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China Resourcing for Raw Materials Reaches Australian Shores

Wednesday, July 27th, 2011
china's resources

Today’s China is a symbol of growth. Spread across the country, hundreds and thousands of industries, most of them located in special purpose export hubs, have been leading China’s march on its way to becoming an economic powerhouse. While the smaller-scale industries are of the homebred variety, those in charge are local collaborators backed by massive multinational companies. Almost every one of them, regardless of their size, is a builder, producer or manufacturer of consumer products of a total worth of more than several million dollars. China is today the manufacturing hub for nearly every possible industrial segment, from premier automobile brands, agri-based industries, pharmaceutical industries, residential-commercialindustrial construction goods to leading names in electronic consumer goods. And today, nearly every known brand name sources its goods from China.

The other side of this ‘Long March’ to development is the insatiable need for raw materials and natural resources. Almost eighty percent of these industries require natural raw materials in one form or another. The list ranges from silica and rare earthmaterials for electronics and defense equipment to minerals, wood, paper, steel and all forms of energy resources. Manufacturers need massive quantities of coal and other energy resources such as oil, gas, nuclear power, etc., to keep up the pace of production and match global market demands.

As energy and resource consumption grows at an exponential rate, China is reaching critical mass with its own resource exploitation. Unless it can strategize better in planning for the future, it will be exhausting nearly its entire resource base in the next few decades, given its double digit growth rates. Substantiating local resource reserves with imported energy resources is the only route forward for China Inc., as its demand for iron ore, steel, and other energy resources has led China to a position of panning for resources abroad.

China Following US ResourcesGrowth Plan

The situation demands that the country look beyond its own natural resources for alternatives as demand far outstrips supply. This is almost similar to the gestational stage that post-Second World War America was in. Feeding its burgeoning industries and commerce was made possible, despite its own colossal reserves, by meeting it in large part with imports from neighbouring countries. The US supplemented its own resources with long-term resource supplies from across the globe, which it found fast and at low-cost prices. From across the Panama Canal to the Hudson Bay, America built a large network of feeder lines for oil, gas and other energy resources, for example.

China is in many ways replicating that developmental stage of the US. In the past couple of decades, China has been building strategic relations with most of the resource-rich nations the world over. China’s investments in Africa, South America, parts of Middle Asia and recently Australia are likely to satisfy its long-term energy and resource requirements.

Focus on Australian Resources

Australia’s expansive resource-rich land tracts beckon Chinese investment to augment its perennial need for long-term natural resources supply. With its limited population and rich mineral resources, Australia needs Chinese capital to fund its own growth. Australia has traditionally traded its raw materials to seek capital investments in key areas of its economy in order to boost its paced growth.

However, over the past two years, the Australian dollar has strengthened to an extent that exporters there are today finding it difficult to remain competitive major players. As exports of raw materials from several mines across the island-continent reach the Chinese mainland, Australia’s dollar has been on the rise.

Analysts opine Australia was spared the global recessionary side effects of the 2008 economic meltdown because of the millions of dollars Chinese mainlanders poured into the mining sector of the country. Today close to 25 percent of Australia’s exports are keeping the giant wheels of Chinese industries in constant motion.

China’s shopping list for iron ore, coal and energy resources has found the best goods in the vast land tracts of Australia. In just under a month, the China Sovereign Wealth Fund of US$200 billion (quite substantial considering the relevant economic stagnation of most countries) has begun to fund various projects in Australia.

China Moving from Purchasing to Mining

The norm for China thus far has been the purchase of minerals and ores of billions of dollars worth from established mining companies such as Rio Tinto and BHP Billiton. However, the widening disparity between supply and demand is forcing it to move into owning mining operations.

China is opting to lease land for mining purposes at these resource rich sites. While China manages and invests in these projects, the royalties and the substantial taxes reach the local governments’ coffers. The local population too benefits with better employment and development of the area. A case in point is the electrification and commercialization of remote villages in Russia, as oil lines pass through them and cross the Bering Strait to fuel Chinese industries. A recent project has also funded the development of a port with a 2 km breakwater along the Indian Ocean.

Some of the High Profile Investments

The biggest and the most massive of all the coalmines in the Pilbara region is NorthWest Australian Citic-Pacific Corporation’s Sino Iron project. It will be an opencast mine and will start production by the end of the year. It will be the single largest magnetite iron-ore mine in the world and will be using sophisticated hydraulic excavators and a customized power source of 450MW. The net weight of iron ore to be mined from this site is projected to be a minimum of two billion tons. This will last for close to twenty four years, given China’s present rate of consumption.

Close to US$25 billion is being invested into purchasing ore and local small-scale mineral producers or suppliers to buffer against future price escalations. In the past month, Fortescue Metals Group, a resource rich Australian company, is under the Chinese buyer’s scanner. Acquiring Fortescue will be opening up resources worth several million tonnes that will last for a minimum of two to three decades. It will be one of many such Chinese-owned Australian mines.

This increasing presence of China in the Australian mining sector is under observation by some local political parties. All mining contracts, etc., are subject to Australian regulator examinations before a deal is struck, though Chinese companies are eligible to make purchases of up to 9.8 percent without regulatory permission.

Symbiotic for China and Australia

One major Australian mine, Fortescue, which had put its expansionist plan on hold due to lack of funds, has been fortunate to find reliable Chinese foreign investment in the present recession. To the Chinese, on the other hand, getting access to rich resources at an 80 percent discount has been like a godsend.

As Australia’s current fiscal budget is being proposed, the government continues to gamble on China’s steady growth rate and is relying on the millions of dollars committed through Chinese investments in mining and related sectors.

The Prime Minister of Australia has had a daunting job defending “Made in China” investments as her government grapples with carbon tax, greenhouse and gas emissions, all in all a definite aftermath of the intensive energy consumption sector. Yet the recent China visit by the Prime Minister Julia Gillard and the intense round of talks between the two has established a better road map for both countries.

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