Letter from China

THIS week’s "Letter from China" is penned not from a snow-covered Beijing CBD, but from fair-weathered Cape Town, on the sidelines of the Investing in African Mining Indaba.

This is rather appropriate, given the amount of interest that the mining world is showing in the China story and its development, especially after China’s economic slowdown last year drastically affected commodity prices, capital expansion plans, indeed the whole global mining industry.

It is clear China remains an important driver for the sector, arguably the most important driver, albeit altered since the global slowdown. China’s economy is evolving and its growth model is changing, making it more attractive to mining companies. But how exactly is China going to influence resource sector trends going forward?

China’s unparalleled consumption of raw materials has been due to its drive to industrialise and catch up to more developed economies. Roads, bridges, ports, factories, residential properties and commercial buildings are being built, populating the breadth of China with glittering cities. However, this growth is now being tempered due to domestic realities and the variability and volatility of the global economy. This, in turn, has a knock-on effect on commodity prices, capital expansion plans and the ability to finance new projects. This means that it is more important to accurately gauge China’s economic growth and likely demand for resources than ever.

However, China has moved beyond simply being a resource consumer. It is transforming itself into a bigger and more discerning global investor, and increasingly, not just a buyer of traded raw materials, but a buyer with a strong intent to own raw materials at source. The past few years has seen China targeting resource projects in Australia, Canada, Africa, Latin America and Southeast Asia. This trend will only gather pace. Apart from the consumption of raw materials and the rise of China as an investor in the resource sector, it is also developing its manufacturing and supply capabilities supplying complex, value-added products and services for the mining industry.

While the label of "World’s Factory Floor" comes with a double-edged gibe at the low-value, low-quality properties commonly associated with mass-produced, made-in-China products, the country is shedding that reputation by manufacturing complex machinery and specially engineered tools and equipment, as well as building its technical knowledge and capacity as a service provider. Though perhaps still not at the level of the leading western or Japanese manufacturers, Chinese companies are most definitely starting to make a mark as suppliers to global resource projects.

Another interesting trend is China Inc embarking on a path to being a more comprehensive project partner in various resource and infrastructure ventures.

This can take on a variety of forms, but it means that China often plays a range of key integrated roles in strategic projects such as off-take partner, equity investor, debt provider, capital equipment supplier and engineering and construction service provider.

This trend sees China taking on a more active role in developing resource projects in conjunction with foreign project owners’ teams, and is revamping the way it plays in the global resource value chain.

Five to 10 years ago this did not happen at all. Now it is becoming a real trend, but imagine what role China Inc would play in another five years from now once its companies come of age more fully.

This will have quite an influence on the industry. For example, it is potentially good news for miners that will, of course, have a wider choice of professional project development partners from China. But it may be bad news for some established players as it will certainly make the mining services space — traditionally dominated by western firms — more competitive as China’s companies are recognised as viable alternative project delivery partners in the global resource industry.

As a very eventful Year of the Dragon ends and China rings in the Year of the Snake just after the Indaba, the mood in the global resources sector is a bit more optimistic compared to the doldrums of a few months ago. China’s better GDP growth prospects for 2013 certainly have something to do with that. But far more important over the long term, mining companies, policy makers and other stakeholders must appreciate the expanding, evolving role that China is playing in this global industry: from consumer to investor, lender, supplier and fully integrated project partner.

Van der Wath is group MD of The Beijing Axis. He can be reached at kobus@thebeijingaxis.com.