Abstract: The global financial crisis that began in 2008 quickly spread to the real economy, affecting energy and raw-material industries. The oil, steel, and nonferrous metals sectors subsequently entered a period of recession. The international mining industry has shifted from an upward cycle since 2002 to a downward one. With insufficient demand for energy and mineral products—except for precious metals—the markets have slumped, and prices have fallen. Since China joined the World Trade Organization in 2001, it has been importing large quantities of foreign energy and mineral resources. Some of these resources are refined and processed domestically before being re-exported overseas, thus forming an export-oriented mining economic model with both ends of the production chain located abroad. As a result, China has also reached the end of its rapid growth phase and entered a period of adjustment. To address this situation, China should: ① limit production and stabilize prices by reducing the output of various minerals in mining, beneficiation, and smelting processes; ② consolidate related mining enterprises and smelters; ③ selectively acquire overseas mineral resources and mineral products that China currently lacks; ④ establish a new order for mineral exploration and development in China.
Keywords: International Financial Crisis, Mining Industry Situation, Countermeasures
1. Demand for mineral products in the international market is insufficient, the market is sluggish, and prices are falling.
In the summer of 2007, the United States experienced a subprime mortgage crisis, which by September 2008 triggered a global financial crisis that quickly spilled over into the real economy. The global real estate and automotive manufacturing sectors entered a downturn, followed closely by the energy and raw materials industries—including oil, steel, and nonferrous metals—all of which subsequently fell into recession. After entering a new upward cycle in 2002, the international mining industry saw prices for various mineral products reach their peak over the past three years. Since then, energy and mineral products (with the exception of gold) have successively entered a period marked by insufficient demand, oversupply, market downturn, and falling prices.
After reaching a peak of $140 per barrel in July–August 2008, international oil prices fell below $40 per barrel starting in October. From 1997 to 2007, international coal prices rose by more than 50% over the decade; however, starting from July 2008, coal prices began to decline, falling by about 35% within half a year. Over the decade, gold prices surged by 400%, reaching a peak of $1,002.8 per ounce and dipping as low as $252.8 per ounce. Gold prices started to decline in 2007, yet in October 2008, they remained around $800 per ounce.
During the previous economic cycle—from 2002 to 2007—global production of copper, aluminum, lead, zinc, and nickel increased by 19%, 46%, 22.2%, 15.8%, and 20.3%, respectively. Consumption growth was roughly in line with or slightly exceeded production growth. Subsequently, affected by the U.S. financial crisis, prices of nonferrous metals in both domestic and international markets began to enter a downward cycle. It is estimated that in 2008, the pace of production growth slowed across the board; nickel production even declined by 6.4%. Consumption growth also decelerated significantly, with lead and nickel consumption trending downward. Meanwhile, global consumption of copper and aluminum continued to maintain a certain growth rate (Table 1).
The cyclical peak prices of copper and aluminum in the international market occurred in July 2008, reaching US$8,940 per ton and US$3,381 per ton, respectively. The peak prices of lead and zinc were recorded in October 2007 and November 2006, at US$3,890 per ton and US$4,580 per ton, respectively. On December 18, 2008, the spot price of zinc on the London Metal Exchange (LME) fell to US$1,080 per ton, a drop of 76% from its recent peak. The price of lead fell to US$976.75 per ton, representing a decline of more than 70% from its historical high.
Nickel and tin prices also declined following the bursting of the metal bull market bubble from the previous year. By mid-2008, international nickel prices had plummeted from an astonishing $51,750 per ton to just $8,850 per ton, while tin prices fell from $25,525 per ton to $10,700 per ton. It is estimated that in 2008, global nickel supply exceeded demand by 67,000 tons, and with weak demand, the oversupply situation is expected to intensify in 2009, potentially leading to further price declines.
Currently, the global market is experiencing an oversupply of energy and mineral products, plunging the mining economy into a downturn that is expected to last for 3 to 5 years.
II. China’s mining industry has ended its period of rapid growth and entered a phase of adjustment.
Since joining the World Trade Organization in 2001, China has significantly increased its imports of foreign energy and mineral resources. Some of these resources are refined and processed domestically before being re-exported overseas, thus creating an export-oriented economic model with both ends of the production chain located abroad. Many sectors have become deeply integrated into the global economy and have entered the global economic cycle, making it difficult for China to escape the downturn plaguing the global mining industry. Consequently, China’s rapid growth phase has come to an end, and the country has entered a period of adjustment—precisely because China’s market economy remains underdeveloped and imperfect. As a result, many aspects of its mining economy are, to varying degrees, influenced by domestic micro-environments and policies, causing the mining economic cycle to either lag behind or diverge from that of the international market.
1. Steel: Large-scale imports and exports, particularly affected by the global financial crisis.
In recent years, China’s imports of iron ore have increased significantly year by year. From 2002 to 2007, the average annual growth rate of iron ore imports reached as high as 30%. In 2007, import volume climbed to 383 million tons, accounting for roughly 50% of China’s total iron ore consumption. Starting from 2006, China has become a net exporter of steel, with export volumes rising rapidly. In 2007, the proportion of net steel exports relative to total production surged from 5.2% in the previous year to 8.1%, and net exports reached 45.78 million tons.
In 2008, due to the financial crisis, steel mills generally reduced production, and steel exports declined. From January to October, China’s total steel exports amounted to 53.12 million tons, a year-on-year decrease of 1.2%. Meanwhile, in the fourth quarter of 2008 and the first quarter of 2009, orders for steel product exports plummeted significantly, and it is expected that future export volumes will continue to decline further.
It is expected that domestic steel consumption will also decline slightly in the future. While steel consumption for highways, railways, power equipment, and pipeline construction will remain stable as China’s 4 trillion yuan investment is implemented, demand for steel in sectors such as real estate, machinery, automobiles, home appliances, and hardware materials will decline significantly. In the coming years, China’s steel products as a whole will likely face a situation of oversupply and excess capacity, with output estimated to decrease by 5% to 10%.
2. Coal: Affected by steel and power industries, supply exceeds demand, leading to falling prices.
China’s coal consumption is primarily driven by domestic demand. From 2000 to 2007, coal production doubled, with an average annual growth rate of 9.95%. At the beginning of 2008, freezing rain and snowstorms in southern China led to a sharp increase in coal demand during the first half of the year, resulting in tight supply and rapidly rising prices—a situation that persisted until July. However, starting from August 2008, affected by the global financial crisis and the downturn in China’s economic cycle, demand in key coal-consuming sectors plummeted (particularly for thermal coal and coking coal used in power generation and steel production). As a result, coal supply became excessive, prices fell, inventories piled up, and by December, coal production turned negative.
From December 2008 to January 2009, due to declining demand, some coal-producing enterprises suspended or reduced production, helping to bring China’s coal supply into balance and causing prices to rise slightly. In 2008, coal inventories in Qinhuangdao reached a peak of 10 million tons, then fell to 5 million tons before the Spring Festival, and have now risen slightly to 6 million tons. At the beginning of 2008, electricity coal inventories were as low as just 7 to 8 days’ worth; currently, they have recovered to a more normal level of over 20 days’ worth.
Due to declining demand and increased production capacity (from 2008 to 2010, China’s net coal production capacity increased by 480 million tons), in the coming years, domestic coal market prices will mainly follow a rational trend of adjustment from high levels. Coal-producing enterprises will need to limit production and stabilize prices; it is estimated that coal output should be reduced by 20% to 30%.
3. Silver: With exports declining, the production of both associated and recycled silver should be appropriately reduced.
In 2007, China's silver production reached as high as 90,915.8 tons, representing a year-on-year increase of 10.18%. Silver production in China comprises four main components: silver extracted from independent silver mines, silver co-produced with lead, zinc, copper, and gold ores, silver refined from imported silver ores, and recycled silver. In recent years, imports of silver ores and recycled silver have grown significantly. According to customs statistics, China imported 188,700 tons of silver concentrates, 979 tons of silver powder, and 4,241 tons of semi-finished silver products. Meanwhile, domestic silver ore production totaled only 4,185,100 tons. It is estimated that between 35% and 45% of China's total silver output comes from recycled silver recovered from scrap materials and waste products. For instance, the city of Chenzhou in Hunan Province alone produced 2,699.6 tons of recycled silver; among them, Yongxing County is the country's largest producer of recycled silver, with its output reaching 1,980 tons in 2007. Xianju County in Zhejiang Province ranks second nationwide in recycled silver production, recovering and producing over 800 tons of silver and silver-based products annually. Together, these two regions account for 3,499.6 tons of recycled silver, or 34.19% of the nation's total output. Adding to this the output from enterprises in Jiangxi, Yunnan, and other regions, it is estimated that China's recycled silver production exceeds 45%. In 2007, China exported 46,825.9 tons of silver ore and concentrates, as well as 8,689.4 tons of silver jewelry, utensils, and their components. Domestic consumption accounted for less than 40% of total production, with the majority of silver output being destined for export. After declining for three consecutive years starting from 1998, silver prices began to rise in 2002. In 2006 and 2007, the average price per ounce reached $11.55 and $13.32 respectively, and by January 2008, silver prices had surpassed $15 per ounce. The primary driver behind the rise in silver prices is investment demand. As stock and real estate prices declined, substantial investments shifted toward gold and silver, which offer certain value-preservation benefits. In 2006, industrial demand for silver increased by 5.07%, while overall supply fell by 1.5%, further fueling the price hike. Additionally, the rise in gold prices has also been a key factor driving the increase in silver prices.
In recent years, China has been consuming only half of its own silver production, relying heavily on export markets. However, in 2008, imports increased by 10% year-on-year, while exports declined by 14% year-on-year. Given the pessimistic outlook for exports, it would be advisable to reduce production appropriately—especially the output of silver recovered from scrap materials. This approach could also help cut down on waste emissions and environmental pollution.
4. Copper, aluminum, lead, zinc, tin, and nickel: Prices have declined across the board.
Since mid-September 2008, influenced by the sharp decline in prices of major nonferrous metals on the international market, prices of key nonferrous metals such as copper and aluminum in the Chinese market have also fallen significantly, resulting in an oversupply. By mid-October 2008, the price of copper in the Chinese market had dropped to 45,720 yuan per ton, a decrease of 17.2% from September 10; the price of aluminum stood at 14,530 yuan per ton, down 7.4% from September 10; and the price of nickel had fallen to 120,000 yuan per ton, a drop of 20% from September 10.
Copper is a mineral resource that China lacks in sufficient supply and relies heavily on imports. In 2007, refined copper consumption reached 4.86 million tons, accounting for approximately 27.1% of global consumption. Domestic production stood at around 1 million tons, with the remainder entirely dependent on imports, resulting in an external dependence rate approaching 80%. The sharp drop in global copper prices is favorable for China's imports, but it will also drive down domestic prices.
China holds a significant position in global aluminum production. In 2007, its primary aluminum output reached 12.56 million tons, accounting for 33% of the world’s total production. In recent years, China has faced a substantial supply gap in bauxite, leading to a rapid increase in alumina imports. From 2002 to 2007, annual imports grew at an average rate of 45.76%. In 2007, China imported 23.26 million tons of bauxite (equivalent to 16.92 million tons of domestic bauxite), representing a 140% increase over the previous year. Exports, by contrast, amounted to only several hundred thousand tons. Domestic consumption accounted for the vast majority of aluminum demand, with growth in the construction sector being the primary driving factor. During this recent sharp decline in nonferrous metal prices, domestic aluminum prices have fallen to 14,530 yuan per ton—already below the average production cost—and the entire industry is now operating at a loss. It is expected that as the pace of growth in the construction sector slows down in the future, aluminum consumption will decrease accordingly. Therefore, it is advisable to reduce both alumina imports and primary aluminum production. Given that electricity consumption for primary aluminum production accounts for 5.6% of the nation’s total power consumption, reducing primary aluminum output will help lower both electricity and coal consumption.
From 2002 to 2007, as China’s lead and zinc smelting capacity expanded, the country’s imports of lead and zinc raw materials steadily increased, leading to a growing dependence on imports. However, the pace of import growth slowed down significantly—from an annual growth rate of 36.2% to just 7%. In 2007, imports of refined lead ore reached 1.27 million tons, with import dependency reaching 45%. After being imported into China, some of the lead ore was smelted and processed before being re-exported. From 2002 to 2006, China exported between 20% and 30% of its refined lead; however, from 2006 to 2007, the country shifted to large-scale exports of lead-acid batteries, exporting 187 million tons and 173 million tons respectively over those two years. In the first three quarters of 2008, net exports of refined lead plummeted from 1.64 million tons in the previous year to only 8,000 tons. The massive importation of lead raw materials for domestic processing generates substantial quantities of toxic and hazardous substances, exacerbating soil and groundwater pollution in certain regions of China and causing long-term harm.
In 2007, China imported 2.06 million tons of zinc concentrate, and its dependence on foreign sources for zinc smelting raw materials reached over 30%. Meanwhile, exports of unwrought zinc and zinc alloys totaled 276,700 tons. Starting from October 2007, China's exports of galvanized steel sheets began to show negative growth. Since February 2008, China's production of galvanized steel sheets has significantly declined along with the sharp drop in automobile production.
In the past six months, tin prices in China have fallen by 55%. In 2008, production declined by approximately 17% year-on-year. Supply companies are significantly affected by market price trends and may reduce supply at any time; therefore, prices are unlikely to fall substantially in the coming years. In 2007, China imported about 53,000 tons of tin ore and its smelting products, accounting for roughly 35% of refined tin production; it exported 31,000 tons of tin smelting products and related articles, representing approximately 20% of refined tin production.
China imports large quantities of unwrought nickel and nickel ore, with its current external dependence standing at around 40%. The imported nickel, after being smelted and processed, is primarily used for domestic consumption.
Due to the lack of supporting factors, investors lack confidence in major nonferrous metal futures. It is expected that, for the foreseeable future, prices of major nonferrous metals in both domestic and international markets will generally remain weak.
3. China’s mining industry should implement production restrictions, consolidation, stockpiling, and standardization.
1. Limit production to stabilize prices and reduce the output of various mineral products in mining, beneficiation, and smelting processes.
Faced with the ongoing spread of the global financial crisis and the sustained downturn in the mining economy, China’s various mining industries should systematically close mines and smelters, reduce production volumes, and refrain from expanding capacity in the coming years. With the exception of oil, natural gas, copper, potash—products for which China faces supply shortages—and gold, whose market fluctuations remain relatively stable, production of other bulk commodities such as iron, coal, aluminum, lead-zinc, and tin—products that are heavily imported and exported—should all be reduced.
2. Integrate relevant mining enterprises and smelters.
Currently, most energy and mineral markets are sluggish, with many mines and smelters halting or reducing production. The situation of reduced output is unlikely to reverse in the short term. We should take this opportunity to consolidate China’s mining enterprises and companies, reduce the number of small and medium-sized firms, and achieve economies of scale, thereby enhancing our market competitiveness.
3. Selectively acquire overseas mineral resources and mineral products that are in short supply in China.
The international mining market is sluggish, with prices remaining low—this presents an excellent opportunity for China to acquire overseas mineral resources and carry out exploration and mining operations abroad, especially in regions rich in oil and gas, iron ore, copper, chromium, nickel, boron, and potash—resources that China currently faces shortages of. Additionally, now that mineral prices are low, China can take advantage of the situation by importing larger quantities of scarce minerals such as petroleum, thereby building up strategic reserves.
4. Establish a new order for mineral exploration and development in China.
China’s new institutional framework for mineral exploration has yet to be established, and its legal system for mineral mining is also incomplete. At present, reforms and improvements should be carried out in accordance with the requirements of developing a market economy, and the contents of these reforms should be incorporated into the draft amendment of the Mineral Resources Law, so as to establish a new order for mineral resource exploration and development that is suited to the demands of the market economy.