China’s role in the future of global mining

From an address by Peter Arkell, Managing Director of Carrington Day, to the Global Mining Executives’ Council, London July 2014

The face of the international mining community in China has changed significantly over the past ten years. In the early 2000’s there were many enthusiastic exploration offices in China representing most of the world’s mining major and mid-caps as well as a large number of entrepreneurial start ups with a singular China focus. These offices each had their own projects spread out across the country, even in the remote provinces of Tibet, Gansu, Qinghai and Xinjiang.

In fact, by 2004 there were almost 300 projects by non-Chinese mining companies exploring for a variety of minerals across China. In those heady days, a headhunting firm like Carrington Day would carry a little black book of geologist contacts, because the exploration scene was so vibrant.

By 2012 that had reduced to 53 and now it is less than two handfuls.

It is not difficult to understand why there has been this dramatic exodus from China by the international explorers. Exploration licenses were not difficult to get approved and there was much excitement about the geology of China and its potential. However, the regulatory landscape for converting this exploration work to a mining license was extremely difficult to traverse.

One international mining company after another departed China without successfully establishing a mining operation in China. Today there are a small number of industrial minerals miners, such as Omya, with successful operations and two miners, Eldorado Gold and Griffin Mining, operating mine sites across China. And there is the very interesting joint venture exploration company, Chinalco Rio Tinto Exploration (CRTX), which is a possible model for a return of the international miners. It is clear that the optimism for China in the early 2000’s of the international mining community was not realized.

What brought about this change? The regulators, from the Minister for Land and Resources down, have continued to promote China as a place for international participation, yet the numbers are now so low that they can almost be counted on one hand.

Work by GMAC (Global Mining Association of China), the peak representative body for the international mining community, has identified three core reasons for the decline. They have seen that the regulatory environment has:

  • Loaded risk to the end of a project
  • Built reels of red tape into the process
  • Encouraged opaqueness rather than transparency

The result is that explorers had spent large sums developing a project without any guarantee of being approved for a mining license to develop the resource.

With the explorers departing China, it did not mean that there was an absence of companies from the international mining community.

Of course there has never been seen such a minerals commodities market emerge to rival the Chinese market from the mid 2000’s. All producers and traders found that China was their key market and built marketing and analytical teams to tap this gigantic market.

Most also established procurement and sourcing hubs to serve their operations around the world.

The GMAC membership, as a representation of the international mining community in China changed from being an association for geologists to a very broad a diverse reflection of the wider mining community. Many of these are serving the Chinese miners as they continue to develop China’s minerals, selling equipment and providing professional services and IP. Even headhunters like Carrington Day, seeking talent for international and Chinese miners.

Now as the Chinese companies are seeking mining investments abroad, international companies that are well-established in China are partnering with these outbound investors as they seek opportunities offshore.

The emergence of China as a buyer of commodities and more recently as an investor in international mining projects raises a very interesting question.

Will all decisions on mining investment be determined by China, or at least require consideration of the China factor?

China has demonstrated its ability to grow at a rate that is unimaginable in the developed economies. Its growing middle class are requiring infrastructure and goods that demand much of the world’s natural resources. As a result, security of supply of natural resources is a critical factor for the Chinese government as it manages this huge economy.

A phrase used in a recent GMAC paper was that it has “shifted from being a price taker to a price maker”. This has set China up as the dominant factor in strategic decision-making in the mining industry.

It also begs the follow-up question of will there be a mining equivalent of Lenovo’s acquisition of the IBM assets? Will there be a Chinese mining company among the top four mining majors in the world?

These questions are hardly hypothetical in the new order. After all, who would have thought ten years ago that there would be six Chinese banks in the world’s top twenty?

The Chinese leadership, from President Xi JinPing down are committed to this Chinese self reliance. In a different industrial context, however as a glimpse of his mindset, President Xi said in May 2014 at one of China’s aviation hubs that “in the past, someone said the best choice for us is to rent (passenger aircraft) from others and then to buy (them), and that the last option is to make our own. But we have reversed this notion. We will invest more to develop and produce our own large aircraft.”

The Chinese have demonstrated in recent times that they remain active investors in the commodities markets. Resource security is the important driver. The MinMetals’ acquisition of Las Bambas using its MMG corporation, BaoSteel’s investment in Aquila are both signs that large Chinese corporations have the nerve and central government support to make large strategic investments.

The destinations for those investments is spread around the world, but in dollar terms more than 50% of the investments went to Africa and Australia, according to the China Chamber of Commerce of Metals, Minerals & Chemicals. The Chamber also indicated that the commodities that were of interest was dominated by copper (36%), coal (17%) and iron ore (16%).

Speaking at the Oriental Mining Club in May 2014, the then Chairman of MMG Wang LiXin said “At its simplest, overseas investment is a partnership.
It is a partnership between countries, between companies and most importantly, between different cultures and people.

Chinese business has the financial reserves, the market demand and the entrepreneurship to be looking for global opportunities.

As Minmetals experience in Australia has shown, where we listen, where we are open and transparent, where we respect and value local communities, employees and management and where we look for win-win opportunities – we can build great partnerships.”

Just as the face of the international mining community in China has changed remarkably of the past decade, it can be expected that the Chinese face in the international market will go through some remarkable change too.