China minerals outlook: the Dragon has turned

By Mike O'Driscoll
Published: Friday, 20 March 2009

China has switched to domestic demand priority status. Those relying on Chinese mineral exports should now be seeking alternative sources. Here we examine how China’s mineral industry has changed tack, its impact on world markets, how it will cope with the recession, and spotlight on barytes, bauxite, fluorspar, magnesite, paper minerals, and rare earths

 
Delegates from IM’s CIMC 2007 conference gaze across the vast magnesite mine at Pailou, Liaoning, operated by Haicheng Magnesite Refractory General Factory. Declining Chinese magnesia exports have encouraged overseas development of new sources. 
When researching the evolution of the oft-used phrase “The worm has turned”, in general, it is found to refer to a reversal of fortunes. In Henry IV Part 3, Shakespeare used the phrase “The smallest worm will turn being trodden”.

One definition stated that “Worm” was a common term for dragon. In fairy tale terms, the flying dragon spewing fire would ravage fields and villages. To be in the dragon’s path resulted in inescapable destruction. What a relief if it changed directions.

With less drama perhaps, this is what appears to have unfolded over the last two years with respect to China and its influence on the global industrial minerals industry. And is now further complicated by the prevailing economic recession.

The turning of the Dragon

During the late 1980s-1990s, the western mineral consuming markets were dominated by relatively low cost, and improving quality and grades of Chinese industrial mineral exports – especially regarding fused alumina, barytes, bauxite, graphite, magnesia, silicon carbide, and talc.

The net effect was that many western consumers modified their requirements to accommodate the Chinese grades and a number of well established mineral producers outside China diversified into other markets or were forced to withdraw from the business altogether, unable to compete with lower Chinese prices.

Come the early 2000s, and Chinese supply began to be affected by power, fuel, and freight shortages and rising costs, as well as a legacy of poor mine planning and lack of modern processing investment.

By 2005-2007, these factors already tightening Chinese mineral supply were further compounded by central government policies on controlling pollution (eg. closure of calcined bauxite shaft and round kilns) and, most crucially, discouraging mineral exports.

The latter programme was, and is, driven by China’s aim to conserve its own natural resources and focus their exploitation on serving the booming domestic market. A variety of measures including raising the export licence fee, reducing the export volume quota, increasing the export tax, and abolishing the export tax rebate on a range of exported industrial minerals are continuing to erode China’s mineral export trade (see table of latest selected figures).

While this evolving situation clearly troubled traders and consumers of Chinese minerals, by late 2006 and early 2007, those on the ball began to perceive an opportunity here for overseas mineral suppliers and developers.

The last in-depth feature we published on China (“The changing face of China”, IM December ’06, p.26-39) led with the phrase “Doing business with China has just got tougher”. At that time, a trader was quoted as commenting: “The overseas buyer will either be forced to pay a significantly higher price for Chinese minerals or buy from an alternative source”, which pretty much summed up the prevailing mood at the time.

While it was clear that no-one was able to predict the extent of the economic downturn that started to snowball two years later, the trends of China closing its doors to certain industrial mineral exports, soaring mineral prices, and the quest for mineral resources and alternative sources outside China gathered momentum during 2007 and dominated much of 2008.

Indeed, by August of last year, the global magnesite supply sector was positively brimming with capacity expansion plans in order to meet current and anticipated future demand from customers who were seeing their traditional Chinese supplies dwindle (see “Magnesite ignites”, IM September ’08, p.28-45).

At that time, Marinko Bosnjak, managing director, Bommag Ltd (part of refractory group Bomex Holding, Serbia, looking to expand its magnesia portfolio) told IM: “At the end of 2009 we should be independent regarding supply of DBM and FM [from China]. A similar strategy should be the base for any serious producer of magnesia based refractory products.”

In early 2007, this author presented a paper at the SME Annual Meeting, entitled “The turning of the Dragon”. Now, two years on, the Dragon has indeed turned.

So what now?

Generally speaking, the trends described above are continuing. However, the onset of the global economic recession has caused many, but not all, mineral prices to decline sharply; there has been an easing of freight costs and vessel availability; and the oil price has fallen from its $140/bbl peak in 2008; but despite this, Chinese mineral trade during the first quarter of 2009 has been pretty stagnant.

Some of this has been down to western buyers stockpiling during late 2008 in advance of increases in Chinese export taxes implemented at the start of 2009, and a general fear of avoiding getting caught short in raw material requirements (as happened to some during 2005-2007).

With falling market demand since Q3/Q4, eg. for refractories for European steelmaking, those stockpiles (eg. of Chinese refractory minerals) will now see consumers through a longer period than originally anticipated – therefore they have little incentive to buy more at present.

The economic downturn has also raised questions over whether it signals the end of the Chinese boom and indeed how China might influence world economic recovery.

Clearly, China’s economic miracle has slowed, but Beijing is still talking of 8% growth targeted for 2009 – a not inconsiderable figure. China reported growth of 9% for 2008, which represented a seven year low, and broke a five year streak of double digit expansion. Indeed, it was not so long ago when economists were calling for China to cool down its economic growth rate. Just for the record, according to China’s National Bureau of Statistics, the country’s industrial output grew 3.8% in the first two months this year, with a rise of 11% in February 2009.

At the Second Session of the 11th National People’s Congress (NPC) in Beijing during early March, Premier Wen Jiabao assured that China will be able to achieve the economic growth target of about 8% in 2009. “As long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve this target.” said Wen.

Wen acknowledged that the country is facing “unprecedented difficulties and challenges”, adding 2009 could be “the most difficult year for China’s economic development since the beginning of the 21st century.” Incidentally, the last time China was confronted by a similar crisis, the economy expanded by 7.8% in 1998, in the wake of the Asian financial crisis.

November 2008 saw China unveil a huge stimulus package to see it through the global slowdown amounting to nearly $600,000m. over two years. As well as social welfare and reform, the package is to focus on public housing and large infrastructure projects – all pointing to maintaining mineral demand in domestic construction, ie. for key industrial mineral market sectors of steel, cement, refractories, glass, ceramics, paint, paper, and plastics.

For western players with Chinese investments in mineral developments and mineral based end products, this should be welcomed.

In his Work Report to the NPC, Wen said the country would implement a proactive fiscal policy and a “moderately easy” monetary policy. The government will increase its spending and expect banks to issue RMB5 trillion in new loans. The four principles of the plan may be summed up as:

1 Boost domestic demand to sustain economic growth

2 Adjust structure of the economy to raise it to a higher level of development

3 Press ahead with reform to invigorate economy

4 Give top priority to ensuring people’s wellbeing and promote social harmony

On industrial restructuring, the Chinese government will implement plans for “adjusting and invigorating” key industries such as the automotive sector, steel, shipbuilding, petrochemicals, textiles, nonferrous metals, equipment manufacturing, information technology, modern logistics, and light industries – all major users of industrial minerals.

The central government is also to allocate RMB146,100m. ($21,366m.) to the science and technology sector, up 25.6% from last year. It is not yet known if some, or any of this funding might be directed to improving mineral processing and development in China, although a fair bet would be that the rare earths sector will be a recipient in some way.

Overall, it seems that the first tranche of China’s stimulus package is kicking in, with the steel industry already responding with inventory restocking. Jing Ulrich, managing director, China Equities, at JP Morgan, Hong Kong, considers that attitudes towards China’s efforts to counter the economic slump seem to have turned more positive.

During a recent UK road show on China’s stimulus package, Ulrich observed: “While it is too early to conclude that China’s economic slowdown has reached a bottom, market sentiment appears to have improved – domestically-listed A shares have seen a distinct volume recovery and risen 32% since the start of 2009. Stocks with exposure to Chinese household consumption should benefit from improved sentiment as further consumption-oriented stimulus measures materialise.”

China is under great pressure to actualise its 8% target, and the most pessimistic forecasts indicate a 5% growth achievement for 2009. On 18 March, the World Bank cut China’s GDP estimate for 2009 to 6.5%. The World Bank said its latest view of the Chinese economy followed recent downgrades of its projections for global GDP growth and imports in 2009.

In a statement, the World Bank said: “While China’s real economy has been hit hard by the global crisis, it is still holding up”, adding, “the estimate is significantly lower than potential growth and the resulting spare capacity is likely to lead to weaker market-based investment, less job growth and migration, downward pressure on prices, redirection of exports to the domestic market, and import substitution in the coming years.”

Environmental opportunities

Amongst the planned reforms, there could be opportunities for mineral consumption in environmental related applications. “China will continue its drive of energy saving, emissions reduction, ecosystems preservation, and environment protection in 2009.” said Premier Wen Jiabao.

The government is to emphasise energy conservation in the three key areas of industry, transportation, and construction. Wen gave out a set of measures to achieve environment protection, ranging from energy conservation, clean energy, to pollution prevention. “We will implement energy-conserving measures for power generators, boilers, automobiles, air-conditioners, and lighting products.” said Wen.

This could translate to increased demand for minerals used in FGD (limestone; magnesium hydroxide), waste/water treatment (limestone; magnesia; bentonite); autocatalysts (rare earths); new generation light bulbs (silica; soda ash; limestone); and new generation power sources such as batteries and fuel cells (lithium; graphite; zirconia; borates).

Export trade outlook

The country used to rely heavily on exports for growth, which contributed to about 40% of GDP. However, a sharp decline in overseas demand for Chinese exports reduced economic growth to 6.8% in Q4 2008, and by February 2009, exports had plummeted 25.7% year-on-year, the worst decline in more than a decade. Commerce minister Chen Deming said that foreign trade faced a “grim picture” in the months ahead.

At the NPC, Wen pledged measures, including fiscal and tax policies, to ease the difficulties of exporters and “ensure steady growth in foreign trade.” However, tellingly, Zhuang Jian, senior economist with the Asian Development Bank was reported as stating: “We should look to domestic consumption, although that will take time.”

In a bid to boost exports, on 10 March 2009 the Chinese government announced plans, so far with little supporting detail, to reduce export taxes to zero. The commerce minister, Chen Deming, said China would “according to international rules, steadily restore zero tax rates for export products.”

As well as the gradual reduction of export tax to zero, Chen also said the government would follow international trade rules and restrict industries that are high polluting and wasteful of natural resources – the latter may well affect certain mining and calcining operations.

It is anticipated that these zero export tax “plans” will certainly encompass finished products (this could include refractory and ceramic products exported), but whether they will also include raw materials or processed minerals remains to be seen.

Chinese export taxes are imposed for a range of industrial minerals – including bauxite, mullite, alumina, kaolin, silicon carbide, fluorspar, talc and graphite – with some tax increases initiated on 1 January 2009 (see IM December ’08, p. 10). Export VAT rebates for these minerals have also been abolished.

Certainly, most traders and consumers would welcome such a move, which would further soften Chinese mineral export prices, which have been falling since the year’s beginning.

Meanwhile, US trade officials are compiling a case against China to the World Trade Organisation, challenging China’s export restrictions, such as taxes and export quotas, on raw materials used in US industries, such as steel, and including magnesite and fluorspar (see IM October ’08, p.9).

The charge is that such practices distort world trade and provide downstream Chinese manufacturers (ie. domestic users of these minerals) with an unfair advantage of selling their products at a lower price in domestic and overseas markets. This should provide an intriguing backdrop for the upcoming G20 London Summit.

At a press conference on the sidelines of the annual session of the NPC in March, Chen Deming raised the subject of trade protectionism, stating: “China firmly opposes trade protectionism and would not turn to trade protectionism.”

Deming went on to say: “All nations attending the G20 Washington Summit [November 2008] stated against trade protectionism. But in practice, protectionism is still gradually gaining ground.” Chen noted that a distinction must be made between trade protection measures permitted within the WTO framework, and outright trade protectionism.

Interestingly, Chen said: “A country is allowed to use some trade protection measures during a financial crisis, when its industrial and agricultural products are impacted.”

Selected Chinese export quotas 
Mineral 2008 (tonnes) 2009 (tonnes)
Bauxite 940,000 930,000
Magnesite 1.3m. 1.4m.
Silicon Carbide 216,000 216,000
Fluorspar 500,000 550,000
Phosphate Ore - 1.5m.
 

Selected Chinese export taxes, VAT, and export licences 
Mineral 2008 2009 Export licence (RMB)
export tax (%) VAT export tax (%) VAT
Bauxite 15 13 15 17 130
Mullite 15 13 15 17 0
Brown Fused Alumina 0 17 15 17 0
Kaolin 0 13 0 17 0
Silicon Carbide 0 17 0 17 310
Fluorspar 10 13 10 17 220
Dead Burnt Magnesite 10 17 10 17 330
Talc 0 17 10 17 60
Flake Graphite 20 17 20 17 0
 


Going global

Included in the Work Report delivered to the NPC, was reinforcement of China’s “go global” strategy, ie. supporting Chinese enterprises in investing overseas and undertaking international mergers and acquisitions.

Recent obvious examples of this include Bosai Minerals Group’s acquisition of Omai Bauxite Mining Inc., Guyana, for $46m. in early 2007. A somewhat strategic buy, since OBMI (now Bosai Minerals Group (Guyana) Inc.) is the sole producer of refractory grade bauxite outside China.

Much is still being made of Chinalco’s increased stake in the beleaguered Rio Tinto Plc, including a $12,300m. investment in Rio Tinto’s metal projects.

In another strategic buy, on 16 March 2009, China’s East China Exploration Co. (ECE) announced that it will invest A$24m. (US$15.9m.) to acquire a 25% interest in Arafura Resources Ltd, a Perth-based speciality metals explorer, with projects in rare earths (RE) and phosphate.

If further evidence were needed, on 4 March 2009, China’s $200,000m. sovereign wealth fund, China Investment Corp. (CIC) announced its intention to diversify its portfolio into the natural resources sector (after booking heavy losses on high-profile financial investments in private equity firm Blackstone and US bank Morgan Stanley). CIC sees investment opportunities in energy and commodities sectors as prices have fallen steeply.

It is also no secret that China’s State Reserves Bureau has also bought up metals to increase stocks of strategically important raw materials such as copper, and to lend support to struggling smelters of aluminium and zinc.

The market can expect to see more Chinese activity in securing mineral resources and strategic mergers and acquisitions worldwide. Mineral targets are most likely to be those in short supply, with limited producers, or deemed strategic. These could include lithium, rare earths, talc, bauxite, aluminosilicate minerals, borates, graphite, fluorspar, oilfield materials (barytes, frac sand), and fertiliser minerals.

Supply/demand scene

Until China’s stimulus package really takes hold, domestic mineral production and export trade is taking a considerable hit, although China and East Asia might be considered slightly better off than the West. The Asia market for minerals is about 30% off, compared to about 50-60% off in western countries, estimated one industry source.

While it is clear that Chinese mineral producers are pinning their hopes on a quicker and more substantial recovery in the domestic markets rather than overseas export markets, there are still signs that this has yet to take off.

For example, according to Metal Bulletin, in mid-March chromite inventories at Chinese main ports had reached an incredible 1.5m. tonnes – three times that of last year. Stocks of imported chromite have been climbing since Q3 2008 owing to falling demand for ferrochrome from Chinese stainless steel producers. Some 1m. tonnes of chromite is enough to produce 450,000 tonnes of ferrochrome.

There was an upturn in demand just after the Chinese New Year when steel mills were producing at 90% capacity, that has since fallen to 20% as steel demand has dropped and thus has demand for raw materials.

Many Chinese mines are reported to be reducing production rates or ceasing operations altogether. Export of wollastonite from Jilin province, north-east China, for example, was reported as “nearly stopped”, partly owing to the lack of demand from its main European importer.

Japan, a primary consumer of a range of Chinese industrial minerals, has also cooled its demand on raw material requirements. Junguo Fan, Sales Dept., of mica producer and mineral processor Hebei Chida Manufacture & Trade Co. Ltd told IM: “The demand of the Japanese market in the first quarter of 2009 is only nearly 20-30% of the same period in 2008. The mineral market will be very hard in 2009.”

Hebei Chida’s response to conditions re-emphasises the industry’s focus on China’s domestic market future. “Our company is trying its best to find new customers beyond our current clients. We are trying to develop domestic customers because the domestic market seems much better than the overseas market.” said Fan.

Likewise, Cindy Wu, general manager, Sino Industrial Minerals Trading Co. Ltd (SIM), concurred: “As the Chinese domestic market is booming, so the domestic demand for the minerals is also increasing very fast.”.

Wang Ying, import & export manager, of magnesia and refractories producer Fengchi Refractories Co. of Haicheng City, told IM: “The export market is not good now. The price of the mineral reduces again and again. Demand is very low, all the overseas customers are waiting and do not buy. Many small manufacturers are closed because of the crisis. But in the domestic market demand is not bad. I think in the second half of 2009, the economy will be better.”

Since the Beijing Olympic Games in August 2008, the Chinese talc market has contracted. The government added a 10% export tax on talc on 1 December 2008, and a 10% export tax on chlorite on 1 January 2009. In view of the economic recession, the Chinese talc industry was somewhat “puzzled” by the government decision.

Jia Xiu Zhuang, manager, Haichen MinChem Co. Ltd, said: “The talc resource tax has increased greatly in 2009. This cost increase makes small mines impossible to survive. Chinese producers are struggling to absorb the mining cost increase and the 10% export tax.”

The Chinese talc market is described as “quiet”. Chinese talc relies mainly on Japan for micronised talc imports, and the USA as the major importer for high quality lumps. However, there have been few new enquiries or even firm orders during the first quarter of 2009. Some outstanding orders have been delayed since most mines have not been able to maintain full operation.

Zhuang told IM: “It is very uncertain for the market for Q2 and afterwards. Both suppliers and buyers are watching and waiting. Chinese producers hope the market will be better in Q3 and Q4.”

Wu of Sino Industrial Minerals Trading Co. Ltd admitted that compared to a “prosperous 2008”, this year’s mineral market was relatively inactive. “By the end of March, there will not be much shipping and selling. The market could not be too well for this year. It is difficult for any new developments on mineral markets this year. Having a look around, it seems as if everybody is silent. So, be patient and wait till the new development comes.”

Pricing highlights

Or rather “lowlights” – the trend is definitely one of declining Chinese mineral prices compared to the sharp increases experienced during 2008. However, that said, there have been some mixed reactions, and perhaps the drop in prices has not been as sharp as expected. For example, Chinese FOB talc prices are apparently at the same levels as last year (see accompanying panel for recent prices news).

One reason is that the January 2009 export tax increases have probably offset some of the decline in prices triggered by the recession. Certainly, while inventory mineral stocks of western consumers remain high, and demand for their products down, prices will soften and trade will be slack. Mid-year might well see a turnaround in this situation.

Junguo Fan, Sales Dept., of Hebei Chida told IM: “Mineral prices are lower than before, but not by too much. The main reason is that mineral products are not encouraged by our Government. The VAT for mineral products was increased from 13% to 17% since Jan. 1st 2009. Almost all mineral products don’t have a tax rebate. However, many other non-mineral products are enjoying more tax rebate that before.”

“Export prices didn’t come down, not as the people have expected. They have maintained the same high prices as last year.” said Cindy Wu, of SIM.

What is very clear is that freight rates have decreased considerably, and that has assisted some exporters, particularly those supplying long distance customers. “Before end of August 2008, the freight rate was extremely high, but months later, the freight has dropped sharply. It seems that suddenly a lot of empty containers are always waiting at the ports.” commented Wu.

The accompanying table illustrates the reduction in prices of container rates during 2008. The present rate for a full container load appears to have dropped further, one example quoted from China Port to Europe Main Port at U$350/20ft FCL.

Container freight rates Jan-Dec 2008 
Port Jan-08 Jul-08 Dec-08
From Tianjin, China to
Los Angeles, Long Beach $1,500/20ft container $1,700/20ft container $1,100/20ft container
$1,900/40ft container $2,100/40ft container $1,400/40ft container
From Tianjin (China) to
Rotterdam (Netherlands) $2,300/20ft container $1,600/20ft container $550/20ft container
$3,900/40ft container $2,900/40ft container $1,100/40ft container
 


Mineral spotlights

Magnesite – quota questions

As reported last year, a number of Chinese magnesia producers are investing in new kilns and resources to better serve the domestic market, while overseas producers have announced a raft of ambitious capacity expansion plans to take up the slack from declining Chinese exports (see IM September ’08, p.28-45).

Although, the economic downturn must surely have placed a temporary hold on some of these capacity expansions, two new sources of magnesia supply have emerged in recent months: Magnezit to export magnesia from Russia (see IM January ’09, p.6), and Quintermina to supply grades from North Korea (see IM February’09, p.8).

Industry sources in China describe production as being “now very small” and market demand “sluggish”. Dead burned magnesia (DBM) production is at least 50% down owing to a slow market. Caustic calcined magnesia (CCM) production is reported as steady, although the market may be about 30% down – with demand, unlike DBM, not constrained to mainly the steel industry.

Fused magnesia (FM) production has been described as at least 60% down, demand for FM97 grade in MgO-C refractory bricks is also 60% down.

FM producers are under pressure from electricity providers requiring immediate payment – on average some 3,000kwh/tonne of FM is required.

One of the key issues facing the Chinese magnesite industry is its use, or rather, non-use of the export licence quota volume, and how this might affect the rest of trade in 2009.

The export quota for the first half of 2009 export license is 700,000 tonnes. Then there remains some 80,000 tonnes of the 2008 export quota still to be used up.

The leading Chinese magnesia producers, which hold the majority of export licenses and associated quotas, are lobbying the government to cancel the issuing of the export license for the second half of 2009 – which is scheduled at 700,000 tonnes.

In late 2008, IM was made aware of this situation, and was informed that should 90% of the H1 2009 quota (ie. 630,000 tonnes) not be fulfilled by mid-2009, then the H2 2009 magnesia export quota would indeed be scratched.

With market demand down by an average of at least 50%, coupled with availability of the 80,000 tonnes from the H2 2008 export quota, it seems likely that a total of 780,000 tonnes would be ample for H1 2009 market demand.

The problem is that western buyers purchased huge stocks of Chinese magnesia last year which are expected to see them through to mid-2009, and perhaps longer if refractories demand continues to slow in the West.

The key point is, if say, over 50% of the H1 2009 quota is sold, but shy of 90%, will that trigger cancellation of an H2 export quota and leave very little material left for buyers to fight over for the rest of the year? Bear in mind that Asian magnesia consumers also will be competing for this material.

No doubt this is where new sources such as in Russia and North Korea may come into their own.

 
Talc in the hand...is worth more in the domestic market?: hand sorting talc at Liaoning Aihai Talc Co. Ltd plant in Mafeng. Chinese producers are struggling to absorb the mining cost increase and the 10% export tax. 
Barytes – heavy grades available

There is continued debate over whether there is a shortage of drilling grade barytes, with China traditionally having been a major supplier to the global market.

Added to the melting pot is the imminent move by the American Petroleum Institute (API) to approve a modification of its API barytes drilling grade specification to 4.1 g/cm3 SG (as opposed to a minimum of 4.2SG – see News p.6). This would open up the potential of using 4.1SG barytes deposits in Nevada, USA to supply the Gulf of Mexico market, and lessen reliance on Chinese imports. According to US Geological Survey data, in 2007, the USA imported 2.2m. tonnes of barytes from China, representing 92% of total US consumption in that year.

Although factors such as increased barytes consumption within China and export discouragement through export taxes and export VAT rebate abolition point towards a challenge to continued supply from China, there is support that China can yet maintain its position as a supplier of 4.2SG grades.

In his presentation at the SME Industrial Minerals Division luncheon on 24 February, consultant Ian Wilson maintained that there was no shortage of potential sources of 4.2SG barytes in China. Indeed, Wilson explained that over 50% of 334 recent samples from deposits yielded an SG of 4.3-4.4.

Rocky Mountains Industry Development Co. recently brought on stream a 4.2SG barytes source near Sanjiang, Guangxi province (see “New Chinese barytes source”, IM August ’08, p.75). The ore is taken to the company’s processing plant at the port city of Zhanjiang for processing to finer grades. One trend that is understood to be gaining ground is that more Chinese barytes is being processed locally, and that this may result in a decrease in lump barytes exports.

John Allen of UK based barytes trader Anglo Pacific Minerals said: “There is no shortage [of >4.2SG barytes] and [owing to the present conditions] everybody is highly stocked. We purchased a lot of >4.2SG barytes before China’s export tax came in November 2008 ”.

Bauxite – supply tight, but demand down

Sources in China have informed IM that owing to the government crackdown on illegal mining operations, raw bauxite mining for refractory grade has almost ceased. Apparently, in China only alumina plants now have the mining rights to bauxite reserves. “What is more, bauxite is enlisted in the government’s protocol of ‘restricted mining’ policy.” said the industry source.

This situation has translated into a shortage in supply of calcined bauxite, and crucially, an apparent drop in quality. However, its shortness in supply means that prices have not dropped, and indeed remain relatively high.

But the irony is that overseas demand for refractory bauxite is very much down anyway, by as much as 70% according to one trader. The first two months of 2009 witnessed a mere 10,000 tonnes exported.

It is understood significant stocks of bauxite amounting to some 100,000 tonnes remain in bonded warehouses in Tianjin, China. Elsewhere, stocks also remain high outside China, and end users are now waiting for stocks to draw down before ordering more material.

The export quota volume for bauxite for H1 2009 stands at 470,000 tonnes. It remains to be seen if this gets fulfilled, and to do so, prices would probably have to come down.

Fluorspar – exports declining

The situation for Chinese fluorspar is similar to that of magnesite – reduced exports, domestic demand priority. As a percentage of world fluorspar production, during the 1990s, China’s exports hovered around the 30% mark, exerting considerable influence on world trade, effectively pushing prices down.

Since 2000, like magnesite, China’s fluorspar exports have declined significantly, to about 9% of world production in 2008. After reaching its peak in 2001 of 1.5m. tonnes, China’s fluorspar export quota has dropped to 550,000 tonnes in 2009. During this same period, China’s fluorspar consuming markets of aluminium, steel, and hydrofluoric acid have grown significantly – the latter tripling in size (see chart).

Outside China, western fluorspar producers had exited the market under pressure from low cost Chinese exports, and few companies invested in fluorspar resources and capacities. Thus there is now a dearth of high quality acidspar supply outside China and consumers worldwide are facing shortages.

There is a handful of projects at various stages of exploration and development worldwide, but significant new fluorspar supplies are not expected to come on stream until 2010 or later (see IM February ’09, p.38-45 for a review), and with the downturn in full swing, some of these project may now face delays.

Estimates of Chinese and rest of world fluorspar consumption 1984-2008: Although ROW consumption has fallen, Chinese fluorspar is increasingly supplying its growing domestic market at the expense of exports, and there is now a shortage of quality acidspar grades.
 
Source: Michael Miller, USGS (2009) 



Paper minerals – good prospects

One market that has been experiencing rapid growth in China is the paper minerals market. Key minerals consumed are precipitated calcium carbonate (PCC) and ground calcium carbonate (GCC) for main fillers, and kaolin for coating.

According to Ian Wilson (2009), the Chinese market for GCC grew to 12m. tonnes in 2007, from 375,000 tonnes in 1992, with paper the largest consumer at 33% after plastics (34%). Leading players active in wet GCC processing plants for paper companies include: Imerys at Nanling, Anhui, and UPM-Kymmene, Changshu, Jiangsu; Omya at Changshu, Jiangsu, and Chenming, Jiangxi; Hosokawa Alpine at Sun Paper, Shandong; GAW Technologies GmbH at APP, Dagang, Jiangsu, Nine Dragons, Guangdong, and a new APP project at Ningbo, Zhejiang Province; Callisto International at Chenming Paper, Shouguang, Shandong; Hua Xia Co. at Gold Huashen (APP), Suzhou.

Paper and board production in China has accelerated markedly since the early 1990s, especially compared against other paper world leaders Japan and the USA, and is estimated to push through 80m. tonnes in 2009 (see chart). Of the 11.6m. tonne increase in world paper and board production in 2007, an amazing 74% was accounted for by China, which saw its market grow by 13% (2005-06 growth was 16%).

For the first time, during Q4 2008 China produced more coated woodfree paper (CWP) than South Korea. CWF paper uses bleached chemical pulp, little or no mechanical pulp, and can be single, double, or triple coated – the surface is typically matt or gloss-calendered. China is expected to become Asia’s largest CWF producer and exporter.

USA, China and Japan paper & board production 1993 to 2009e (m. tonnes), showing the sharp increase in paper output by China since 2000 - a fertile market for GCC, PCC, and kaolin.
 
Source: Ian Wilson, consultant (2009)


Rare earths

One of China’s “crown jewels” is its rare earths (RE) deposits on which it has built a huge and growing production base. China is responsible for some 95% of world RE production. At Baotou, Inner Mongolia, the ever expanding “REE Development Zone” staffs 200 scientists, 2,000 technicians, and 20,000 workers (Cox, 2009).

There are three distinct production zones: Bayan Obo, Inner Mongolia, bastnaesite, low-cost by-product of iron mining, light REE; Sichuan province, bastnaesite, primary source light REE; and south China, adsorption clays, primary source of heavy REE. What is catching the headlines is China’s growing RE market and its policy of securing RE resources – home and abroad.

Also noteworthy, is news that China’s RE production centre at Bayan Obo is starting a stockpile of RE raw material – speculation as to its size ranges from 30-300,000 tonnes. Cox (2009) also noted that increased recovery of REO was expected at Bayan Obo, and that the Baotou tailings dam has 200 years worth of world supply.

World demand is about 124,000 tpa rare earth oxide (REO) valued at $1,250m., and is forecast to reach 200,000 tonnes in 2015, valued at $2-3,000m. Chinese RE consumption has been accelerating at 28% annually since 2002. Dudley Kingsnorth (2009) has warned that the RE balance between supply and demand could be an issue in 2014.

Leading end uses for RE include metal alloys (15-20% growth estimated 2011-2014), magnets (10-15%), phosphors and pigments (7-10%), ceramics (7-9%), polishing (6-8%), and catalysts (6-8%).

To meet this increased demand, some 205-210,000 tonnes of REO will be required to be produced. China would be expected to produce 165,000 tonnes, with 115-120,000 tonnes for domestic consumption (expected to increase as it expands its RE product manufacturing base), and a mere 25,000 tonnes for export.

China, as with certain other industrial minerals, has also constrained world RE availability by withdrawing its VAT export rebate, adding an export tax, and reducing the 2009 H1 export quota by 15% to 15,043 tonnes, down from 2008’s 22,780 tonnes.

Therefore, new RE projects outside China, will be required to come on stream to meet the short fall of capacity outside China (see chart). There are several projects in the pipeline (see “Rare earths at the crossroads”, IM September’08, p.70), but they are facing the hardships of the recession (Lynas recently suspended its Mt Weld project – see IM March ‘09, p.8), and will also need to compete with China’s policy of seeking RE sources outside China.

Chinese companies are on a quest to secure new RE resources, as evidenced by East China Exploration Co.’s recent move to acquire a 25% stake in Arafura Resources Ltd which is developing the Nolan’s Bore RE deposit in Australia (see News p.10). It was also reported recently that newly formed China Minmetals Rare Earth Co. plans to invest $44-58m. to position itself globally in the RE sector. This will include restructuring of mining and processing companies in Ganzhou, Jiangxi province

Kingsnorth is confident that China will not “starve” the world of RE resources, although that remains to be seen, and that with the first of the new and potential RE operations on stream, the increased demand for RE should be met.

Chinese and world RE supply & demand 2004-2013f: this assumes current trends continue, new projects are developed, and there is a “balance” in supply and demand for individual rare earths. Crucial, will be the opening of new sources outside China to meet demand.
 
Source: Dudley Kingsnorth (2009)


Conclusion

Although the market can only wait and see how China’s economy responds to its stimulus package, and it appears that this is leaning towards a positive outcome which might emerge during H2 or late 2009, there are certain factors which are very clear.

China is no longer a source of readily available, low cost mineral exports. In fact, mineral exports should be expected to decline further as the policies of raw material export discouragement continue combined with growth in demand from China’s domestic markets.

The priority for mineral producers in China is its rapidly developing and expanding domestic market. Traders and consumers which have historically relied on Chinese minerals must seek alternatives elsewhere

The situation throws up two strands of opportunities: within China, to join others already active in investment and development of high grade raw material resources to serve the domestic (and other East Asian) markets; and outside China, investment and development of new and established mineral sources to meet the shortfall in mineral supply from China.

The extra challenge now apparent regarding the latter opportunity, is to compete with Chinese players in securing global resources of strategic industrial minerals.

References

Cox, C. (2009), The Anchor House, “Competing with China in rare earth exploration & production”, paper presented at 2009 SME Annual Meeting & Exhibit, Denver, 22-25 February 2009.

Kingsnorth, D. (2009), Industrial Minerals Co. of Australia, “The rare earths market: can we supply

demand in 2014?”, paper presented at PDAC 2009 International Convention, Toronto, 1-4 March 2009.

Miller, M. (2009), US Geological Survey, “Effects of China’s export policies on world fluorspar suppliers and prices”, paper presented at 2009 SME Annual Meeting & Exhibit, Denver, 22-25 February 2009.

Wilson, I. (2009), Consultant, “China”, paper presented at SME Industrial Minerals Division Luncheon, 2009 SME Annual Meeting & Exhibit, Denver, 22-25 February 2009.

CALL FOR PAPERS: 8th Chinese Industrial Minerals Conference -CIMC8, 7-9 September 2009, Qingdao, China; contact: Victoria Smith, vcooper-smith@metalbulletin.com