East meets West in a Nordic setting to discuss China’s presence—and influence—in global minerals markets
By Simon Walker, European Editor
In late September, the Swedish minerals-information and consultancy company, Raw Materials Group, hosted a two-day seminar together with Beijing Antaike Information Development Co., a Beijing-based metal information provider. With the two companies having recently signed a strategic partnership agreement, the China Metal Forum provided an ideal stage for specialists from both East and West to present their perceptions of the way in which China’s seemingly insatiable demand for metals is likely to develop. Other topics addressed included China’s growing, yet still small, influence in developing mineral resources in other parts of the world, as well as opportunities for mineral project development in the Nordic countries.
Setting the scene for the following presentations, Gunnar Oom, state secretary to Sweden’s minister for foreign affairs, pointed out that China is Sweden’s No.1 trading partner in Asia, with some 500 Swedish companies now active there. “It is important, to emphasize the need for free and open access to trade,” he said, referencing his remarks to recent Chinese moves that have been perceived as restricting foreign access to supplies of rare-earth elements. “We need to learn much more about the Chinese base-metals industry.” And to be fair, the presentations that followed did indeed provide a useful insight into the current position and potential future developments for China’s metals supply and demand.
In another keynote address, Vice Secretary General of the China Nonferrous Metals Industry Association (CNIA) Fan Shunke, provided more detail. “China has been the world’s No.1 consumer of non-ferrous metals for the past eight years,” he said, while noting that global metal markets have been strongly influenced by the levels of Chinese imports. Dr. Ren Weifeng from Antaike provided an additional explanation for the growth in demand, which has been generated by the rapid change from light to heavy industry within the Chinese economy. This, he said, has resulted in a significant increase in the intensity of usage for non-ferrous metals, and predicted the growth in demand for copper, for instance, will not peak until 2020.
The impact of China’s industrialization is being felt world-wide, and not just through the plethora of consumer products that fill Western shops. In many respects, continuing Chinese demand for raw materials can be thanked for having kept commodity markets buoyant over the past few years, with mining companies in general having withstood the global economic crisis better than their counterparts in other industrial sectors—up to now, at least.
And this, of course, has had a very positive impact on exploration budgets and companies’ enthusiasm for discovering new deposits. As Tom Niemi, chairman of Finland’s Geological Survey, pointed out, not only are the Nordic countries rich in mineral resources but there are now many more exploration and development projects in the region than in the rest of Europe as a whole.
Asked what had happened to stimulate Finland’s mining sector over the past five years, Niemi explained that many of the deposits now being evaluated have been known for 20 or 30 years. However, Chinese demand for raw materials since the mid-2000s has supported higher commodity prices and has turned formerly uneconomic prospects into potentially viable mining projects, mainly through the drive shown by junior companies. Nonetheless, he continued, securing financing for new projects remains a significant barrier to resource development, with a recent report for the Finnish government having recommended that it should establish a seed fund to help juniors get established.
Niemi presented some figures regarding China’s domestic production in relation to its national demand for various commodities. While it is essentially self-sufficient in hard coal and tin, he noted, it produces only 80% of its own zinc needs and around half of its lead. Its own iron ore accounts for about 45% of its needs. For nickel and copper, the situation is much worse, standing at around 25% and less than 20% respectively, reinforcing the need for China to import concentrates, cathode and scrap to meet manufacturing requirements. This, of course, also provides an insight into why Chinese companies have been targeting iron ore, copper and nickel in particular for their overseas investments in productive capacity in recent years.
Addressing the question of the drivers behind China’s accelerating growth in raw-materials demand, Boliden CEO Lennart Evrell took copper as an example. Despite short-term volatility, there has been gradually accelerating world demand for copper since 1900, with recent sharp increases in the rate of demand growth. As an illustration, demand growth averaged 0.4% per year from the mid-1970s to the mid-1980s, and stood at an annual 2.5% through the 1990s and 2000s. However, he said, predictions suggest that copper demand will grow at around 3.6% per year over the next decade as Chinese industry consumes more metal. In reality, this means the world will need to produce some 5 million mt/y more copper by 2018, just to meet the increasing demand.
The same scenario applies to zinc, Evrell added, although in both cases metal prices will have to reach $5,500/mt and $3,100/mt to justify the investment needed to bring new resources into production.
The rise in metals demand is driven by some basic economic parameters, he said. Where a country has a per-capita GDP of less than $5,000/y, economic growth is slow. Above $15,000/y, and the same applies, while growth stagnation occurs where per-capita GDP rises above $20,000/y—the evidence is clear from looking at commodity demand in the world’s post-industrialized countries today.
The big driver is where countries have per-capita GDP of between $5,000 and $15,000/y, a sector that now includes around 30% of the world’s population, including China. On the other hand, 45% remains in the <$5,000 bracket, although countries such as India are close to breaking through the barrier to the next stage of industrial development, and hence to commodity demand growth.
Several of the speakers from Antaike provided insight into China’s production and requirements for specific metals, including copper, zinc, gold and silver, and steel-industry metals such as molybdenum, nickel and tungsten.
For copper, Professor Li Yusheng explained that between 2001 and 2010, Chinese copper consumption increased from 2.25 million mt to 6.8 million mt, while refined copper production rose from 1.52 million mt to 4.57 million mt. However, with only 1.2 million mt of this coming from domestically produced concentrates, there is a major shortfall that has to be filled by imports. China’s copper-smelting capacity stood at 3.5 million mt/y last year, while it had 5.9 million mt of refining capacity available. The challenge, he said, is that the gap between concentrate requirements and availability from domestic sources is continuing to widen.
One of the problems facing Chinese copper smelters is that most of the country’s output comes from low-capacity mines. Indeed, the largest single concentrates producer, the Dexing mine, has an output of only 120,000 mt/y of concentrates, with the next four largest operations producing not much more than 20,000 mt each. Most Chinese copper mines, Li said, produce less than 10,000 mt/y. In terms of companies, Jiangxi Copper is the largest, with an output of 902,000 mt of refined copper in 2010.
To make up the supply gap, China imported 6.5 million mt of copper concentrates last year, plus 4.4 million mt of copper scrap, 399,000 mt of anode and blister copper (from countries such as Zambia) and 2.9 million mt of refined copper (mainly from Chile).
Looking ahead, new projects that will provide an additional 600,000 mt/y of smelting capacity and 950,000 mt/y for refining are scheduled for commissioning this year, with a further 650,000 mt/y and 1 million mt/y respectively due on stream in 2012. Nonetheless, Li said, in 2013, China will need to import around 6 million mt of copper in one form or another. By 2015, 1 million mt/y will come from overseas projects owned by Chinese companies, such as in Afghanistan, Burma, Peru and Zambia.
China has been better positioned for zinc, Jin Xiangyun told the meeting, although the proportion of demand satisfied by domestic suppliers has fallen from 88% in 2000 to 71% last year. The profile of China’s zinc industry has changed a lot over the period, she added, with China now having the world’s highest zinc-smelter capacity, using state-of-the-art technology. Zinc demand stood at around 5.2 million mt last year, with domestic supply totaling around 3.8 million mt, and concentrate imports accounting for some 13% of total world production.
In a similar position to copper, some 70% of China’s zinc production comes from operations with an output of <10,000 mt/y of concentrates, with the industry remaining very fragmented. The main trend over the next five years will be a move in the centers of production from eastern and central China toward the west, where deposits are larger and production costs lower, but transport costs to consumers in the east will be higher.
From its current level of around 6 million mt/y, zinc-smelting capacity is set to rise by 7% per year as the industry commissions newer, larger units: some 260,000 mt of capacity in smaller, older smelters has gone over the past year, Jin said.
The Largest Gold Producer
China took over top spot in the gold producers’ league several years ago, and is also the world’s second-largest gold consumer. For silver, it leads the way on both counts, said Antaike’s Yvonne Wang, who added that China holds the world’s third-largest gold reserves (after South Africa and Russia) and fifth-largest for silver. Gold production rose from around 290 mt in 2008 to some 340 mt (10.9 million oz) last year, she said, with Zhongjin Gold and Zijin Mining the leading individual suppliers. New resources have been found recently in Gansu province.
Gold production in China is more concentrated than for copper and zinc, with the 10 leading companies accounting for more than 50% of the total output. For copper, by contrast, the comparable figure is only around 30%. In terms of consumption, the Chinese market is focused more on jewelry and investment than is the case in other parts of the world, and industrial demand has been growing at a slower rate than have these offtake areas, Wang said.
Turning to silver, less than one-third (28%) of China’s 43,000 mt of resources are held in primary deposits, with 38% held in lead-zinc deposits, 23% in copper deposits and 11% in conjunction with gold. Silver production has been growing steadily, and reached some 8,100 mt (260 million oz) last year, with an increase to around 9,500 mt predicted for 2012. None of China’s producers is in the big league in world terms, however, with the largest having an output of around 600 mt/y (19 million oz), compared to the world leader, BHP Billiton, at 45 million oz.
In terms of silver usage, at 68% of the total industrial demand in China is significantly higher as a proportion than is the case elsewhere, with demand from the electronics and solar photo-voltaic industries growing fast. Indeed, China now imports 1,500 mt/y of silver powder for photo-voltaic cell production, although the high silver price is providing an incentive for substitution by copper.
Nickel, moly and tungsten: three critical metals for the steel industry, where China is again the world leader in production terms. Demand for all three has been rising, albeit at different rates.
Tungsten use in China reached 34,000 mt last year, said Xu Aihua, while the Chinese industry consumed around 60,000 mt of molybdenum. For tungsten, cemented carbide has been the growth driver, she explained, accounting for nearly half of the total demand, while increasing production of stainless and high-strength steels has led moly usage.
For the future, the use of moly in catalysts, electronics and the aerospace industry is likely to increase significantly, with Antaike predicting demand for 125,000 mt/y by 2020. Both moly and tungsten are considered to be strategic metals in China, which hosts around half of the world reserves of tungsten and a quarter for moly.
On account of their strategic position, both tungsten and moly are subject to export restrictions by the Chinese government, although the World Trade Organization has been working to get export taxes lifted—a move Xu believes is unlikely to succeed. Looking ahead, she predicted China will continue to produce around 80% of world tungsten supplies into the future, while accounting for around 36% of the world’s moly output: domestic production will rise, but then new capacity elsewhere will also come on stream.
And so to nickel, where the emergence of nickel pig iron (NPI) as a major consuming sector since 2006 has led to a complete transformation in the demand structure. Invented in China, NPI is produced from low-grade laterite ores to give a 4%–13% Ni ferro-nickel material that can be used for stainless-steel manufacture. According to Xu Aidong, China will produce around 260,000 t of NPI this year out of a primary nickel total of 455,000 mt, with a number of stainless-steel producers diversifying into integrated NPI production, and vice versa.
Annual nickel consumption in China currently stands at 515,000 mt, Xu said, of which nearly 80% is used in the stainless-steel industry. Jinchuan is the largest individual nickel producer, accounting for 10% of the world total (compared with 22% for Norilsk Nickel).
Despite the prominence given—sometimes for the wrong reasons—to investments in foreign minerals projects by Chinese companies, the Raw Materials Group (RMG) estimates China’s level of control of world mineral production remains at less than one-half of one percent. So said RMG’s Professor Magnus Ericsson, who added that the Chinese government’s target to have at least 50% of the country’s iron-ore imports sourced from operations that are owned either in full or in part by Chinese companies is unlikely to be achieved.
China has had long-standing investments in iron-ore production in both Australia and Peru, and more recently has been involved in various copper mining and smelting projects in Zambia. Development of the Ramu nickel operation in Papua New Guinea was undertaken by Chinese companies, while in 2008 the governments of China and the DRC signed a $9.25-billion agreement covering infrastructure development that included $3.25 billion for mining projects.
In fact, Antaike’s Professor Zhao Wuzhuang told the forum, Chinese overseas investment dates from the 1980s, when CITIC took a stake in the Portland aluminum smelter in the U.S. Alcoa is supplying China Minmetals with 400,000 mt/y of alumina under a 30-year contract signed in 1997, and in 2001 Chinese companies took over management of the Saindak copper mine in Pakistan.
Perhaps China’s most noticeable foray into the outside mining world came in 2009 with China Minmetals’ (now Minmetal Resources) acquisition of most of OZ Minerals’ operations in Australia and Laos, including the Century zinc mine and Sepon copper and gold mines.
One of the challenges facing Chinese companies looking for overseas investment opportunities is that of communications, Zhao said, with host governments not understanding the relationships between the Chinese companies and the Chinese state. Chinese companies also face a lack of operating experience in places outside China, as well as knowledge of local cultures and practices, while having to gain state permission for raising financing on both domestic and international markets.
Recent developments that have involved Chinese overseas investment have included the Aynak copper project in Afghanistan, which is scheduled for commissioning in 2013 with a capacity of 200,000 mt/y of blister. Other countries in which investments are taking place include Peru, Ecuador, Mexico and Burma (all copper) and Guinea (bauxite), together with the existing operations in Zambia, PNG and Australia.
Other drivers may also be at play, as Xu pointed out in relation to nickel. In Indonesia, for instance, a ban on nickel ore exports is due to come into force in 2014, so Chinese companies may invest in smelting capacity there as a way of securing supplies, she said.
The consensus from the China Metal Forum was clear: the growth in demand from China’s industry, supplying consumers abroad and, increasingly, at home, has provided a major boost to the world’s mining companies at a time of economic uncertainty and market volatility. On a day-to-day basis, however, Chinese mining companies are facing the same challenges as their counterparts elsewhere—deeper mines, lower grades and higher costs. If for no other reason, then, there is strong incentive for greater Chinese investment overseas, albeit with the proviso that Chinese companies will need to show better understanding of the wishes and needs of their foreign host communities if they are going to be successful.