How important is the Chinese influence over African mine production?
Published 2011-05-23 00:00:00
“Rare earths ‘will not be bargaining instruments’“ was stated in a headline in China Daily October 29th 2010. The Chinese government is trying to fend off the persistent accusations from Japan, the USA and Europe to manipulate the supply of these so called “critical” metals to gain political and economic advantages.
The critics maintain that China has taken the rest of the world as hostage by controlling 97 % of the resources of rare earths. These elements are crucial in a number of high-tech applications. They are not impossible to substitute but difficult to do so effectively. The name “rare earth” is a misnomer, as even the least abundant is 200 times more common in the earth’s crust than gold. They are however difficult to find in economic concentrations. The Chinese near monopoly over the rare earths together with China’s scramble for other resources in Australia, in Africa and elsewhere around the world is seen as two examples of a Chinese strategy to take control over vital metal resources. The Chinese are also accused of using unfair and sometimes illegal business practices in this fight for resources. Practices which, critics claim, put the Chinese interests before and above the interests of the host countries in particular in Africa.
But how important is the Chinese influence over African mine production and what degree of control does the Chinese exert over global mineral and metal production? Is the Chinese grip over the “critical metals” as serious and dangerous as it is presented? Firstly Chinese control over global metal production outside of China is so far negligible in spite of a fast growth in recent years, but a growth from an almost zero start position. It will take years before Chinese companies and China becomes a powerful global player in the mining industry. Further it is a mistake to view the Chinese investors as a homogenous group. There are all different types of Chinese companies active internationally: small companies earning a quick buck in the Congolese copper industry and major companies like Chinalco cooperating with the leading mining TNCs such as Rio Tinto. In this respect the Chinese are exactly like their western competitors there are good guys and bad guys. From the point of view of the African and other mineral rich emerging economies the strong demand for metals from China and worries in the traditional industrialised countries in Europe, America and Japan that their future supply might be threatened, opens opportunities to create a competitive situation, where these countries could get better deals than earlier. Provided only that the countries have the internal capacity, competence and resources to manage their mineral resources and the rents they generate. This is often the weak link.
China is the demand engine for metals and minerals globally. In spite of China being by far the largest mining nation of the world, far ahead for example of Australia, a serious import dependence for copper, iron ore, nickel and other major metals has developed. This gap is generally covered by deliveries by the major international mining companies such as Vale, BHP Billiton, Rio Tinto, Codelco. The Chinese reliance on imported metal supplies is generally far more important and serious to the Chinese economy, both in terms of the cost for these imports and their economic and societal importance than the rare earths are to the western countries. The present low production level of rare earths is today more a function of a recent fast demand growth, which has not been possible to meet in the short term given that to start a mine is often a 5-10 years process, than a problematic long term supply situation. So far the demand has been very limited and the production volumes of these metals so small, total volumes a few thousand tonnes annually valued at the mine at less than 100 MUSD, that none of the major mining companies have bothered to get involved. When demand increases new mines will be opened and the Chinese monopoly will be broken. It will take some years as most mining projects involve a detailed and careful environmental permitting process. In the meantime there will be some price spikes but the price sensitivity for example to increased costs of europium in liquid crystal displays is low as the volume of europium in each screen is miniscule.
On the contrary however there is no chance that the Chinese dependence on the major mining companies for their supply of copper, iron ore or phosphates and potash will diminish in the near future. The opposite is much more probable. All these metals and minerals are produced in enormous amounts and only copper and iron ore together represent roughly half of the total value created in global metal mining. Chinese iron ore imports alone amount to over 500 Mt conservatively valued at 50 billion USD. Phosphates and potash are crucial for the production of fertilizers and hence for Chinese food supplies. This situation where China is dependent on a limited number of major transnational mining companies will continue to be a much more serious risk for international conflicts in the future than the supply of rare earths.
It is also important to note that the US and Europe have their own interests to protect in Africa and Latin America. During all of the 20th century cheap raw materials has been flowing out of these regions and when a new competitor emerges it is easy to forget the colonial history. Judging from African experiences of Chinese mining investments in general it is seems as if there is an resource administration in place, like in South Africa, to make sure national laws are followed the Chinese will be more prone to do so than if there is no local capabilities to regulate the mining industry. The behavior of Chinese investors is hence partly depending on the local capacity to control the mining sector. In this area experiences from the Nordic countries, Canada and other countries which have built their wealth on mining is of key importance if the mining boom shall benefit the mineral rich countries in the developing world.
