The global mining index continues its upward trend, and the vitality of the mining sector keeps being unleashed.

　　In 2017, the global economy was emerging from a period of moderate and slow growth, breaking the “three lows” pattern of low growth, low inflation, and low interest rates. The U.S. economy showed quarter-on-quarter improvement in its recovery, European economic growth exceeded expectations, Japan’s economy experienced a modest rebound, and growth among emerging economies began to diverge. The IMF forecasts that global GDP will grow by 3.6% in 2017 and 3.7% in 2018. China’s economic structure is undergoing continuous adjustment and optimization, presenting a favorable situation of steady progress amid stability and improving prospects, with development momentum shifting in an orderly manner. From the perspective of China’s mining sector, the recovery trend continues to consolidate, various mineral product price indices have been fluctuating upward, and mining profitability has significantly improved. Investment in oil and gas extraction has grown markedly, metal mineral production has been predominantly on the rise, and non-metallic mineral production has continued to expand. The trade index for mineral products has shown volatile but generally rising trends, with overall imports of major mineral products remaining on an upward trajectory. On the other hand, investment impetus in the mining market as a whole remains insufficient, and the structural adjustment and transformation of the mining industry still require further upgrading. Based on our ongoing monitoring, analysis, and comprehensive research, we present the following assessment of the mineral resource situation for 2017:

　　From a global perspective, first, the global mining index as a whole has emerged from its slump and is now entering a phase of gradual, staged recovery. As the global economy slowly recovers, demand for mineral resources is picking up, and mineral prices are entering an upward trajectory. The global mining sector began showing signs of recovery in 2016, and this recovery trend continued into 2017. According to the Pipeline Activity Index (PAI) compiled by SNL Metals and Mining Consulting, the average value in 2016 was around 70 points, while the average index value in 2017 had already reached 80 points. Overall, from 2016 to 2017, the PAI index exhibited a wave-like upward trend.

　　Second, global drilling activities are gradually becoming more active, and mineral exploration budgets are stabilizing and rebounding. According to the latest report released by S&P, global drilling activities showed a steadily increasing trend in 2017, with gold drilling activities experiencing particularly significant growth. In 2017, global solid mineral exploration budgets hit bottom and then began to recover—a first increase since 2012—rising by 14% from 2016 to reach US$7.95 billion.

　　China’s mineral product price index has been fluctuating and rising, with significant improvements in the profitability of the mining industry.

　　From China’s perspective, first, the price index for mineral products has been fluctuating and rising steadily. According to a price index study conducted by the Institute of Land and Resources Economics under the Ministry of Natural Resources of China, after hitting bottom at the end of 2015, prices of major mineral products have entered a new phase of sustained rebound and rise. As a result, confidence in the mining market has gradually recovered, market vitality has continued to strengthen, and momentum for the recovery of the mining sector is building. In 2017, the price indices for major mineral products initially declined before rebounding, showing an overall upward trend. In November, China’s non-energy mineral product price index, energy mineral product price index, and major mineral product price index stood at 79.8, 72.4, and 73.4, respectively, representing year-on-year increases of 5.4%, 5.2%, and 5.2%, and month-on-month increases of -0.5%, 0.8%, and 0.7%, respectively.

　　Second, profits in the mining industry have increased significantly, and the economic performance of the mining sector has markedly improved. The overall recovery in prices of major mineral products has led to a substantial year-on-year increase in total mining profits. From January to October 2017, the nation’s total mining industry profits reached 411.16 billion yuan, an increase of 297.36 billion yuan over the same period last year (when profits were 113.8 billion yuan), representing a year-on-year growth rate of 261.3%. Among these, the coal mining and washing industry recorded total profits of 250.63 billion yuan, up 193.32 billion yuan from the previous year (when profits were 57.31 billion yuan), a growth rate of 2.4 times; the oil and gas extraction industry posted total profits of 40.65 billion yuan, up 78.42 billion yuan from the previous year (when it had a loss of 37.77 billion yuan); the ferrous metal mining and beneficiation industry and the non-ferrous metal mining and beneficiation industry reported profits of 37.24 billion yuan and 51.42 billion yuan, respectively, representing year-on-year growth rates of 17.3% and 40.3%; and the non-metallic mineral mining and beneficiation industry achieved total profits of 30.34 billion yuan, roughly flat compared with the same period last year.

　　The recovery in prices has led to a significant improvement in industry profitability. First, as oil prices rebounded, the operating performance of China’s “Big Three” oil companies saw a substantial increase in the first three quarters of 2017. Specifically, PetroChina reported a net profit of 17.37 billion yuan, up 9.1 times year-on-year; Sinopec achieved a net profit of 38.37 billion yuan, representing a 31.6% increase over the previous year; and CNOOC generated operating revenue of 116.07 billion yuan, up 29.5% year-on-year. Second, international coal prices have rebounded rapidly since July last year. From January to October 2017, the total profits of large-scale coal enterprises nationwide reached 250.63 billion yuan, an increase of 6.3 times compared to the same period last year. Third, the average price of Platts’ 62% iron ore from January to December was $71.2 per ton, up 23.7% year-on-year. Large-scale mining enterprises recorded profits of 37.24 billion yuan from January to October, representing a 56.4% increase over the same period last year. Fourth, prices of non-ferrous metal products have remained volatile at high levels, yet profitability continues to improve. From January to June, 8,264 large-scale non-ferrous metal industrial enterprises nationwide (excluding independent gold enterprises) generated profits totaling 197.59 billion yuan, up 49.2% year-on-year. Fifth, the non-metallic mineral industry has seen a substantial increase in profits, with total profits reaching 24.13 billion yuan from January to October, up 7.9% over the same period last year.

　　Third, although overall investment momentum in the mining market remains insufficient, investment in the oil and gas extraction industry has seen a significant increase. Despite a substantial rebound in mining industry profits, market confidence in investment has not yet been fully restored. From January to November 2017, the nationwide fixed-asset investment in the mining industry totaled 822.3 billion yuan, a year-on-year decrease of 10.2%. Among these, investments in coal mining and washing, oil and natural gas extraction, ferrous metal mining and beneficiation, non-ferrous metal mining and beneficiation, and non-metallic mineral mining and beneficiation amounted to 243.5 billion yuan, 216.0 billion yuan, 69.6 billion yuan, 104.3 billion yuan, and 162.3 billion yuan, respectively—representing year-on-year changes of -11.3%, 15.8%, -23%, -22.4%, and -15.8%. In November 2017, nationwide mining industry investment reached 78.3 billion yuan, up 4.7% month-on-month. Specifically, investments in coal mining and washing, oil and natural gas extraction, ferrous metal mining and beneficiation, non-ferrous metal mining and beneficiation, and non-metallic mineral mining and beneficiation were 21.6 billion yuan, 25.3 billion yuan, 4.7 billion yuan, 8.7 billion yuan, and 14.4 billion yuan, respectively—showing month-on-month increases of 4.3%, 40.6%, -32.9%, -8.4%, and -13.3%.

　　It is particularly important to note that confidence in fixed-asset investment in the private mining sector remains insufficient, and the willingness to establish mining operations remains weak. From January to November 2017, private-sector investment in the mining industry totaled 455.8 billion yuan, a year-on-year decrease of 19.3%. Specifically, investments in coal mining and washing, oil and gas extraction, ferrous metal mining and beneficiation, nonferrous metal mining and beneficiation, and nonmetallic mineral mining and beneficiation amounted to 135.6 billion yuan, 18 billion yuan, 51.4 billion yuan, 79.5 billion yuan, and 152.9 billion yuan, respectively, representing year-on-year declines of 19%, 19.4%, 27.4%, 18.4%, and 15.8%. In November 2017, private-sector investment in the mining industry reached 42.5 billion yuan, a month-on-month decrease of 1.2%. Among these, investments in coal mining and washing, oil and gas extraction, ferrous metal mining and beneficiation, nonferrous metal mining and beneficiation, and nonmetallic mineral mining and beneficiation were 14.1 billion yuan, 1.5 billion yuan, 3.9 billion yuan, 6.5 billion yuan, and 14.2 billion yuan, respectively—showing month-on-month increases of 24.8%, decreases of 31.8%, decreases of 30.4%, decreases of 4.4%, and decreases of 6.6%, respectively.

　　The mining industry index has shown fluctuating upward trends, and the recovery trend is generally stable.

　　First, China’s mining market remains in a plateau period characterized by structural adjustments yet showing a stable and improving trend. According to the China Mining Industry Index released by the China Institute of Land and Resources Economics, in November 2017, the coal industry index stood at 123.3, up 1.1% year-on-year and 0.4% month-on-month; the non-ferrous metals industry index reached 181.9, increasing 2.9% year-on-year and 0.3% month-on-month; the ferrous metals industry index was 140.5, rising 1.4% year-on-year and 0.4% month-on-month; and the oil and gas industry index came in at 117.4, up 1% year-on-year and 0.1% month-on-month.

　　Since 2017, from a macroeconomic perspective, industrial production across the country has accelerated its pace of development, with structural optimization and improved efficiency. Supply-side reforms—focused on “three reductions, one deleveraging, and one补”—have been smoothly advanced. Taking the first three quarters as an example, the value-added of industrial enterprises above designated size nationwide grew by 6.7% year-on-year in real terms, an acceleration of 0.7 percentage points compared to the same period last year. China’s mining market has shown a steady and positive trend, and the mining industry continues to be in a phase of structural adjustment and upgrading. Correspondingly, the China Mining Index has generally maintained a moderate upward trajectory without experiencing significant fluctuations. In November, the overall trend of the China Mining Index was upward, with both year-on-year and month-on-month growth rates posting positive values. The indices for the coal industry, non-ferrous metals industry, oil and gas industry, and ferrous metals industry all recorded slight positive year-on-year and month-on-month growth, and their trends were better than those of the previous month. Overall, China’s mining market remains in a platform period characterized by structural adjustment yet showing a stable and positive trend, and this trend is expected to continue.

　　Second, crude oil production declined, while natural gas and coal production increased. The output of metallic mineral products remained predominantly on an upward trend, and non-metallic mineral product output continued to grow steadily. First, crude oil production decreased, whereas natural gas and coal production saw some growth. From January to November 2017, the nation’s output of conventional natural gas, raw coal, and crude oil totaled 133.8 billion cubic meters, 3.14 billion tons, and 176 million tons, respectively, representing year-on-year increases of 9.1%, 3.7%, and -4.1%. It is projected that in 2017, the nation’s crude oil production will reach 195 million tons, natural gas production will amount to 145 billion cubic meters, and shale gas production will be approximately 9.3 billion cubic meters. Second, the output of metallic mineral products was primarily characterized by growth. From January to October 2017, the nation’s output of ten major nonferrous metals reached 45.217 million tons, up 3.4% year-on-year—a growth rate that narrowed by 0.7 percentage points compared to the period from January to September. The output of copper concentrate, lead concentrate, zinc concentrate, nickel concentrate, tin concentrate, and antimony concentrate were 1.42 million tons, 1.53 million tons, 3.19 million tons, 78,000 tons, 77,000 tons, and 84,000 tons, respectively, representing year-on-year increases of 4.5%, 9.6%, -4%, 3.7%, -0.2%, and 0.5%. From January to October, large-scale mines produced 1.082 billion tons of raw iron ore, up 6% year-on-year. Third, non-metallic mineral production continued to expand. From January to November this year, the output of flake graphite, a key non-metallic mineral, reached 600,000 tons, up 10% year-on-year; talc production stood at 1.7 million tons, remaining stable; fluorite production reached 3.8 million tons, up 18% year-on-year; and kaolin production totaled 4.6 million tons, up 5% year-on-year. Given the impact of rising mineral prices throughout 2017, it is now certain that non-metallic mineral product output will continue to grow.

　　Third, the mining products trade index has shown a volatile rebound, with imports of major mineral commodities on the rise. According to research findings from the Institute of Land and Resources Economics under the China National Administration of Natural Resources, which monitors and tracks the mining products trade index: In March of this year, the index surged to its highest level since 2015 before beginning to decline. From August to September, the index showed an upward trend, though this momentum did not last long. In October, the index fell again, but remained higher than its level in July of this year. The increase in imports of bulk mineral commodities has helped boost the mining products trade index. As of October 2017, China’s imports of coal, crude oil, liquefied natural gas, and iron ore totaled 230 million tons, 350 million tons, 29.09 million tons, and 900 million tons, respectively, representing year-on-year growth rates of 12.1%, 11.8%, 47.8%, and 6.3%. It is expected that in the near to medium term, the mining products trade index will continue to rebound, with coal imports increasing, crude oil imports continuing to grow, liquefied natural gas imports experiencing rapid growth, and iron ore imports posting modest growth.

　　In the fourth quarter, China's mining rights activity index declined significantly, but there is a possibility of another rebound in 2018.

　　The monitoring and analysis results of the Mining Rights Activity Index released by the China Institute for Land and Resources Economics show that, since reaching its peak in the fourth quarter of 2013, the index has generally been on a volatile downward trend. In the second and third quarters of 2017, the exploration rights activity index rebounded, and the mining rights activity index also saw a rebound in the third quarter; however, both the exploration rights and mining rights activity indices experienced a significant decline in the fourth quarter. The main reasons for this are: the central government’s continued strengthening of environmental protection inspections, the ongoing cleanup and withdrawal of mining rights from nature reserves, and the incomplete implementation of supporting policies following the introduction of new regulations on revenues from the transfer of mining rights—leading some provinces to temporarily suspend the transfer of mining rights. As the mining market stabilizes and recovers and as the management system for mining rights continues to improve, it is expected that China’s mining rights activity index will rebound again in 2018. However, against the backdrop of prioritizing ecological conservation and promoting economic transformation and upgrading, China’s mining rights activity index is likely to remain at a relatively low level overall.

　　In the fourth quarter of 2017, the number of mining rights competitively auctioned in the national market significantly declined. From October to November, only six exploration rights were competitively auctioned (including four geothermal rights and one each for copper and lead), representing just 3.6% of the number auctioned from July to August. The total contract value for these exploration rights was 3.49 million yuan, or merely 0.25% of the contract value auctioned from July to August. From July to August, a total of 12 exploration rights were transferred, a decrease of 62.5% compared to the July-August period. The total contract value for these transfers reached 240 million yuan, an increase of 38.7% over the July-August period. The primary minerals involved in these transfers were gold and lead. From October to November, 54 mining rights were competitively auctioned, a reduction of 62.8% compared to the July-August period. The total contract value for these auctions was 103 million yuan, or only 3.3% of the July-August figure. The main minerals auctioned were construction sand, gravel, and clay. A total of 67 mining rights were transferred from October to November, a decrease of 47.2% compared to the July-August period. The total contract value for these transfers reached 1.027 billion yuan, an increase of 42.4% over the July-August period. The primary minerals involved in these transfers were limestone for construction aggregates, coal, basalt for construction, and limestone for cement production.

　　Reflections and Recommendations: Deepen the transformation and upgrading of the mining industry and promote ecological civilization.

　　In 2017, the State Council and relevant ministries and commissions issued a series of documents and introduced related policies and measures aimed at key tasks such as consolidating the foundation for the recovery of the mining industry, deepening supply-side structural reform, and promoting ecological civilization. Among these, preliminary statistics show that 148 measures pertain to the management of mineral resources. While these measures primarily focus on serving medium- and long-term resource management, given the current situation—characterized by insufficient momentum for sustained and stable growth in the mining sector, challenges in advancing ecological civilization, and ongoing difficulties in supply-side structural reform—it is imperative to develop a new conceptual framework for resource ecology, a new approach to spatial governance, a new vision of resource security, a new paradigm for resource utilization, a new global perspective on resources, and a new set of resource values. This will enable us to deepen the transformation and upgrading of the mining industry and accelerate the advancement of ecological civilization. Recommendations:

　　First, we must accelerate the adjustment of the industrial structure and promote transformation and upgrading, striving to enhance both the quality and efficiency of domestic mine development. First, we need to speed up the elimination of outdated production capacity and improve supply quality. We must earnestly implement the "National Mineral Resources Plan (2016–2020)," resolutely shutting down “scattered, small, chaotic, and polluting” mines that lack safety guarantees, fail to meet environmental standards, or have low resource utilization levels, and completely withdrawing mines located within various nature reserves. Second, we should advance the construction of resource bases and enhance competitiveness. We will select a group of large-scale mines with reliable resource reserves, substantial production scales, and clear comparative advantages—mines that can significantly impact stable production capacity, industrial upgrading, and profit growth—thus strengthening the capabilities of major enterprises and boosting the overall competitiveness of domestically produced minerals. Third, we must promote the development of green mines and raise the level of green development.

　　Second, leveraging the Belt and Road Initiative to create new growth drivers for metal demand. First, we should implement a strategic approach of shifting low-end production capacity overseas while strengthening high-end capabilities. Drawing on the U.S. and Japanese strategies of "reducing capacity without declining," the metals industry can, through international cooperation in production capacity, on the one hand, transfer China's surplus mid- and low-end capacity abroad to address overcapacity issues; on the other hand, by collaborating to learn from and adopt advanced technologies from other countries, we can focus on developing and enhancing high-end production capacity, thereby boosting the international competitiveness of the metals industry. Second, we should vigorously encourage the participation of private capital. We need to strengthen top-level design, systematically guide private enterprises to engage in international capacity cooperation, intensify policy guidance and support, enhance information services and talent development, and adopt a variety of channels to comprehensively address the financing challenges faced by private enterprises in international capacity cooperation, thus boosting their enthusiasm and competitiveness in participating in such cooperation. Third, we should innovate investment models. Given the long cycles, large investments, and high risks associated with mining investments, the outward investment models for the metals resource industry should be innovatively designed to reflect the unique characteristics of the mining sector—for example, by participating in risk exploration, acquiring property rights, undertaking mergers and acquisitions, or taking equity stakes and underwriting shares.

　　Third, we must deepen reform of the mining sector’s institutional framework to enhance its resilience in the face of cyclical fluctuations. First, we should accelerate the reform of state-owned mining enterprises, shifting their focus from merely pursuing revenue growth to enhancing profitability. We should speed up the separation of social functions previously handled by enterprises and ensure smooth re-employment and social security arrangements for affected workers. Second, we need to refine China’s tax and fee policies for the mining industry, further promoting the value-based assessment of resource taxes, abolishing or reducing earlier-stage tax and fee rates, and establishing a Mining Stability Adjustment Fund to smooth out profit fluctuations across mining cycles. Third, we must provide policy support and necessary financial assistance to enterprises that are slated to exit the market, helping mining companies properly handle employee placement, re-employment, and social security matters.

Source: Mineral Resources Situation Analysis Group, China Institute of Land and Resources Economics 2018-01-17