Now Available: China Mining Report Q3 2016

China's mining sector will continue to be pressurised by low mineral prices over the com ing years. Government-led consolidation will support production growth by state-owned enterprises as smaller miners shut operations , however, depleting reserves, falling ore grades and the relatively short life span of domestic mines will further drive outward Chinese investment.

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While cooling Chinese economic growth will adversely impact mining operations, we expect the impact to vary across different mineral segments. Copper and tin will do better due to the better price outlook for these minerals than iron ore and coal.

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China's structural shortfall in domestic production combined with the government's desire for resource security will continue to spur overseas mining deals. Although China's reliance on imports will increase due to the country's depleting reserves, falling ore grades and the relatively short life span of mines, outbound investment will face more caution, as Chinese projects are increasingly faced with rising costs and project delays. As a result, Chinese firms' 2015 mining merger and acquisition activity (M&A) in Latin America slowed to USD2.1bn, a 72.8% y-o-y decrease from 2014. Chinese mining M&A activity in the Middle East and Africa also fell significantly, by 46.0% y-o-y, to USD135mn in 2015. Chinese metal investment in Sub Saharan Africa also dropped in 2015 to USD1.2bn, significantly lower than USD4.0bn in 2014 and USD8.4bn in 2013.

We forecast Chinese iron ore production to decline by 10.0% and 5.0% in 2016 and 2017, respectively. Chinese iron ore output will average an annual contraction of 4.0% during 2016-2020 on the back of low iron ore prices and weak steel consumption growth. In addition, a rising environmental regulatory burdens will reduce demand from steel mills for low-grade iron ore. This will limit domestic output, as Chinese ore grades declined from 66% in 2004 to 17% in 2014.

Chinese nickel mine production will face significant challenges from slowing growth in fixed-asset investment, which will drag down demand for steel products, and by extension, refined nickel given its use in stainless steel production. We forecast Chinese nickel ore output to average an annual growth of 2.0% during 2016-2020, compared to 5.2% during 2011-2015, with smelters pledging to reduce output by at least 20% in 2016.

We forecast China's lead mine production growth to stagnate, averaging an annual growth rate of 0.3% during 2016-2020. This would represent a significant slow-down compared to average annual growth of 6.0% during 2011-2015. Lead mine production in China will reach 2.3 million tonnes (mnt) in 2020. Despite our significant downbeat forecast on lead production growth, we expect China to remain the largest lead producer for the coming years, accounting for an estimated 53.8% of global lead production in 2016.

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