The year 2011 saw a staggering increase in Chinese mining investments in Africa. Whereas these had totalled some $1.5-billion at the end of 2010, by the conclusion of 2011 the figure had rocketed to $15.6-billion. Africa has become the site of almost 75% of Chinese foreign mining investment. The China Mining Association (CMA) reported that, worldwide, Chinese companies invested in 284 mining companies during 2011. These figures exclude the oil and gas sector.
China needs minerals and metals to feed its economy. From 1999 to 2009 the country’s real gross domestic product (GDP) grew at an annual average rate of 10.3%. The Asian giant has become the second largest economy in the world, and, according to The Conference Board’s “Global Economic Outlook 2013” (January 2013 Update), accounted for 16.4% of global economic output last year. (The US contribution was 18.2%; in rather sharp contrast, India was responsible for 6.3%, the whole of Latin America for 7.7%, Russia and Central Asia and South East Europe 5.9%, Africa 3.3% and the Middle East 3.7%. As for Europe – defined as the European Union plus Iceland, Norway and Switzerland – that contributed 20.3%, while the figure for the Euro area was 13.8%.)
The world was, of course, hit by the Great Recession of 2008/2009, and the downturn is by no means over. And China was also affected. Economic growth for 2012 was 7.8%, the Chinese Academy of Sciences (CAS) has reported. But the second semester of the year saw faster than expected growth. The Chinese government’s growth target for the year was 7.5%. Nevertheless, this was the country’s slowest growth rate since 1999 – the rate for 2011 was 9.3% and for 2010, 10.4%.
"China’s economy has maintained steady growth,” reported National Bureau of Statistics Commissioner Ma Jiantang. “The economic situation in 2012 was complex and severe. China’s economic growth rate in the fourth quarter ended a seven-straight-quarter slowdown. However, with great effort, China has implemented a macro-regulation policy and the economy in the fourth quarter picked up and grew by 7.9%."
This year, however, the economy is expected to start accelerating again. The Academy forecasts the country’s GDP will rise by more than 8%. "We expect that China’s GDP will expand by 8.4 percent year on year in 2013, 0.6 percentage point higher than last year,” affirmed CAS researcher Chen Xikang. “The growth is not large but is still quite significant."
"China’s job market remains quite steady.We still create lots of new jobs, despite growth has decelerated,” Peking University National School of Development Professor Huang Yiping told China Central Television (CCTV). “At the same time, the government has become cautious in promoting more stimulus policies to promote growth. So I think China may experience the 8 percent growth for a while.” "I think what interesting is that whether we should be pleased or disappointed by the 8 percent growth,” said the Economist’s Asia economic editor Simon Cox, also talking with CCTV. “Eight percent may be the new normal for China’s economy. Eight percent may be enough to keep the labour market fully employed."
Slowdowns and signs of recovery
The slowdown has not been without its effects. Notably, the Chinese steel industry is suffering from overcapacity and prices last year were back at 1994 levels. The China Iron and Steel Association (CISA) forecast in December that the country’s steel production for 2012 would come to 723-million tons, an increase of 3% over 2011, but that steel consumption would be some 679-million tons, a rise of only 1.8%.
Yet new investment in the steel industry, mostly from the private sector, came to $65.82-billion last year and was 3.9% greater than in the previous year. “The steel industry is facing an increasingly difficult time, and the surplus capacity is worsening,” warned CISA Secretary-General Zhang Changfu in December. “The high investment will apparently intensify the oversupply in the steel industry.” January saw slower steel sales in China, and lower steel prices.
Yet, even so, there has been some good news for the global iron-ore mining sector. The stockpiles of the ore held at Chinese ports have been falling. They fell by 1.05-million tons, or 1.3%, in just one week last month (the second week of January). That same week saw slight increases (one point in each case) in the price indices for imported 63.5% grade and 58% grade iron-ore.
It is true that Chinese iron-ore imports last year, at 740-million tons, represented a 8.4% rise over 2011, but the 2012 average import price was down 21.6% on that for 2011. The spot iron-ore prices during last September were the lowest in three years. Although spot iron-ore prices are expected to be rather weak during the next few weeks, they were already 67% higher in January than during the September lows. And Chinese pig iron prices rose by 4% in January, in comparison to December, and are expected to remain stable until March.
It is currently still winter in China and the “construction season” starts in March – steel sales should rise rapidly from then on, as a strong season is expected, and this should help iron-ore prices. For 2013 as a whole, the Baltic and International Maritime Council (the largest shipowners association in the world) foresees increased steel demand in China, for machinery as well as infrastructure and housing, requiring the country to increase its iron-ore imports. These are expected to grow by 7.5% this year. The Council also believes that the proportion of domestic-mined iron ore in the Chinese steel industry’s inputs has declined since early 2008.
However, Chinese imports of refined copper are forecast to decline this year, in comparison to last year. The figure for 2013 is expected to be 2.8-million tons to 2.9-million tons, as against 2012’s 3.4-million tons.The 2012 figure was a record (the previous record was 3.19-million tons, set in 2009) and was driven by very strong demand during the first two quarters of the year. Chinese companies were apparently acquiring copper to act as collateral against loans.
By late 2012 the cost of the imported copper exceeded the cost of the metal on the Chinese market and the metal was stacking up in bonded warehouses. At the end of the year, copper stockpiled in bonded warehouses in Shanghai amounted to 1-million tons, in comparison to 500 000 t in March (2012).
In addition, some Chinese banks started refusing to issue Letters of Credit (LC) for copper imports. “Besides high domestic inventories, difficulty in getting LCs is another reason for discouraging imports,” the Platts news agency and consultancy quoted an unnamed Hong Kong copper trader as saying in January. Furthermore, Chinese domestic copper production is expected to increase this year.
Regarding coal, China’s imports last year were 57.9% up on 2011, amounting to 289-million tons. This was composed of anthracite (11.93%), coking coal (18.55%), thermal coal (35.14%), lignite (18.59%) and “other” (15.79%). The only significant African source was South Africa, which contributed 12.4% of Chinese coal imports. (Australia accounted for 38.18%, Indonesia for 33.05% and Russia for 6.58%.)
The country’s imports have seen a steady increase over the past three years, and the China Coal Transportation and Distribution Association expects them to remain strong during this year. Coal imports are increasing in large part because the Chinese government is closing unsafe local mines – 1 973 coalminers were killed in mining accidents in China in 2011 and 2 433 in 2010. Beijing plans to close some 5 000 coal mines this year, the Xinhua News Agency reported early this month.
Of course, China also imports other commodities, such as alumina, lead, nickel, tin and zinc. The country’s alumina imports rocketed 165.1% in 2012 in comparison to 2011, reaching 5.02-million tons. Barclays Bank thinks that alumina imports may decelerate this year. Chinese imports of lead concentrate rose by 25.69% in 2012 as against 2011, coming in at 1.82-million tons (containing 1.03-million tons of lead) and reversing declines during 2010 and 2011. Refined lead imports were up 3.31% last year.
Regarding nickel, Chinese imports of ore in December were 10% higher than in November (annual figures do not yet seem to be available). This was because of restocking by Chinese traders and smelters. Barclays expects Chinese demand for nickel ore to continue to increase during this year. Concerning tin, the Chinese built up stocks during 2012, therefore import growth this year is expected to be modest. Refined tin and tin alloy imports in the 11 months January to November 2012 came to 29 307 t, an increase of 45% over the same period in 2011.
Zinc imports in 2012 were nearly 50% higher than in 2011, but this jump was the result of purchases of the metal for use as collateral, which could support the price but curtail Chinese production of the metal. However, Barclays predicts that Chinese demand for imported zinc will stay strong in 2013. There are also other minerals and metals that the Chinese are importing or seek to import, including uranium and gold.
With GDP growth accelerating again, the Asian giant’s need for access to resources remains strong. But this is not the only reason for the strong interest in Africa by Chinese companies. Other mining jurisdictions are becoming less inviting. “The change of Australia’s mining tax policy has made it more expensive to invest in the country,” ATKEPP International Consultancy chief analyst Zheng Jiaxin told the Global Times newspaper back in June. Even earlier, in March last year, China-Africa Development Fund chief marketing officer Liliang Teng remarked to the Reuters news agency that it was “easier to get approvals in African countries. There are no big headaches, like with Canada and Australia”.
There is also a positive side to the change in investment focus. “The country’s rapid increase of investment in Africa was mainly driven by several large successful projects undertaken by Chinese companies in the continent last year ,” affirmed CMA spokesperson Yang Qiuling, again to the Global Times in June. Chinese companies made seven major investments in the African mining sector in 2011, totalling $14.7-billion. The smallest of these was worth more than $1-billion. Together, these seven represented 94% of Chinese mining investment in Africa in that year. In contrast, Chinese mining investment in Australia in 2011 fell 70% year-on-year, to $1.3-billion.
Chinese mining companies have adapted their strategies for investment in Africa. Increasingly, instead of seeking to acquire assets or projects outright, they are entering into joint ventures (JVs) and even accepting minority stakes. Thus, the Aluminium Corporation of China (Chinalco) and four other Chinese companies have formed a consortium which has a 47% share in global mining major Rio Tinto’s Simandou iron-ore project in Guinea. Chinese groups have also begun buying equity in overseas mining groups. Chinalco has owned 9% of Rio Tinto, for example, since January 2008.
Meanwhile, Chinese resource-consuming companies have begun seeking off-take agreements with foreign miners, in return for investment. Thus, last year, Shandong Iron & Steel bought 25% of the Tonkolili iron-ore project in Sierra Leone for $1.5-billion from UK-domiciled African Minerals. The deal gives Shandong the right to buy the iron-ore at a reduced price and to have the option to buy up to 25% of the mine’s output.
However, full take-overs till occur. In April last year the China Guangdong Nuclear Power Holding Corporation bought the Australian company Extract Resources, which was developing the Husab uranium project in Namibia, for $2.4-billion.
Right now, the Sichuan Hanlong Group is busy concluding a $1.5-billion take-over of Australia’s Sundance Resources, which is developing the Mbalam iron-ore project, which straddles the border between the Republic of Congo and Cameroon. This deal should be concluded by the end of this month or the beginning of next month (March), and it is being financed by the China Development Bank.
Sichuan Hanlong is reported to be trying to interest two other Chinese groups, Hebei Iron & Steel and Wuhan Iron & Steel, to invest in Mbalam. Wuhan already has iron-ore projects in Africa, in Liberia and Madagascar.
With the Chinese economy accelerating again, more such deals, in many areas of mining, and across the entire African continent, can be expected.