Commodities rout and unfriendly regulations further thin foreign interest in China’s mining sector

Overseas investment drops to 11-year low as prolonged industry slump sees abundance of quality projects come on the global market

PUBLISHED : Sunday, 08 November, 2015, 10:53pm
UPDATED : Sunday, 08 November, 2015, 10:52pm

Foreign investment in China’s mining sector has slumped to the lowest in more than a decade amid the downturn in the commodities industry, which dampened the already low levels of inbound investment over the years due to the sector’s unfriendly regulatory environment.

A relative abundance of distressed quality assets overseas amid the global commodities market rout also means foreign firms are unlikely to make significant investment in China soon, industry observers say.

“With the prolonged downturn in commodities, assets are being forced on to the market at prices that are reflective of the urgency which sellers must act,” John Tivey, the global head of mining and metals at law firm White & Case, told the South China Morning Post. “Given these rare opportunities to secure quality assets in investor-friendly jurisdictions, it’s unlikely international firms will look to China now to invest.

“I can’t see why they would go to China to invest while they can secure quality assets in jurisdictions with a long track record of successful foreign investment in the commodities sector.”

Even before the commodities rout that began more than two years ago, outbound investment by Chinese firms had dwarfed foreign inbound investment in China.

Foreign direct investment in China’s mining industry, covering metals and oil and gas, amounted to about US$300 million last year, the latest official figures show.

It is the lowest in at least 11 years after peaking at just under US$800 million in 2012, according to data from the National Bureau of Statistics and Ministry of Commerce cited by commodities consultancy CRU in a report.

In contrast, outbound acquisitions in this year’s first nine months in mining and oil and gas sectors together amounted to US$6.6 billion, down from US$11.9 billion a year earlier, according to capital markets data provider Dealogic.

Ken Su, the China mining and metals leader at PwC, said inbound investment into China had long been more restrictive than most other major mining nations, largely because domestic firms had sufficient financial and technical resources for development.

“Nations in Africa, South America, Central Asia and Russia – some of which are not always seen as particularly business-friendly – are more open than China to foreign investment in mining, as the projects or companies there could be more in need of investment,” Su said.

According to the latest edition of the Ministry of Commerce’s catalogue of sectors for foreign investment, Beijing encourages investment that can bring advance technology to enhance the yield of oil and gas projects, but the foreign investor must partner with a Chinese firm and bear the exploration risk alone.

It also welcomes the exploration and mining of potassium salt and chromium iron in which domestic supply cannot meet demand.

But foreign participation in the extraction of gold, silver, platinum, lithium and graphite and certain types of coal is restricted, while that of tungsten, molybdenum, tin, antimony, fluorite, rare earths and uranium is banned. China is the world’s largest producer of gold, coal and rare earth minerals.

While foreign investment in China’s difficult and expensive-to-extract resources like deep sea oil and gas, as well as gas trapped in coal seams and shale rocks are encouraged, low prevailing energy prices had made it difficult to justify and finance such high-risk and capital-intensive projects, Su said.

After Beijing opened the mining sector to foreign participation in 2000, a boom saw the emergence of more than 200 foreign-funded projects by 2005, according to Lisa Li, a partner at KPMG China.

It was a time when many international mining majors sought to set up an exploration and production presence in China when its resource demand seemed insatiable.

Only a handful of junior mining companies currently had any exploration and mining presence in the country, and this number was diminishing, CRU said.

They include CRTX, a copper exploration joint venture between state-owned aluminium and copper major Chinalco and global mining giant Rio Tinto, Canadian-based Eldorado Gold, which has several gold projects in various provinces, and London-based Griffin Mining, which is producing several metals in Hebei province.

“Although the government has been trying to implement policy changes to attract foreign companies, inbound investments in the mining sector are still minimal ... Chinese companies seem to be content with the current technology, capital and management techniques they have in place, therefore they are less incentivised to look for [Sino-foreign cooperation and] investments,” Li said.

Besides outright barriers to entry, according to a survey and in-depth interviews conducted by CRU on behalf of Beijing’s Global Mining Association of China, 19 per cent of about 40 respondents cited bureaucracy, conflicting laws and insufficient transparency as obstacles to investing in the country. The respondents were Chinese and overseas mining stakeholders.

About 14 per cent said licensing and project approval issues were an obstacle, while 12 per cent considered arbitrary regulatory decisions and unnecessary rules a barrier, and 7 per cent cited poor quality and accessibility of geological database and requirements to use local mining suppliers.

The CRU report said it was common for one department to make a decision, such as issuing a mining permit, only for another to declare it invalid.

“Many of these obstacles … are relevant to both overseas and domestic mining companies,” it said. “However, there was a clear message from many respondents that domestic mining companies found it much easier to navigate the ‘Chinese system’ than did foreign companies.”

CRU said while Chinese regulators had been learning fast, the country was relatively new in developing its mining regulatory regime, which was being changed from “political-based laws” to “a more independent rule of law”.

Foreign firms used to more transparent regulatory regimes could find it frustrating to meet Chinese requirements.

“In some cases, when a project is acquired by a foreign firm, it would take a long time to get the projects to fully comply with regulations, if the previous owner is a domestic firm that has been operating without all the proper permits and licences, or only informal consent from certain regulators,” Su said.