Chen Jinghe: the current situation and future of China’s mining industry under the new normal economy
Source: www.zgkyb.com Citation: www.agkyb.com Date: October 26, 2015
Editor’s Note:
Where you are in is determined by your location, where you’ll go by your angle, what you’ll see by your level, and what your future is by your attitude.
The “new normal” of China’s economy and the “winter” of China’s mining industry gave a dual influence on these mining industry leaders who suffered. How will they regard the current situation and think of the future?
Mr. Chen Jinghe, president of Zijin Mining Group Co., Ltd., believed that though “winter” brings challenges, the new normal can give birth to big opportunities.
Four years ago, Chen had warned the coming of mining industry’s winter, which had already become a truth. He predicted that the minerals price would continue float on the current price, the price of certain kinds may have a further glide and rebound later. However, this rebound phenomenon still couldn’t bring the “Golden Ten Years” glory back again.
As a member of the mining industry, Chen jinghe admitted that a sober understanding of the current economic and mining situation and a more fully estimation of the difficulties would be a safer performance. In his view, slack demand and low price of the minerals is the new normal of the mining industry. What mining companies should do is to have a solid skill and control the costs rather than complain the market as nobody can drive the market. Besides, in this clod winter of mining industry, it’s necessary to reform and adjust the management system and many other measures that formed in the peak time. Survival is the first, development comes later.
Chen had confidence in the future economic development and the mining prospect. He said that in the new historical period, mergers and reorganization between mining companies will become increasingly active. Under the guidance of One Belt And One Road strategy, width and the strength of China`s mining enterprises’ participating in the global mining market will be further increased. China`s mining enterprises will become one of the most active powers in global mining market and thus will lead to a certain degree of change of the global mining pattern.
Perhaps Chen’s opinion couldn’t be accepted by all the insiders, however, we must admit that in this mining winter period Chen Jinghe, as one of the leaders of our major mining enterprises, leaded enterprises starting from themselves to face the challenges and seek for breakthrough in the crisis. His thinking and practice for development should be affirmed.
So did this happened in reality as what he said. There is no big change in the development strategy of Zijin Mining Group under the new normal. “Reform, economic growth and development” is still the main guideline in Zijin Mining Group’s future development, internationalization is the main direction of the group in it’s new round of development and capital spending and operating cost control is the main work.
In order to get a wider range of transmission of this positive voice across the whole industry, we published Chen’s full speech at the 2015 CHINA MINING Congress and Expo as a reference.
It’s my honor to stand here in the CHINA MINING Congress and Expo 2015 to talk about China’s mining industry with you all. What we’ll discuss today is a really heavy topic as we are in a “winter” of the mining industry now, in which whoever related to mining industry can feel the chill and would suffer from. The common concern is, how long will this winter last? Is it the coldest time now? What’s the current situation and future of China’s mining industry? I’ll show my personal views as follows.
1.mining industry’s winter in the new normal
1.1 Weak demand greatly affects the mining industry in the new normal
“The new normal” is one of the often-used phrases in the Internet related to economy and in different medias. That China has stepped into the “economic new normal” has become a common sense in the market, which is the stage feature of China’s economic development. During this phase, the economic growth has decreased from a high speed to a high-middle speed, and the tertiary industry has become the main force taking place of the secondary industry. Growth pattern has changed as well, from a growth of amount that consumes vast resources to the growth of quality that driven by innovation, from investment pulling to consumption pulling.
The high speed economic growth has met its ceiling in the past 30 years. The generation in which amount produces growth and money has gone, leaving surplus a common economic phenomenon in this new normal. Among them, the real estate market had a significant influence on Chinese economy, especially on the metal materials industry.
In terms of the bulk commodity as the metal, it’s production and consumption amount in mainland China has accounted for 40%~50% of the whole world. China has created many of the world’s first, this huge consumption formed a super cycle for bulk commodity that lasts for more than ten years. People were crazy about mining in the past and lots of investors made their fortune overnight. Such high profit attracts heavy investment which gradually result in over capacity. The minerals price began to fall, or even slump three years ago and lead to an extremely difficult situation for mining industry now, in which investor are trapped. Coincidentally, there’s a real lesson that the once flourishing coal industry decayed from a fat profit to a total loss.
The population of mainland China consists of 20% of the world population and the minerals produced and consumed surpassed double of the global average share, which means it’s far from possible to pull a larger global demand growth only by Chinese market. Though China still has a certain demand growth for the bulk commodity. The growth rate and amount are significantly slowed down. This status of demand growth will remain exist in a relatively long period of time.
1.2 price swings in three to five years and a continuous glide
Four years ago, I warned the coming of mining industry’s cold winter at the China Prospectors Annual Meeting, on which many peers don’t agree. However, it has become true unfortunately with some minerals’ price keeping declining since 2012 and thus lead to a overall collapse.
National bureau of statistics shows that the mining industry profits has presented a yearly decline and the decline range has expanded year bu year since 2012, with a 17.34% decline rate in 2013, 23% in 2015 and 57.3% in the first eight months this year. At present, mining enterprises are experiencing a very serious management condition. Predictably, the “four mines” problem repeatedly called on by he ex-minister Zhu Xun will reappear.
Many peers have been looking forward that the minerals prices could return to the orbit of rapidly rising as what happened before, a quick realizing of a ‘V’ type inversion in 2009 after the financial crisis in 2008, which seems unrealistic now. I though that the minerals price would continue floating on the current price, the price of certain kinds may have a further glide and may rebound later. However, the “Golden Ten Years” glory could never come back again.
As a matter of fact, many mining enterprises has further expanded their production to control unit cost when there’s a price collapse and a continuous losses. For example, in the iron industry, though the price has slumped about 70%, some international iron giants that possess resource and cost advantages continued to increase their production. Hence, even if the price slump has leaded to many high-cost mines’ shutting down, it’s still not easy to reduce the market supply, as its an obvious case of the current iron ore concentrate and coal production. It needs a much longer time than we expected to achieve a reasonable price return through sharply reducing the capacity and output.
1.3 With the deficiency of China’s mining industry, survival is the primary target.
Compared with other peers in the world, China’s mining industry faced more difficulties and problems.
First, the mineral resources in China is small and medium-sized in general with low quality. What’s more, it’s hard to exploit those resources, to acquire the mineral right and to coordinate the relationships among land, woodland, environmental protection approval and the local government. Besides, mining industry marketization degree is not high, the overall system is relatively rigid, enterprise are in small size and large amount, the large ones are not so strong as it should be. Most of the burden is heavy, the debt ratio is high, the cost is high, in the face of mining the cold winter, the lack of response and effective measures. With heavy burden, high debt ratio and high cost, most enterprises had nothing to do when facing this cold winter in mining industry.
Second, China`s mining economy is a vassal economy, state-owned mining still accounts for absolute advantage. It is a major characteristic to control mineral resources by regionalism. Even in very difficult current mining circumstances, mergers and reorganization is rare. That to sell all the apples when they are bad is not a good idea.It’s a better choice to solve the problem of mining under the market laws.
Third, China’s bulk minerals resources enjoyed a poor endowment condition and a high external dependency. 56% iron ore, 83% copper, 83% bauxite and 57% crude oil need to be imported. At present, it’s a truth that many small and medium-sized mining enterprises with high cost in China has closed down, even though the dominant mineral, the coal, whose production ranks first in the world, is trapped under the impact of the low-cost mines overseas.
As a member of the mining industry, it would be safer if we have a sober understanding of the current economic and mining situation and a more fully estimation of the difficulties. Slack demand and low price of the minerals is the new normal of the mining industry. What mining companies should do is to have a solid skill and control the costs rather than complain the market as nobody can drive the market. Besides, in this clod winter of mining industry, it’s necessary to reform and adjust the management system and many other measures that formed in the peak time. Survival is the first, development comes later.
2. The new normal gives birth to big opportunities
2.1 Active factors in the crisis
There’s no doubt that China’s economy will keep growing at a high speed in the next decade.Even a 5% growth is pretty good under the background with a big economic base. According to some relevant calculations,the main minerals demand will continue to maintain a certain growth, but the growth rate and growth amount will significantly slow down to 2025.
As we can see, with the economic growth and especially the speeding up of industrialization, emerging markets economics, such as south east countries, India and countries along the “One Belt And One Road”,will become the major regions in which there’s an increased demand of the new minerals. With the gradual recovery of economy, the western developed economies’ demand for mineral raw materials will have a certain growth.
Quite a number of the current commodity prices are near the cash costs. In recent years, a majority of comprehensive cost of the new or upcoming new capacity is much higher than the product price and those capacities fell into a state of the mine production losses or even a collapse because of its huge capital expenditure and construction investment. With the disappearance of the costs red line and the high cost capacity, minerals price has a limited space for downside.
In the new historical period, mergers and reorganization between mining companies will become increasingly active. Under the guidance of One Belt And One Road strategy, width and the strength of China`s mining enterprises’ participating in the global mining market will be further increased. China`s mining enterprises will become one of the most active powers in global mining market and thus will lead to a certain degree of change of the global mining pattern.
2.2 Some excellent enterprises are qualified for the global mining industry competition.
Chinese market and it’s minerals production and consumption has made an important contribution to the global economy and the development of mining industry. China`s mining industry has made great progress as well. With the "going out" of China`s mining enterprises, China has become one of the important members in the big family of global mining industry.
Many Chinese enterprises failed and got some lessons when they took the policy of “going out” at the high time of market bubble. However, we shouldn`t blame these pioneers as it’s never been so easy to succeed. And international mining giants would also make the same mistake, many international mining companies mining suffered a huge financial and Provisions losses. For example, an international mining giant bought an ore deposit with $4 billion in 2011 and sold it with just $50 million three years later, this is the market!
We should see that China`s mining enterprises have already had a considerable scale and level, some enterprises have had the basic capability for competing in the market of global mining. In the aspect of innovation and application of advanced mining development technology and the cost control, in the aspect of the development and utilization of low grade and difficult mineral intergrowth resources and in the aspect of exploiting small complex ore deposit mining, Chinese mining enterprises have been in the international leading position in some areas and have created a lot of myths in mining exploitation. What the China`s mining industry currently lack of is the international operations personnel and experience, which could only be solved through practice.
2.3 “Going out” is the hope of China’s mining enterprises future development
China has an overall excessive exploitation of mineral resources, a low maintain reserves and a low per capita ownership level. most of the mining company just developed domestically with a very limited space and a bigger difficulty.
At present, the global mining market is in its downturn, quite a number of the mineral resources and mining companies’ value is severely undervalued. Mining companies with strength and ability should take this opportunity to boldly take the policy of "going out” and to participate in the cooperation and competition of global mining market. this is the hope of the future development of China`s mining enterprises. China is the world`s second largest economy and the world`s largest minerals market. During this period, if we haven’t cultivated transnational mining groups that have important international influence, this will be a great failure in mining industry!
Over the past decade, Chinese commodity has gone global. With the speeding up of the process of RMB internationalization in the future, China`s capitals’ fully entering the global capital market is just around the corner. China`s mining companies and investment funds will take this great opportunity to comprehensively and deeply cooperate with international mining enterprises to promote global economic growth and the revitalization of the mining market.
3. New action under the new normal
3.1 Government should know their responsibilities and obligations
Currently, many of the regulations related to mining are promulgated at the peak time of mining industry, which work well on disciplining the market order and following the relevant laws at that time. However, these regulations have an excessive strictly examination and approval process, which limits the access of mining right and market circulation. Cumbersome procedures and a considerable time in completing a full mining licenses will put bigger constraints on the marketization of mining industry. In addition, in the mining industry profitable period, state and some relevant provinces introduced many harsh tax policies. Some local government regarded the mining right the same as the land, even the basic conditions acquired by the application for the exploration right were also replaced by bidding procedures. All these has gone against to the healthy and benign development of the mining market.
In recent years, the State Council has taken a major reform of examination and approval matters, for example, the National Development and Reform Commission and the administration of industry and commerce decentralized many rights and introduced many convenient provisions on project examination and approval, the enterprise registration management and mergers & reorganization in the hope of activating the market that through decentralization. We expected that the mining related management department and the finance and tax departments could complete the related reform as soon as possible to warm the mining companies and help them ride out the storm.
3.2 Focus on the difference between the background anomaly and the environmental pollution and regulate mine environmental well
Ensuring environmental security is the bottom line that mining enterprises must stick to. Zijin Mining Group had made a mistake in this regard at the price of a huge losses and had learned a lesson. We should see that, in the past 20 years, China`s mining enterprises’ progress in mine environmental protection is huge, the government`s regulation of environmental protection is extremely harsh and the regulatory supervision is more severe than that in overseas in some aspects.
Here I want to say that the discovery of mineral deposits is mainly by the anomaly of water, stream sediment, soil and rock elements, which is now called "heavy metal pollution” in terms of metal. While actually, we should strictly distinguish the difference between the “heavy metal anomaly” in the natural background and “heavy metal pollution” caused by human exploitation, especially in the phase of reconnaissance, in which the geological work is very important. As far as I know, the so-called “heavy metal pollution of soil” that often appears in the media should be the one that formed in the nature, which is also called as background anomaly. We hope our geological and mining industry peers and regulatory departments can attach great importance and pay attention to the difference between the background anomaly and environmental pollution caused by development, otherwise the whole mining industry will suffer from "an accident", in which everyone should be blamed. Furthermore, we also hope that the relevant departments could learn the advanced environmental management experience of overseas to improve the scientific supervision level.
3.3 Strongly support the mining enterprises to “go out”
The proposing of “One Belt and One Road” pointed out the direction of "going out" of mining enterprises and created a good policy environment for the internationalization of China`s mining enterprises. I wish that the government can provide more policy and financial support to enterprises that went out. For example, provide convenience capital market financing channel to these "going out" enterprises, use plenty of foreign exchange reserves to provide cheap funding for overseas mergers and acquisitions and project construction for the enterprise, at the same time provide more convenience in terms of project examination and approval.
We should learn from advanced international counterparts humbly and combine our own advantage with the objective conditions in the project location in strict accordance with international advanced standards and attaches great importance to the harmony development of community coordinated. Enterprises participating in the overseas investment should make full use of all the advantages and strength in all aspects, uniting to compete in the market to avoid vicious competition.
3.4 Industry association should become a shelter for enterprises to keep warm
As an Industry Association in mining industry, China Mining Industry Association and other relevant associations play a positive role under the mining industry cold winter. In terms of policies and regulations and related taxes and dues, seriously listening to the views of enterprises, actively and systematically reflecting the current situation and demands of the mining industry to the relevant government departments, building a good mining development environment to provide mining enterprises in this cold winter with a shelter to keep warm.
3.5 Zijin Mining Group is willing to develop hand in hand with all the peers.
My dear leaders, colleagues and collaborators, thanks for your full supports to the development of Zijin Mining Group!
Under the new normal, there’s no big development strategy changes in Zijin Mining Group, internationalization is the important even the main direction inthe new round of development. We focus on some large mature metal mining projects such as gold and copper etc.We are very willing and attaches great importance to the cooperate with large mining companies in home and abroad.
Zijin Mining Group carried huge pressure of business when facing the slump of metal prices. “Reform, economic growth and development” is still the main guideline in Zijin Mining Group’s future development, internationalization is the main direction of the group in its new round of development and capital spending and operating cost control is the main work. minerals gross profit margin in Zijin Mining Group is higher than most mining companies, which means a strong ability to resist risks. We are still full of confidence when facing the future!
The domestic development of Zijin Mining Group is successful in the past 20 years. Overseas development is the key to the future. The company will continue to be in accordance with the thought and model of innovation and be fully in combination with the practical situation to solve the difficulties and problems existing in the company`s internationalization process. We are very willing to work with counterparts and investors hand in hand resisting mining winter and welcoming the mining spring! (Liu Aiying)
About CHINA MINING
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