China's move to a more open and market-driven economy has resulted in a massive demand for raw materials, such as metals. The mining /energy industry has developed over the last decade to become the fourth largest in the world in value terms. Leading the charge is China's steel industry which has grown from the world's seventh largest in 1970 to top position in 1996, producing around 1OOm tonnes a year. China is also a significant importer of steel, currently accounting for 25-30 per cent of its total consumption.
Foreign investment into China's mining sector has also been encouraged. By the end of 1995 there were over 114 mining projects involving some form of foreign investment in mining rights, with around 17 of these projects being wholly foreign-owned.
The search for iron ore
In concert with the growth of the steel industry has been an expansion of domestic iron ore production, and the importation of iron ore from overseas. China has estimated iron ore reserves of 47bn tonnes, but most of this is relatively low in iron content and expensive to transport and process. In 1996 China produced 118m tonnes, and for the year ending September 1997 it imported US$890m-worth from Australia. The industry is currently undergoing a process of expansion and upgrading several of its mines, with the help of imported products and services.
China is also the world's leading coal miner, producing 1.36bn tonnes in 1996 and with proven reserves of close to 1,010bn tonnes. However, only about one-quarter is suitable for coking coal and most of the coal deposits are situated in the northern provinces, some distance from the major end-users. China is also a significant importer of coal and in the year to September 1997 imported coal valued at US$90m from Australia.
The opening up of the Chinese iron ore industry has also been accompanied by the move offshore of a number of Chinese mining and trading corporations. One example is the Channar Mine in Western Australia owned jointly by the China Metallurgical Import and Export Corporation (40 per cent) and Hamersley Iron (60 per cent). The project started in 1990 and output is heading towards 10m tonnes a year. Another Chinese company ?Anshan Iron & Steel Complex ?has a 40 per cent share in the Portman Mining Koolyanobbing Iron Ore joint venture which shipped nearly lm tonnes of lump ore to China in 1997. Portman has also contracted to supply a minimum of 3m tonnes over five years to another Chinese client.
Technology transfer
Over the past four decades China has spent in excess of US$12bn on mineral prospecting and now lays claim to having the world's third largest verified mineral resources behind the US and Russia. It is estimated that the mining and metals sec-tor will need around US$44bn of new investment by the year 2000 to fund the capital construction (US$30bn) and technical developments (US$14bn) necessary to keep pace with domestic and export demand. The government is planning on much of this happening through technology transfer and joint venture mechanisms to reduce the drain on its foreign exchange; but it will also have to turn to global financial markets.
In the non-ferrous sector China is the world's largest exporter of antimony, bismuth and tungsten, and the second largest producer of zinc and manganese; in addition to being a major source of rare earth metals.
Although considered a resource-richcountry, China is actually very short in supply of non-ferrous metals, with many of them having inherent quality, mining and transport problems. This means that China has to depend on imports of alumina, copper (40 per cent of annual requirements), lead and zinc, valued annually in excess of US$2.5bn to sup-port its domestic market growth. In late 1996 China National Nonferrous Metals Industry Corp-oration signed a 30-year contract with Alcoa for the supply of 400,000 tonnes of alumina out of Alcoa's three Western Australian refineries. The first shipment went in July 1997. Citic has also been active in Australia, owning 10 per cent of Portland Aluminium Services in Victoria.
Reforms in the gold sector
The other outstanding sector of the mining industry is gold, China being the sixth largest world producer. Its estimated production of 150 tonnes in 1997 was up almost 30 per cent on 1996. The country's main gold producing areas are in the provinces of Shandong, Henan, Hebei, Shaanxi, Heilongjiang, Liaoning, Inner Mongolia aid Jilin. Around 85 per cent have a production capacity of less than 200 tonnes a day, with just over 40 mines producing 10,000 ounces or more annually. Historically, the industry has been closed off to outside interests, and did not begin to develop seriously until the late 1970s when the government increased its financial support to encourage increased exploration and development activity.
Since 1979 the average annual growth rate has been around 10-12 per cent, with production now five times higher than it was 14 years ago; 2,000 tonnes of additional reserves have been identified in the past five years. Despite its great potential, the industry is still highly fragmented and beset with declining economic efficiency. Few mines or prospects are of genuine world class and approximately one-third of the gold-producing enterprises are running at a loss. The accumulated debt for the industry now stands at US$600rn and many workers have been laid off. Where possible, mines or companies try to find alternative work for those made redundant. For example, China National Go' {1 Corporation (CNGC) has bought unreclaimed land in northern China to enable former miners to earn a living as farmers.
In order to meet its stated goal of 10 per cent annual growth up to 2000, the government has instituted sweeping reforms to make the industry more efficient. These reforms have only been partial, however, as the government still maintains overall control of mining development and gold pricing, which is now pegged at 10 per cent below inter-national parity. In September 1993 the Gold Administration Bureau also announced that foreign investment in co-operative mining would be welcome.
This move was motivated by the recognition that, without access to foreign capital and technology, the industry would find it very difficult to upgrade China's existing mines and successfully bring into production new and mineralogically difficult deposits.
Difficult environment
Despite these measures, foreign mining companies are still faced with some major difficulties, such as:
the lack of an established gold market, gold loans and gold hedging
the uncertainty regarding ownership and transference of exploration rights to mining rights
complex approval processes
the difficulty in securing geological data, and different Chinese perceptions of laws, contracts and foreign involvement.
The Gold Bureau recognises that China's overall operating environment is difficult for the foreign investor, but avers that two different systems for domestic and foreign-invested enterprises will not be permitted. However, it also believes that with China's inherently cheap labour costs, foreign investors will still find it profitable to mine.
In relation to foreign investment policy, the overriding operating tenet is that where China can carry out projects solo, it will do so, not wishing to expend more foreign exchange than necessary. Priority is given to developing on its own account the economically viable lower cost and higher grade /volume deposits.
However, where the capital and technology needed to exploit a find is lacking, foreign joint ventures and co-operative ventures will be welcomed. Officially though, foreign co-operative projects are 'limited' to the following types:
hard-rock refractory mines with less than 3.5 grams of gold per ton of ore
hard-rock mines with more than 3.5 grams per ton that contain arsenic, organic carbon, antimony and other elements that make retrieval difficult?placer mines (principally found in stream beds) with a content of less than 0.2 grams per cubic metre ?the sluicing of auriferous gravel with no grade limit from which domestic technologies can barely recover gold.
In 1994, CNGC announced a list of 10 mine sites, in Guizhou, Sichuan, Yunnan, Guangdong, Guangxi, Liaoning, Shandong and Gansu that were open to foreign investment ?all low-grade, refractory deposits and technically too difficult to be mined economically by Chinese gold mining enterprises. The mines have proven reserves of 10 to 50 tonnes of gold each; some could be as high as 100 tonnes.
According to the Gold Bureau, the projects for joint exploration/development are not now defined by numbers, but rather by fit with the above criteria.
Exploration
With regard to exploration, Australian mining companies have been well to the fore in trekking around China looking at potential prospects for development. About 20 Australian companies are active there. Some of the more notable examples are as follows:
Astro Mining will spend US$3.7m over five years to explore for diamonds in Liaoning
Australian Gold Development is undertaking feasibility studies regarding copper, gold, lead and zinc in Hunan
BHP Minerals is investigating prospects for base metals, coal and gold, with the most recent development being the right to negotiate with CNGC for the Lannigou project in Guizhou, said to contain 60 tonnes of gold
China Gold is negotiating for three deposits containing 2.8m ounces
Kismet Oberon is the first foreign gold mining company to produce gold in China, via a joint venture with the Gold Command Division of the People's Liberation Army
Pinnacle Mining is negotiating to develop the US$70m-80m Caijiaying zinc/ silver /gold project in Hebei province
Sino Mining International is developing a US$35m, 70,000-ounces-a-year gold mine at Jiangling
Werrie Gold has set up a joint venture to explore and develop nickel prospects in Sichuan
Zephyr Minerals, with Changming city government, is developing a gold project with a resource of 400,000 ounces.
The BHP project is particularly important because Lannigou is one of the original 10 projects put up for foreign joint venturing, and it has the potential to be developed well beyond the current reserve calculations. Kismet Oberon is significant for its relatively quick progress to a producing mine via the PLA's gold arm, rather than through China National Gold. Sino Mining International is perhaps the most important in that it is a wholly-owned subsidiary of CNNC, with an international management team based in Australia. It has been set up to develop mines which are capable of securing international project finance, its first success being Rothschild Australia's decision to back the project through a finance package totalling US$17.5m with the Industrial and Commercial Bank of China.
This project is doubly significant in that it is Rothschild's first project financing job in China, and it is also the first time that an international investment bank has financed a mine in China on a limited-recourse basis. Engineering and construction management services are also coming from Australia.
Mining equipment sector
On the mining equipment and services side, China is a growing market for Australia with exports estimated at US$50m-60m in 1996/97. Exporters include Apex Belting (conveyor belting), Maptek (mining software), Hunter Screens (metal and polyurethane screens), Woodward Clyde/ACIL (mine waste management and project reclamation), Domino Mining Equipment (under-ground coal mining equipment), Rimtec (tyre management systems), King Cobra Mining Equipment (hand held mining equipment) and John Finlay Engineering (screening systems, general mining equipment). Given that Australia does not pro-duce big-ticket items such as shovels, haul packs and graders, the spread of equipment and services is quite substantial, and is sure to grow steadily over the next few years on the coat tails of Australian mining companies which progress to the project development stage.
Although the Chinese minerals industry is one of the biggest in the world, it is beset with a number of problems such as poor quality resources, remote locations, and inadequate exploration and development expertise. Mining companies also have to contend with cumbersome and divisive bureaucratic processes, inefficient and labour-intensive mining methods, large-scale debt, inadequate legisl?-tive framework, an over-regulated financial system, the lack of a gold market and a low world gold price.
However, despite all these problems, the industry has much going for it because of its sheer size as both a producer and consumer, and its relatively under-explored resource base. These factors alone will continue to attract the international mining community to China.
China has so far been relatively insulated from the financial crisis now affecting Asia. Huge foreign exchange reserves, estimated at US$135bn, have been swelled by an increasing trade surplus. Furthermore, as the yuan is only convertible under capital account and not current account, it has resisted the speculative attacks that have devalued other currencies in the region.
The central government, however, is slowly starting to realise that, without a reform of the state banking sector, it will not remain immune. China's banks have been burdened with the responsibility of financing the reform of the ailing state sector of the economy ?an estimated 300,000 enterprises need to be nursed back to health. The People's Bank of China (PBOC) has estimated conservatively that 13-14 per cent of bank loans are non-performing and that two to three per cent are non-recoverable. Other estimates have placed the amount of non-performing loans as high as 20-40 per cent of the US$600bn the banks have extended to state-owned enterprises.
National financial conference
Evidence of government concern was the National Financial Work Conference, launched by the PBOC and the State Council and held in Beijing on November 17-19 last year.
What is usually an annual meeting of China's banking chiefs turned into a political forum attended by Jiang Zemin, Li Peng and Zhu Rongji, and assumed a level of importance secondary only to last year's 15th National Congress.
Working out what was agreed at the conference is more difficult. For now China's leaders seem to want to keep a lid on their discussions, but a Xinhua press release gives some indicators. Among talk of the need to develop the socialist market economy, the press release also mentioned reducing or limiting financial risk by putting in place measures to control the banking sector more closely.