CAMBRIDGE, Mass. (Frontier Strategy Group) -- As the mining community gathers this week in Toronto for the annual PDAC show, the industry is facing a critical above-ground challenge: the active emergence of China as a competitor for resources in Africa and Latin America. While almost every senior executive recognizes the importance of the China phenomenon, few companies have developed coherent strategies for dealing with the new competitive dynamics. Such short-sightedness could severely impede the ability of Western firms to replace reserves and deliver value to shareholders.
Most companies have failed to develop China response strategies for three reasons. First, many companies mistakenly believe that the Chinese will focus on doing business in countries such as Zimbabwe, Venezuela and Sudan, where most western companies choose not to invest because of sanctions, war, or other above-ground challenges. Second, companies look for the wrong signposts of the China challenge in the countries where they do business, meaning that by the time the Chinese presence is changing the above-ground environment, it is usually too late to develop proactive response strategies. Third, most companies do not understand the wide variety of tools available to them in order to win in the new competitive environment.
Because of our belief that how mining companies manage the rise of China will be a critical factor in separating winners and losers in the industry, we are launching a study entitled “The Future of Mining to 2025: The Rise of China and its Impact on the Global Mining Industry.” This article will highlight some of the ideas which will drive this study and help mining companies successfully manage the rise of Chinese competition.
Chinese Mining Companies Will Invest Across a Broad Spectrum of Countries in Africa and Latin America
There is a widely-held perception in the mining industry that while the Chinese challenge is an important long-term issue for the industry, in the short-term, most Chinese investment in concentrated in countries where Western firms can not, or choose not to, invest. Examples include Myanmar, the Sudan, Zimbabwe and numerous other countries around the world.
While this has been more or less accurate for the mining industry, mining executives would be well advised to study the experience of oil and gas companies in Africa. With the exception of Sudan, China has made substantial investments in the same areas as most Western multinationals, including Nigeria, Angola and other Gulf of Guinea countries. Most worryingly, new Chinese involvement and active government lobbying has helped Chinese companies over-take concessions previously granted to western oil firms.
The mining industry is likely to experience the same phenomenon. China’s appetite for iron ore, copper, nickel, zinc and even precious metals will soon drive Chinese companies to invest in countries that form the bread-and-butter of Africa and Latin America strategies for western mining companies. Aside from the Democratic Republic of Congo, which is on everyone’s radar screen, impacted countries could include Botswana, Cote d’Ivoire, Guinea, Guinea-Bissau, Mali, Sierra Leone, Tanzania, Togo and Zambia in Africa and Argentina, Brazil, Columbia, Ecuador, Peru and Venezuela in Latin America.
The result will be both a change in the operating environment of these countries and a substantial challenge to the property rights and concessions of western firms. Chinese mining companies, backed by state-to-state infrastructure deals and China’s understanding of how to operate in the developing world, will make every effort to replay the oil scenario described above in the mining sector.
How to Obtain an Early-Warning on the Chinese Challenge
Another key mistake made by most mining companies is that they become concerned with the impact of new Chinese competitors only once these competitors have begun executing visible market-entry strategies. This approach forces mining companies to be reactive in responding to the new circumstances. While it is possible to develop successful response strategies after a Chinese competitor has entered an important market, the strategic nature of this challenge requires earlier action.
Fortunately, advance preparation and action are possible because there are important early indicators of China’s interest in a specific country or property. Because so much of China’s search for resources is driven by government policy, there are several geopolitical factors that mining companies can monitor in order to adopt effective response strategies.
For example, just in the past several weeks, the Chinese government has begun actively assisting Nigeria with defense equipment to quell the uprising in the Niger Delta, a key source of oil. There can be no doubt that the critical impetus for such a policy from the Chinese perspective is strengthening the hand of Chinese companies as they negotiate deals in that country. Similar cooperative acts on the part of Beijing with respect to multiple African countries serve as “early-warning signals” of Chinese entry into resource rich markets. The table below summarizes some of the key indicators senior mining executives should monitor as they evaluate the likelihood that Chinese competitors will enter countries where they currently do business:
Figure 1: Early Warning System for Understanding Trends in Chinese Investment
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Chinese Government Actions That May Indicate Investment Interest |
Analysis |
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Agreements on infrastructure collaboration with potential target country |
Offers of assistance with infrastructure, education, health and other issues are usually the first step in China’s geopolitical courtship of resource-rich regimes. |
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Chinese state-to-state deals in countries that neighbor a resource-rich target country |
A key strategy utilized by China is the development of strong relationship with a potential target country’s neighbors. By gradually building influence in the region, China can make its eventual entry into the mineral –rich country much easier. A good example of this strategy is China’s use of Congo-Brazzaville as both a source of oil and an important stepping stone for eventual investment in the Democratic Republic of Congo (DRC). |
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Military cooperation between China and various regimes in Africa and Latin America |
China’s willingness to sell military equipment to most regimes provides a strong incentive for governments which require this technology to stay in power to encourage Chinese investment. |
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Bilateral trade agreements between China and the target country |
Another method for China to attract developing countries to its orbit and pave the way for investment by Chinese mining firms is to offer special trading privileges for the exports of countries China believes could be important sources of minerals. The ability of China to quickly implement trade agreements, bypassing the political procedures which in Western countries can delay such agreements for substantial periods of time, are a primary attraction of China as a partner for African states. |
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The expansion of the Chinese diaspora in a country, even if this diaspora is focused on other industries |
The presence of a Chinese expatriate community facilitates ties with China and provides a ready source of intelligence for Chinese investors about conditions in a given country. |
The clear implication of this early-warning system is that mining companies are going to have to become more sophisticated about monitoring geopolitical events. Understanding foreign policy, and not only in the countries where one does business but in the entire region, will become a valuable skill for senior mining executives as it has for oil and gas companies.
What Can Mining Companies Do to Address the China Challenge?
Despite the scope of the challenge presented by the entry of Chinese mining companies into developing markets, there are a number of effective strategies available to existing players to protect their current concessions and grow reserves despite the presence of new competitors. We highlight two such strategies below.
Strategy 1: All Parts of a Mining Company - Exploration, Corporate Development, Operating Divisions and Others - Must Prepare Robust China Strategies
As the pervious section made clear, China’s mining strategy in the developing world can often be accurately predicted by relying on key geopolitical indicators. But it is not enough for companies to simply conduct internal research or purchase outside advice on the geopolitical trends in regions of interest to the industry. In our work with clients, we have emphasized the need for proactive strategies that will enhance the competitiveness of a company in a given country or region.
Prudent companies will create robust strategies to understand the challenge presented by China and its mining companies around different divisions of the business. Exploration divisions must map out the key countries of interest to them that will provide reserve replacement for the foreseeable future and understand the China challenge in that context. Any exploration strategy that does not take into account the likelihood that above-ground environments in most African and Latin American countries may shift rapidly due to Chinese influence is unlikely to be successful. Corporate development teams need to appreciate that a new variable in any transaction is the competitive landscape that will be created by Chinese entrants into markets where acquisition targets may have assets. Particularly as the industry prepares for further consolidation, a key part of properly valuing the assets of any target is understanding the ability of the target’s properties to withstand property rights and other challenges from Chinese mining companies. Managers of existing operations need to be cognizant that sudden changes in geopolitical realities in their regions may be possible and could profoundly impact the profitability of their divisions. This is true even for countries currently considered absolutely stable, such as Ghana and Chile.
Strategy 2: Companies Must Learn to Leverage the Assets of Their Home Country Governments
Another important strategy that will help mining companies avoid the loss of property rights and position themselves to gain access to new resources and concessions is to utilize the assets of their governments in the countries where they do business.
Most operating executives already engage the embassies of their countries in the places where they have assets. While this is important, it is not enough to overcome the challenge presented by Chinese mining companies. Executives must engage the central foreign policy apparatus of their home countries – the State Department in the case of American companies, the Foreign Office in the United Kingdom, etc. – in order to both draw attention to the challenge discussed in this article and to put pressure on host governments to respect property rights and have open and fair processes for the allocation of future concessions.
Fundamentally, these strategies can be thought of as a combination of two key forces: the level of a company’s internal preparation to manage the new competitive environment and the ability of a company to leverage the resources of its own government on its behalf. Investors should look for companies that are able to do both.
Conclusion
The mining industry is undergoing a major transformation as new competitors from the developing world, and particularly China, are actively seeking resources around the world. Senior executives and Boards of Directors must develop comprehensive strategies for responding to this challenge. This issue cannot be put off till the challenge is present in the countries where one does business; only by preemptively preparing themselves, can companies successfully respond to the new competitive environment facing the mining industry. The ability of companies to maintain property rights to existing assets and expand their reserves in developing countries depends on successfully designing and executing such strategies.
© Frontier Strategy Group 2006
Alexander Turkeltaub is a Managing Director at the Frontier Strategy Group, a global research and advisory firm headquartered in Cambridge, Massachusetts that specializes in analyzing above-ground risks in the natural resources industries. Comments and/or inquiries about the “Future of Mining to 2025: The Rise of China and its Impact on the Global Mining Industry” study may be sent to aturkeltaub@frontierstrategygroup.com.
