It’s quite remarkable how slow to adapt even sophisticated analysts can be when it comes to China. As ironic as it may seem, some of the same people who grossly underestimated Chinese demand for various mining-related products and services for decades are now just as eager to be overly optimistic when it comes to present and future demand.
Is the mining sector the most misunderstood sector of China’s economy? While it’s hard to provide a clear answer to this question, it is fairly safe to say it is without a doubt among the most misunderstood ones. And that’s a shame in light of the fact that at their core, the dynamics that govern the mining dimension of China’s economy are not that difficult to comprehend.
At the end of the day, all one needs to do is take a close, rigorous look at the nature of China’s GDP growth over the past years because therein lie many of the answers we are looking for when it comes to its mining sector, with there being two distinct dimensions that warrant our attention:
- The let’s say 2,000 to 2010 timeframe, a period marked by remarkably robust 10%+ YOY GDP growth rates for an economy that was already large to begin with (in light of pre-1978 years being but a distant memory), growth rates led primarily by massive infrastructure investments and “traditional” exports. It is during this period that the famous talking point emerged about China consuming more cement in two years than the United States throughout the entire 20th century
- The post-2010 dimension, one marked by a significant change in perspective. More specifically, the Great Recession and its consequences made it clear that China’s economic growth model was not sustainable. As such, the status quo at this point revolves around setting more realistic goals (aiming for 6% to 6.5% YOY GDP growth rates rather than 10%+ ones) and trying to grow the economy in a manner that is less dependent on sometimes reckless infrastructure spending and on low value-added exports. Instead, China is trying to move toward the higher value-added dimension of economic growth models, with goals which revolve around dominating highly research and development-dependent fields such as Internet of Things-related ones, communication (from ambitious 5G plans to eventual 6G implementation), clean energy and so on
… needless to say, this is quite a transition.
And with this transition comes an inevitable change when it comes to its mining-related needs. More specifically, the years of massive growth with respect to Chinese demand for “traditional” minerals are behind us and while nominal demand doesn’t necessarily have to go down, it simply means record-breaking growth is no longer expected. To illustrate this, we cannot help but notice that the share of Chinese “traditional mineral” consumption has remained relatively stable in recent years, with China accounting for 55% to 62% of the global refined tin demand, 43% to 48% of the global refined zinc demand, 40% to 55% of the global primary aluminum demand, 35% to 54% of the global refined nickel demand, 40% to 46% of the global refined copper demand and so on.
Think of this as the pessimistic interpretation of China’s transition.
However, the silver lining for the mining sector is represented by the massively increased demand for “new” minerals, or in other words, the very minerals used in cutting-edge manufacturing. To put it differently, if you were to look under the proverbial hood of the 4th industrial revolution, you’d come across precisely these minerals: rare earths, lithium, cobalt and so on.
After drawing the line, the conclusion is obvious: growth with respect to new minerals is inevitable, whereas growth rates as far as “traditional” minerals are concerned will most likely go down quite a bit, perhaps even flirt with negative values.
All things considered, this much is certain: while the domestic mining sector is indeed able to help China meet most of its demand for some mineral types (most notably coal, with a less than 10% external dependency rate but also zinc and molybdenum with under 20%, lead with just over 20% as well as antimony and aluminum with approximately 30%), China is without a doubt dependent on external sources when it comes to everything else: from tungsten and sylvite with a roughly 50% – 50% balance to sulphur, iron ore and copper with 60% to 70%, manganese ore and nickel with approximately 80% and chrome ore with its almost 100% dependency on external sources.
Does China have a solid domestic mining sector? Yes. However, it is nowhere near enough, with Chinese companies only accounting for roughly 7.7% of the global mining value and China’s mining sector being about the size of the Australian one, almost two times smaller than the Japanese one and almost three times smaller than the Canadian mining sector.
The implications of this reality take us from the economic to the geopolitical dimension. Through various preferential deals with less developed but highly resource-rich nations (sometimes at a loss, to facilitate longer-term collaboration… a political investment, in other words), China is establishing a firm grip on many key players of the new mineral mining equation. So firm, in fact, that it might even end up controlling the various new minerals required for the hi-tech space or, worse yet and as mentioned in a previous article, the rare earth dimension of the military sector.
As can be seen, while without a doubt multi-faceted, the mining sector equation is not difficult to understand if we follow the facts and keep things logical. Just like in many other sectors, changes are taking place in line with the modifications that are inevitable as far as China’s economic growth model is concerned and without a proper understanding of these implications, your perspective on China will be limited at best.