Boston, MA -- (ReleaseWire) -- 06/02/2014 -- The cooling of China's feverish growth is threatening to turn a decade-long mining boom into bust for many domestic miners. With cost containment being key in the face of falling commodity prices, Chinese miners will be forced to recalibrate their investment approach over the coming quarters. While state-owned mines are generally more insulated from the weakness in commodities prices, the Chinese government's gradual embrace of free market economics should pave the way for some much needed consolidation and restructuring in the mining industry.
We believe fortunes in China's mining industry will continue to fade over the coming years as the country's rebalancing process begins in earnest. Apart from mounting economic headwinds, Chinese miners will come under greater pressure from the government's push for industry consolidation. In a bid to curb overcapacity and reduce environmental pollution, the government plans to close smaller and less efficient mines, while mid-sized mines will be merged and production consolidated into giant, vertically integrated state-owned outfits. For instance, there is a national drive in the coal sector to create 14 giant 'coal-powerrail' hubs with each having a production capacity of at least 100mn tonnes per annum (mntpa). That said, the small production losses that will inevitably occur with the closure of smaller mines will give way to production gains down the road due to the efficiency gains of bigger, more integrated mining companies.
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The downshift in the Chinese economy is set to force a growing number of miners to scale back their ambitions as they struggle to maintain profit margins in the face of falling mineral prices. However, we expect miners operating in certain sectors to prove more resilient. For instance, lead mining will be less affected given its primary use in the production of lead-acid batteries. In contrast, other minerals such as iron ore and bauxite will experience weaker growth due to their heavy exposure to the construction sector.
We believe the iron ore and coal sectors will undergo continual restructuring over our forecast period. The consolidation of the iron ore industry will be driven by the current dynamics plaguing the steel sector. While concerns over maintaining employment will hinder efforts to rationalise production, our core view remains that the Chinese government will eventually throw in the towel and allow market economics to work its way. In our view, efforts aimed at consolidating the industry will be successful over the medium term given the government's dominant role in the mining sector. Mining activity in China is heavily regulated by the government, which is responsible for the implementation of regulations, issuance of exploration rights and provision of funding for projects. It is particularly hard for private owners of small companies to resist reforms that the government pushed for.
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