Dec '09/Jan '10

Feeding the cat

China can be the land of unprecedented opportunity for Canadian mining companies

By D. Zlotnikov | Illustrations by A. Pijet

There is a story popular among the Chinese, attributed to Deng Xiaoping, the father of modern China, whose economic reforms included opening the country up to foreign investment,” says Keith Spence, president and partner of Global Mining Capital Corp., a private, Toronto-based investment company focused on the Chinese mining sector. “People would come to Deng and say, ‘You’re proposing all these changes, but they seem more like capitalism than socialism or communism.’ Deng would reply, ‘It doesn’t matter if the cat is black or white, so long as it catches the rat.’” The rat in question was economic growth. To catch it, the Chinese government was, and is, willing to consider cats of many stripes.

China’s two new “cats,” Spence explains, are infrastructure — roads, railways, telecom lines, power stations and grids, and everything necessary to industrialize the vast country. And the other — resources — is needed to keep the first cat fed. For this, Spence says, China must look overseas.

China certainly factors in greatly to any examination of the global mining outlook for the upcoming year. Against the backdrop of a global financial crisis and shrinking economies, China’s growth rate exceeds eight per cent, it has reserves of over US$2 trillion, and its newly established middle class will number 290 million by the end of next year. Whatever colour Deng’s feline may be, its dimensions are enormous.

Working through the slack

With stock markets showing the first signs of optimism and national economies starting to rebound again — or at least to shrink more slowly — the financial crisis seems to be drawing to a close. This can only mean good things for the mining industry, as the demand for minerals picks up. The effects are more immediate for some minerals than for others, explains Bob Bell, vice president and CCO of Teck Coal.

“Steelmaking coal is used to make coke, which is used in blast furnaces to make pig iron, a primary component of steelmaking,” says Bell. “There is a direct link from metallurgical coal to pig iron production. There’s also a very strong correlation between GDP growth and steel demand. As the world economy continues to grow, GDP and the demand for steel will continue to grow.”

Teck saw a slump in coal sales in early 2009, Bell admits, with the first quarter being especially low. But the picture changed significantly in the second half of the year, with sales increasing sharply in the third quarter. By the fourth quarter, demand grew enough to necessitate Teck having to adjust its 2009 annual sales projections from approximately 18 to 20 million tonnes to around 19.5 to 20.5 million. The main change, however, has been in the source of the demand.

A new port in a storm

Whereas Teck’s traditional coal customers were Japanese, Korean, Tawainese, American, South American and Western European, now new demand is coming from China. This is primarily because the economic slowdown in China was much less severe than in most other countries. According to the Asian Development Bank, the Chinese economy will have averaged 8.2 per cent growth in 2009, far outpacing the U.S. economy, which shrank by 3.2 per cent over the same period.

China’s appetite for coal is not really new. “China has always been a huge consumer of steelmaking coal,” explains Bell. “The difference is that they’ve previously satisfied their demand largely with domestic production. But in 2009, they’ve started importing very significant quantities of coal.”

A number of factors drove this change. The first is competition within China, not for coal, but for limited rail capacity. Other goods are taking up the space that domestic coal could have occupied previously. In addition, Bell says, safety concerns have caused a few mine closures, further increasing the coal shortfall. Finally, China is rapidly modernizing its blast furnaces, moving to more modern, larger units. These newer furnaces, Bell explains, require a higher grade of coke, which invariably mean higher grades of coal. China just does not have enough high-grade coal to feed the growing demand, and has to use seaborne imports to make up for the shortfall.

Meanwhile, the rest of the world is also on the path to renewed growth. With its traditional markets slowly recovering, Bell says that Teck has to decide whether to return to familiar lands next year, or to continue its newfound relationship with China. Regardless of which option it chooses, Bell is confident that the company will be able to sell every last bit of coal it can produce.

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