The official entry of China into the World Trade Organisation (WTO) this Tuesday marks the realisation of a 15-year ambition. The prospect of the gradual removal of tariffs has clear implications for the manufacturing sector, as China's low-cost labour gives the country a competitive advantage over the more economically-developed countries in the Asian region, just as many of them once enjoyed over Japan. There are already many stories of factories being disassembled in parts of Asia and re-erected in China in anticipation of the new economic realities.
Mineral resources cannot be moved, but the potential impact on the mining sector of China's accession to the WTO equally also depends on relative inherent competitive-ness. This has already been evident in a number of minerals/metals markets, and the inevitable liberalisation of trade barriers can only accentuate these effects.
China's first major advantage is cheap energy, based on its abundant supplies of thermal coal and hydroelectric power. Chinese thermal-coal production has been sufficient both to supply a growing domestic economy and to build significant export sales, mainly to other Asian countries. These exports have been a depressant on an otherwise booming thermal-coat market, and are acknowledged by Western thermal-coal exporters as the hardest part of the market balance to anticipate.
China is officially engaged in a drive to reduce the large number of very small coal mines, in order to curb local pollution and improve accident rates. Centralisation of coal mining goes hand-in-hand with centralisation of coal burning, preferably using efficient, low-pollution technology, and replacing individual coal fires in homes with electricity. This process could significantly reduce atmospheric pollution, which could start to address external concerns regarding China's contribution to "greenhouse gas" emissions.
China's competitive advantage in energy has also been apparent in its growing exports of refined metals such as aluminum and zinc. Indeed, Chinese exports of the latter metal have had a markedly negative effect on the market, wrong-footing more that one major mining company attracted to zinc's apparently good market fundamentals only a year ago.
The big opportunities for the mining industry stem from China's lack of certain minerals, or at least high-grade deposits, allied both to its competitive smelting/refining industry, for exporting refined metal, and to its booming domestic economy. Not only has that economy enjoyed outstanding growth rates, but the demand has been relatively intensive for raw materials, as it has included a high proportion of manufacturing, surely now set to grow, and infrastructure spending.
Chinese mineral imports include the replacement of low-grade Chinese iron ore in the country's steel mills with material from Western Australia and Brazil, Providing Western iron-ore producers with a welcome market as steel production turns down else-where. China's lak of bauxite/alumina has long provided a strong market for Western alumina. (It is perhaps significant that Rio Tinto's new alumina refinery in Queensland will make the group significantly net long of alumina from around the middle of this decade.) China has been quiet in the copper market in recent months, but continues to replace refined imports with domestically-smelted metal. However, the lack of suffi-cient mine production means that Chinese copper concentrates imports are forecast to grow. Platinum is another mineral resource not yet found in quantities in China, resulting in strong imports to feed growing jewellery demand.
China's other competitive disadvantage is in services. In mining, opportunities could include technology, commodity trading and hedging, and the provision of capital. The US aluminium glant Alcoa has for many years supplied alumina to Chalco, China's largest aluminium producer. Last month, the two companies signed a strategic alliance, including a joint expansion of Chalco's alumina-aluminium complex, technology transfer and a significant capital injection from Alcoa, in a deal that could well be the shape of things to come.
Source: Mining Journal, London, December 14, 2001.
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