BMI View: Chinese mining consolidation will continue over the coming quarters due to weak global minerals prices and government supporting consolidation.
We expect China's mining sector to become increasingly consolidated in the coming quarters for the following reasons.
First, weak mineral prices will price-out high-cost producers. We believe weak mineral prices will continue to pressure Chinese high-cost producing miners over the coming quarters. While state-owned firms are generally more insulated from the weakness in commodity prices, the economic slowdown in China will diminish the financial resources of these firms, forcing them to cut-back capital expenditures over the coming quarters.
Second, government-supported industry consolidation. Beijing's pledge to instil more supply discipline in heavy industry will reduce the number of miners operating within the country. For instance, China's target is to eliminate 97.2mnt of coal over the next five years through the closure of 2,791 small coal mines. Similarly, Chinese policy makers are attempting to tame excess production in the steel sector through a series of forced closures and consolidation.
Third, stricter governmental environmental regulations. The government's attempt to curb pollution will put pressure on small-scale low grade ore miners operating within China.
|China Slowdown To Drag On Mineral Prices|
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While cooling Chinese economic growth will adversely impact mining operations, we expect the impact to vary across different mineral segments. Lead and tin mining production growth will decline less strongly than iron ore and copper, due to continued, albeit moderate demand growth for these metals. We expect iron ore and copper production growth will decline significantly due to their heavy usage in the construction industry.
Overseas Mining To Continue, Despite Economic Slowdown
Depleting reserves, falling ore grades and the relatively short life span of domestic mines will further drive outward Chinese investment. For instance, the average Chinese iron ore grade has fallen from 66% in 2004 to 17% in 2014. The energy-intensive and heavy polluting nature of refining such low quality ore has forced more Chinese steelmakers to venture abroad for mining investment. Furthermore, there is an official push behind Chinese miners expanding their footprint overseas. We believe China will retain a healthy appetite for overseas mining investment in the coming years. The structural shortfall in domestic minerals production will force more miners to venture abroad for resource security, as exemplified by the USD5.8bn purchase of Glencore Xstrata's Las Bambas copper mine in April 2014.
This development is supported by Bloomberg data, which shows a total of 475 cross-border basic materials merger and acquisitions globally over 2014. Of the total amount of deals, 145, or 26.4% of total deals, were made by companies based in Asia. Within Asia, China is the most active deal-maker, with a total of 53 deals, which equals 10% of total acquisitions of basic material companies in 2014. In addition, effective since May 2014, resource deals under USD1.0bn only require registration, not verification from China's National Development and Reform Commission (NDRC).
|Mining The Gaps|
|China - % of Global Production & Consumption (2013)|