Not long ago, mining companies were investing heavily in order to keep up with China’s insatiable appetite for raw materials, which helped drive a commodity “super-cycle.” For example, iron ore prices benefitted from increased Chinese demand, which grew at an 8 percent compound annual growth rate (CAGR) from 2009 to 2014,1 while world demand overall grew at 6.6 percent. In 2014, China accounted for 67 percent of world iron ore imports.2
Now, just a few years later, Chinese demand for commodities is decelerating while supply continues to increase, and iron ore prices have dropped. Many observers see these lower prices for iron ore and minerals in general as the “new normal.” Can China mineral imports return to past growth levels? If not, how can miners mitigate the impact?
The outlook for demand
China’s 13th Five-Year Plan provides some hope. This new plan calls for the acceleration of urbanization, underpinned by a minimum 6.5 percent economic growth target and recently relaxed restrictions on couples having more than one child. These factors could bode well for commodities that are critical to economic growth and infrastructure development. But there are other factors at play.
For example, local governments in China generally lack funds for infrastructure development due to lower tax and land-sale revenues. In addition, China continues its focus on back integration of mineral supplies, an effort that has helped the domestic industry become more self-sufficient. Indeed, the imported minerals share of domestic consumption declined from its peak of 61 percent in the third quarter of 2007 to a share of 43 percent3 in the fourth quarter of 2014 (see Figure 1).
When it comes to potential iron ore demand, we have to consider the continuing decline of steel production in China. While crude steel production grew at a 7 percent CAGR between 2010 and 2014, just 0.2 percent CAGR is expected from 2014 to 2018. The Chinese steel industry has also missed its 60 percent goal for market share consolidation which was set in the country’s 12th Five-Year Plan. It currently stands at just 37 percent. China's steelmakers also need to continue to invest in their production lines to meet more strict environmental protection requirements in the 13th Five-Year Plan. The government has been raising emission standards to clean up China, and a new law implemented in 2015 could require 13 percent higher environmental investment per ton of steel.
Growth in China’s iron ore demand will depend primarily on achieving the targets set out in the 13th Five-Year Plan. It will also depend on the government’s “Made in China 2025” initiative, which calls for promoting breakthroughs in 10 key industries and establishing up to 40 manufacturing innovation centers. How effective all this will be in driving commodity demand is not entirely clear. One major mining company expects Chinese steel production to peak at approximately 1 billion tons by 2030,4 as China replaces aging infrastructure. This translates to a 2.2 percent 16-year CAGR, which is well above the -7 percent CAGR witnessed over the past four years. A ton of steel requires on average of 1.5 tons of iron ore as input. This translates to iron ore demand growth of approximately 0.8 percent CAGR from 2014 to 2030, which is well below the 7.5 percent seen over the last four years— supporting the major mining companies’ expectations.
However, with rising anti-dumping fears related to Chinese steel exports to Europe and the US, the prospects for production growth may be inhibited. In addition, investment in downstream metal products capacity has not increased as much as expected (see Figure 2). This is due to several factors: the slowdown in major world economies; high levels of government debt and spending; overall global uncertainty about regulatory policy and other factors;5 and China’s difficulty in transforming to more of a consumption-driven economy.
What can miners do?
While these trends play out in China, mining companies should consider two broad strategies—diversification and the increased use of digital technology.
Diversification presents a number of opportunities for meaningful growth, while allowing companies to hedge their bets on China. For example, miners might work to serve more diverse markets, re-casting their supply chains so that they can tap into growth opportunities in India, Mexico and other emerging regions. This approach would essentially help companies withstand a downturn in Chinese demand, and buy them time while China’s economy evolves. Miners could also diversify into new growth areas where commodities are critical inputs, such as solar energy. Finally, they could explore new business models to participate more fully in the “circular economy”—an increasingly important model in which the traditional “make, use, dispose” approach to production and consumption is replaced by one that essentially eliminates waste and prolongs the use of natural resources.
The increased use of digital technology can enable companies to do things differently—and also do them better. With intelligent automation, machines can work closely with humans in a complementary fashion. Today’s technology also lets companies monitor operations in real time, simplify processes and reduce disruptions. Ultimately, these improvements support operational excellence—an especially important quality in an era of lower commodity prices. Miners can also take advantage of industry technology platforms that make it easy to connect and collaborate with a range of ecosystem partners to increase efficiency and effectiveness.
The story of the mining industry and China is still unfolding. The good news? Miners don’t need to wait to take action on these changing realities.
1Accenture Research analysis, February, 2016
2Based on analysis of GTIS data, February, 2016
3Based on analysis of GTIS data & Oxford Economic data, February, 2016
4Rio Tinto's iron ore hope at odds with foresight claim: Russell, Reuters. 15 February 2016: D1. Factiva, Inc. All Rights Reserved.
5China chemicals prospects depend on world growth, Paul Bjacek, October 13; 2015. https://www.accenture.com/us-en/blogs/blogs-china-chemicals-prospects-depend-world-growth