China Mining Report Q4 2008 - companiesandmarkets.com adds new report

The poor safety record of Chinese mines was again brought into focus in September 2008, when a gas explosion killed 23 miners in Fuxin, in the north-eastern Liaoning province. China¡¯s coal mines remain the world¡¯s deadliest with a spate of mine collapses, fires and floods killing, on average, some 13 miners each day. However, as greater investment comes into the sector, it is hoped that safety standards will improve.

China¡¯s metals and mining production was impacted by the devastating earthquake of May 2008, which destroyed great swathes of the Sichuan province. State news agency Xinhua reported in early June 2008 that industrial and mining firms suffered some CNY206.53bn (US$29.5bn) in losses as a result of the earthquake.

The impact on mineral prices was mixed. Local reports suggested that coal prices remained relatively stable within the country following the earthquake, as Sichuan does not export much coal. The National Development and Reform Commission (NDRC) stated to the local media that the production capacity shut down due to the earthquake only accounted for some 0.2% of total Chinese output.

However, zinc prices were expected to rise more sharply, as the Sichuan province contained several zinc plants and accounts for some 10-15% of total Chinese zinc output. There were also reports that local aluminium prices would be affected, as the area produced in excess of 500,000 tonnes of aluminium last year, some 4% of the country¡¯s total.

The People¡¯s Republic of China (PRC) is a natural world leader in terms of both reserves and the production of several metals and minerals. It joined the WTO in 2001, and has since become an economic force to reckon with ¨C doubling its manufacturing output and in the process accumulating over US$1trn of foreign exchange reserves. Endowed with abundant mineral wealth, the country leads in the production of copper, coal and aluminium. Further, its 1200 gold mines position it fourth in terms of gold production worldwide ¨C a metal of which it is also the world¡¯s third-largest consumer.

The national government is taking active steps to make the mining industry more competitive. Although it is a communist state, China introduced market reforms in the 1980s and today only about a third of the economy is directly state-controlled. The government is encouraging mergers and acquisitions (M&As) as a means of ensuring optimal use of mineral resources, and barriers to foreign investment are gradually being done away with. By the end of 2008, the government also plans to put in place mining reforms to restrict the exploitation of a mine¡¯s resources by multiple companies, thereby helping to pre-empt accidents, pollution and inefficiencies that result from more than one company exploiting the same mining area.

However, China¡¯s mining industry possesses its share of downsides. Primary among these is the scourge of illegal mining that has resulted in a high accident rate in the country. To tackle this issue, a US$14.42mn project has been launched by the UN to educate and train coal miners in five Chinese provinces, while the government is looking at revamping the country¡¯s mining policies and regulations.

The country is also planning to reassess the value of its deposits of as many as 25 metals and minerals ¨C including uranium and coal. Mine safety is also high on the agenda of the authorities and it has been reported that by mid-2008 the government plans to close down around 23,000 small coal mines, which have proved to be extremely dangerous in the past.

Industry Forecast BMI forecasts an average industry growth rate of around 10.1% over the 2008-2012 period. The value of the Chinese mining industry is forecast to reach US$630bn in 2012, accounting for a significant portion of total GDP. Although the earthquake of May 2008 in Sichuan may well have a negative impact on the short-term performance of the industry, we believe the country will prove capable of bouncing back from this setback and make up any lost ground over the totality of the forecast period. To that end, we will not be making any kneejerk reactions to our forecast figures in this quarterly update, although we will examine H108 figures carefully when they are released to see whether any revisions prove necessary.

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