead zinc ore, lithium ore and sylvite as important minerals.

120 investment companies are involved in the aforesaid 345 projects, wherein 49 mining companies are state-owned companies and 28 are private-owned companies and 43 are non-mining companies (figure 5-4). Large state-owned steel groups are playing a predominant role in iron ore investment; CNNC and its affiliated companies are playing a predominant role in uranium ore investment; China Shenhua and Yanzhou Coal Mining Company are playing a predominant role in coal investment; China Minmetals, Zijin Mining, Tongling Non-ferrous Metals and CNMC are playing a predominant role in copper mine investment. Below companies are the most engaged ones in respect to project quantity: China Minmetals, Zijin Mining, CNMC, Tongling Non-ferrous Metals, Jilin Jien Nickel Industry, China Shenhua, Yanzhou Coal Mining Company, Sino Steel, Shanxi Donghui Coking Group Co., Ltd, Wintime Energy Co., Ltd, and China Hanking Holdings Limited. Overall, the quantity and quality of private-owned-mining-company-invested projects have both been raised to a high level. In the depressed global mining market, some private-owned companies have been decisive to get engaged and acquired quality assets, which laid a solid foundation for Chinese mining industry to go global.

Systematic statistics was carried out on 20 types of minerals involved in 345 projects to calculate equity resource reserve and equity output based on corporate equity stake. The result reflects the overall degree of “going global”. Copper, cobalt and lithium have made satisfactory performance in terms of their equity output. The equity output of copper mine is 1.08 million tons, equivalent to 6% of global output and 64% of Chinese output, wherein, holding copper mine of China Minmetals, Las Bambas copper mine in Peru, enjoys an equity output of 450 kilo-tons; the equity output of cobalt mine is 18 kilo-tons, accounting for 10% of global output and with over half coming from the holding cobalt mine of CMOC, tenke Fungurum copper-cobalt mine in Congo King (8990 tons); the equity share of lithium mine mainly came from spodumene mine in Greenbushes held by Tianqi Lithium Corporation and affiliated to Australia Talison Lithium Pty Ltd. This mine, where Tianqi Lithium owns 51% of shares, accounts for over 60% of global spodumene concentrate supply. The equity output of iron ore is about 90 million tons, accounting for 5% of global total output.

In addition to the above three minerals, the equity output of gold, silver, zinc is respectively 23.2 tons, 343.2 tons and 201 kilo-tons. Although the output of gold and silver accounted for less than 1% of global total and that of zinc less than 2% of global total, they are still considerable assets for a relatively small number of companies like China Minmetals and Zijin Mining because these minerals are mainly held by them. Other minerals such as coal, sylvite, nickel and molybdenum have a large amount of resource reserve but a small amount of output, wherein, the reason for lower output of nickel mine was the production cease of the nickel project in Indonesia held by China Hanking Group (before the cease the annual output was 1.5 million tons of nickel ore)

Table 1, equity share of China’s overseas invested projects

4 The opportunities and challenges China will face in its mining industry globalization in new era

(1) “One belt one road” has created great opportunities for Chinese mining industry to go global

“One belt one road” regions are not well economically developed, where there are numerous mining countries with relatively backward infrastructure. It requires a great amount of mineral reserve to carry out “one belt one road” (figure 6-1). Meanwhile, “one belt one road” regions are abundant in various mineral reserves that are poorly exploited, which indicates that there is great exploring potential in these regions so that’s the focusing area for Chinese mining industry to start going global. As capacity cooperation deepens, the exploitation of “one belt one road” mineral resources will be inter-connected and complementary with smelting and infrastructure construction, which will surely generate more demands and act as an important driving force for global resource demands, thus promoting the advancement of global mining industry.

(2) Global mining industry is experiencing a shifting period that provides an important opportunity for Chinese mining industry to realize globalization

At present, both global economy and Chinese economy are in the middle of profound adjustment, so is mining industry, which gives China a significant opportunity to realize its mining industry globalization. During the past 20 years, Chinese mining industry has encountered many obstacles on the road to globalization and Chinese mining companies have suffered great losses from so many failures. However, since 2012, the global economic crisis has been dragging down the price of minerals and mining companies have been forced to the corner, resulting in a great many mining companies ending up selling their core assets. That was a big opportunity for Chinese mining industry. For instance, in 2016, Zijing Mining purchased Ivanhoe shares and Kamoa copper mine. In 2017, CMOC purchased at the same time the two giants, Freeport and Anglo American, which won annual big award of Standard & Poor’s. Through this, CMOC became the fastest growing mining company in market value increase in 2017 and made the favorable mining recovery even perfect.

The global mining industry will continue to stay in shifting period for the coming 5 years and China must seize and make full use of this great opportunity to realize mining industry globalization.

(3) China is facing considerable challenges in its mining industry globalization and we have to make sufficient preparation and advance bravely

Compared with over 30 thousand mining projects recorded in SNL global database, China’s overseas projects are like a drop in the sea, just 345 projects, far fewer than Australia, Canada, USA and Japan. Even if we look at the 345 projects, the number of mines that are already put in operation is just 68 projects, only accounting for 20%. In other words, many of China’s go-global projects are still in investment and development phase while subsequent development and profitability are not so satisfactory.

Among the studied 345 projects, an overwhelming majority of Chinese mining companies tend to 100% or over 50% hold mines while projects where they are the 2nd shareholders to the 5th shareholders are very few, which is greatly different from Japanese mining companies who are engaged in large-company-run mining operation as mall shareholders. Chinese mining companies are taking a more adventurous way to make investment.

Compared with global giants such as BHP Billiton, Rio Tinto, American Freeport, Glencore, even with South Africa, Russia and Japanese MITSUBISHI and Mitsui, Chinese mining companies are still unsatisfactory mainly in respect to low level of internationalization and poor profitability. International large mining companies arrange 1/3 of their business in overseas countries while Chinese mining companies set their major business within the country. International large mining companies make profit by double digit while Chinese mining companies make profit only by single digit, and it’s good enough that we don’t suffer loss. It’s hard for Chinese mining companies to compete with international large mining companies due to insufficient international competitiveness.

Chinese mining companies are faced with big investment risks because they mainly invest in underdeveloped area like Africa and Southeast Asia. Chinese companies are not able to access favorable opportunities to quality resource regions like Australia and South Africa because these regions are already occupied by western countries. That’s why Chinese companies have to choose blank areas such as Africa, Southeast Asia and Central Asia as their second choice. However, Chinese companies are faced with big risks as they have chosen areas with underdeveloped regions, backward infrastructure and poor political stability.