China Mining Report Q4 2009

The People's Republic of China is a natural world leader in terms of both reserves and the production of several metals and minerals. It joined the WTO in 2001, and has since become an economic force to be reckoned with, doubling its manufacturing output and in the process accumulating over US$1trn of foreign exchange reserves. Endowed with abundant mineral wealth, the country leads in the production of copper, coal and aluminium. Further, its 1,200 gold mines position it fourth in terms of gold production worldwide - a metal of which it is also the world's third largest consumer.

China is also in the fortunate position of being cash rich at a time when many mining companies around the world are struggling to locate financing. So, in recent months, Beijing has been very active in buying up Australian mining assets. We examine this phenomenon in detail on p.8 of this report.

The national government is taking active steps to make the mining industry more competitive. Although it is a communist state, China introduced market reforms in the 1980s and today only about a third of the economy is directly state-controlled. The government is encouraging mergers and acquisitions (M&As) as a means of ensuring optimal use of mineral resources, and barriers to foreign investment are gradually being done away with.

The Chinese mining industry as a whole is suffering from the global financial crisis and the collapse in commodity prices. Yet the recovery of the domestic and international mining sector will be due, in part, to the success of China's CNY4trn fiscal stimulus package. This should include investment in railroads, airports and power generation in 2009-2011, which will help drive demand for steel and other commodities. The government has also pledged to spend CNY900bn on affordable housing in the same period. It is estimated that these measures will boost demand for steel by as much as 150mn tonnes a year, which will help stimulate demand for iron ore.

Meanwhile, predictions that Chinese steel companies will be able to force a 30-40% drop in iron ore prices in 2009 look optimistic. Falling prices are forcing many Chinese ore miners out of business, while smaller international miners are having to reduce production. Therefore, just when China thought it was in a strong position to bargain with the major mining companies, it has found itself more reliant on them than ever. At most, industry watchers expect a cut of 20% in iron ore prices, after negotiation.

Industry Forecast In 2008, China became the world's largest supplier of gold, surpassing South Africa. China is also implementing its 11th Five-Year Plan (2006-2010), which emphasises securing the economy's future metals and minerals resource needs. The focus is on further geological exploration of mineral reserves and increasing the supply of mineral products to fuel China's rapid economic expansion. One area where China is especially keen to increase its reserves is uranium. With the country looking to rapidly increase its nuclear power generation, the government is seeking to secure a stable supply of raw materials.

Uranium exploration is concentrating on Inner Mongolia and north west China. BMI forecasts the mining industry GDP in China to grow at 13.26% per annum in 2008-2013, reaching US$474bn by 2013.