Asia - Mining Sector Outlook
BMI View: Here we highlight some of the key trends that will shape the mining sector in Asia over the coming years. We expect mining sectors in South East Asian countries such as the Philippines and Indonesia to experience the highest growth rates in the region over the coming years. Meanwhile, China and India are restructuring their mining industries to ensure raw material supply security as the countries continue to embark on their development and infrastructure plans. Finally, Asian mining economies are gradually liberalising their mining laws in the hope of attracting foreign investment. This contrasts to the trend of increasing resource nationalism we have seen elsewhere in the world.
1. China Industry Consolidation To Face Near-Term Headwinds
We believe China's mining sector will undergo continual restructuring over the coming years, as part of the country's 12th Five-Year Plan (2011-2015). In a bid to curb overcapacity and reduce environmental pollution, the government plans to close smaller and less efficient mines, whilst mid-sized miners will be merged and production consolidated into giant vertically-integrated state-owned outfits.
That said, we believe efforts aimed at consolidating the industry will be met with limited success over the near term, as concerns over maintaining employment and fears of social unrest takes precedence especially during times of slowing economic growth. Government officials will be reluctant to implement massive cuts to capacity before or in the immediate aftermath of the once-in-a-decade leadership transition and will be politically motivated to prop up embattled domestic producers, at least in the near term. Indeed, regional governments have a strong incentive to support local production where possible in order to maintain employment and prestige. The reluctance of officials to follow through with consolidation plans is exemplified by the country's aluminium industry. At the end of 2011, an estimated 5.7 mntpa (million tonnes per annum) or almost one-third of total Chinese production capacity was unprofitable as full operating costs were at or above US$2,400/tonne. Despite this, aluminium production for 2011 still grew by 11% to reach 18mnt.
Beyond the near term headwinds we have mentioned, we do expect the mining industry to eventually consolidate. We believe that the consolidation effort will be generally successful over the long run given the government's dominant role in the mining sector. Our expectation for industrial metals prices to continue heading lower over the coming quarters will provide further economic impetus to the consolidation of China's metal industry. Over the longer term, we highlight that consolidation of the behemoth steel sector in China will be primarily driven by the deterioration in margins that has made production unprofitable at smaller, inefficient mills.
|Price Weakness To Expedite Consolidation Process…Eventually|
|Select Commodity Prices, Rebased|
2. Global Coal Trade Flows To Centre On Asia
G lobal coal trade flows will continue to move towards Asia in the coming years as the region remains heavily dependent on coal-powered electricity generation. While demand for coal will remain resilient and encourage production growth, a regional shortfall will require a greater proportion of global coal exports to be diverted towards Asia in the coming quarters. Although continued investment in renewable energy has been made, thermal coal will remain the principal fuel for electrification programmes across emerging Asia and this will underpin coal consumption growth. This contrasts with western markets such as the US and Europe, where a combination of slow economic growth, greater environmental regulations and cheap natural gas prices will see coal consumption remain fairly stagnant.
|A Cut Above The Rest|
|% Coal Contribution To Total Electricity Generation|
We expect Asia to remain heavily reliant on coal imports, with Japan, China and South Korea accounting for more than 46% of global coal imports in 2010. These countries will not only be relying on their own respective domestic mines for coal supply but increasingly towards coal import markets. Australia's Bureau of Resources and Energy Economics estimates that global thermal coal trade could reach 1.01bnt (billion tonnes) by 2016, an increase of 20.8% from the 836mnt seen in 2011. With reports that Japan is planning to shut down its nuclear power industry within 20 years, we believe the country will need to import more coal over the coming years. In China, we expect the country's demand for coal to continue its rapid rise and this will result in an uptick in coal imports.
3. Mining Legislation Remains Challenging
Despite an improvement in the Asian mining legislative environment, new laws will not necessarily drive significant investment due to ongoing uncertainty surrounding government policy. For instance, we are skeptical as to the positive impact on business environment that the 2011 Mines and Minerals Development and Regulation (MMDR) bill in India will have if passed. While the bill is seeking to enhance transparency and introduce better legislative environment, we believe any significant effort at improving the investment climate of India will be relatively muted, given dissenting and differing views among members of the state government. India's Chief Minister, Naveen Patnaik, has voiced his opposition against it, citing that the Bill is a violation to the federal structure of the constitution. The most salient issue in Asia is the significant regulatory overlap within respective countries' mining governance structures (inter-bureau and provincial versus national governments), which results in inconsistencies and inefficiencies in regulation.
|Source: Vlado Vivoda and Terry O' Callaghan from the University of South Australia, BMI updates|
|China||2012||Increased mining taxes on iron ore, tin, molybdenum, magnesium, talc and boron|
|2006||Ministry of Land and Resources (MOLAR) announced intention to create a more attractive investment environment.|
|2006||MOLAR issued a notice standardising procedures for the grant of exploration and mining rights.|
|2005||State council issued directive concerning standardising mineral regulation and development.|
|2004||Projects that do not require government financing and fall into the 'permitted' and 'encouraged' categories will be approved automatically.|
|2000||Issued the 'Opinion on Further Encouraging Foreign Business to Make Investment in Exploring and Exploiting Mineral Resources Other Than Oil and Gas'.|
|1993||Allowed foreign investment in prospecting and mining.|
|India||2011||The 2011 Mines and Minerals (Development and Regulation) Bill approved by cabinet.|
|2008||The government approved the new National Mineral Policy 2008.|
|2008||Government allowed 100% foreign direct investment (FDI) in mining and mining-related industries.|
|2006||Investment policy liberalised.|
|2000||New foreign investment guidelines issued, presenting new opportunities for mining investors.|
|1997||FDI policy in the mining sector further liberalised to incorporate 'automatic approval'.|
|1994||Legislative changes consequent to National Mineral Policy.|
|1993||National Mineral Policy revised: non-fuel and non-atomic minerals covered by the act.|
|Indonesia||2012||Foreign holders of mining business permits and special mining business permits to divest 20% of shares to Indonesian entities after five years of production. This will be gradually increase to 51% by the 10th year.|
|2009||The New Law on Mineral and Coal Mining passed, abolishing contract system in favour of a mining permit system and streamlines mining regulation.|
|2004||The president signed an ordinance to allow companies to resume operations in protected forests.|
|Philippines||2011||Presidentially appointed task force to draft a national mining policy aimed at addressing the issue of local ordinances overriding national pro-mining initiatives.|
|2007||Authority over the Philippines Mining Development Corporation transferred from Department of Environment and Natural Resources (DENR) to the Office of the President.|
|1999||DENR attempted to minimise the ability of local governments to withhold consent for mining projects by issuing an administrative order stating that only two of the three local governments need to give their consent to the project.|
|1995||The 1995 Mining Act allowed for FTAAs and MPSA.|
4. Strong Growth Ahead In South East Asia
South East Asia will be one of the main drivers of growth in the Asian mining sector in the long term. Aside from Indonesia, the Philippines and Vietnam show significant potential to be major mining economies, given the size of their respective estimated mineral reserves. We believe Vietnam has the ability to become a major aluminium player, given its vast bauxite wealth and the political initiatives to make this happen. In a bid to develop the country's nascent mining sector, the Vietnamese government has been actively embarking on reforms to further encourage and stimulate foreign direct investment. Beyond reserve size, several South East Asian governments have identified mining as an avenue for growth and responded by legislating key positive reforms in mining regulation.
|Potential Waiting To Be Unleashed|
|Bauxite Reserves (bnt)|
5. China State-Owned Companies To Maintain Dominance
State-owned mining companies will continue to play a dominant role in China's mining industry, given the country's initiative to close down smaller, inefficient mines and consolidate production into giant, vertically integrated state-owned outfits. The vast majority of China's mines are small, privately operated and relatively unsafe by international standards for both employees and the environment.
|An Outsized Role|
|China - State-Owned Enterprises Share Of Mining Industry (%)|