Chinese Equity Accounted For 9.6 Million Mt Of The Capacity Of Newly Commissioned Overseas Iron Ore Projects In Q1-3 2023, Newly Commissioned Overseas Iron Ore Projects To Contribute 33 Million Mt Of Output That Is Owned By Chinese Partners By 2025

Chinese equity accounted for 9.6 million mt of the capacity of newly commissioned overseas iron ore projects in Q1-3 2023, newly commissioned overseas iron ore projects to contribute 33 million mt of output that is owned by Chinese partners by 2025

1. Background of Chinese enterprises’ overseas investment in iron ore

China is the world’s largest steel producer and consumer of iron ore. It needs about 1.4 billion mt of iron ore every year, of which more than 1 billion mt rely on imports, clear evidence of overdependence on foreign supplies. The monopoly of foreign mines means that China has had little say iron ore pricing for a prolonged period of time. The lack of pricing power seriously undermines the production and operation of Chinese steel enterprises. Since the end of the 20th century, adhering to the principle of going global, China began to lay out overseas iron ore resources.

According to incomplete statistics from SMM, from 1987 to the present, China has participated in a total of 70 overseas iron ore projects, of which 525 million mt is owned by Chinese enterprises. Among them, 26 projects were declared to fail due to various reasons, involving 141 million mt of production capacity owned by Chinese enterprises, and a total of 23 projects were successfully put into production, involving 154 million mt of production capacity owned by Chinese enterprises. 21 planned projects have not yet started up operation, involving 230 million mt of Chinese-owned production capacity.

2. Development stages of Chinese enterprises’ overseas investment in iron ore

• Phase I（before 2004）, Stage of initial exploration

The earliest "going out" of China's mining industry began in the late 1980s. 70% of the first group of overseas mining investment were large state-owned mining enterprises, and private enterprises accounted for 30%. From the perspective of investment mode, most of the mining projects in this stage were obtained under the background of inter-government cooperation, including the Chana iron ore mine in Australia of Sinosteel Group and the Marcona iron ore mine in Peru of Shougang Group.

• Phase Ⅱ（2004～2013）Stage of fast growth

In 2004, “the Government Work Report” proposed to make full use of "two markets and two resources", and the mining industry began to go out on a large scale. The investment in overseas mining remained at a high level even by 2013. During this period, overseas investment projects were driven by market and policy factors, and the investment subjects were diversified.

Besides steel mills, enterprises in other fields also began to enter the field of overseas mining investment. Due to the large number of projects and high investment enthusiasm, there is no good evaluation of overseas projects, and the success rate of overseas investment is not high at this stage. Even the successful projects have experienced more twists and turns.

• Phase Ⅲ（2014～2017）, Stage of investment adjustment

China’s investment in overseas mining has been declining since from 2014. During this period, iron ore prices fell sharply, overseas investment projects were suspended or put on hold, and almost no new projects were invested.

• Phase Ⅳ（2018～till now），Stage of project integration

In 2017, driven by the "One Belt One Road" policy and Vale’s dam break accident in Brazil, iron ore price rose sharply. At this stage, overseas project investment gradually increased, but many projects were reevaluated, integrated and restarted, such as the Simandou project in Guinea. During this period, Chinese investors began to invest overseas more rationally. Meanwhile, in order to effectively change the sources of China's iron ore supply and fundamentally solver the resource shortages of the steel industry chain, China launched the Cornerstone Plan in early 2022 in a bid to improve iron ore supply security. Setting goals at three key time periods, namely 2025, 2030, and 2035, China strives to boost domestic iron ore production, expand investment in overseas iron ore projects, and enhance the utilization rate of scrap steel. With the vigorous promotion of the Cornerstone Plan, China’s overseas investment in iron ore projects entered into production stage.

3. Since 2023, with the vigorous advancement of the Cornerstone Plan, Chinese-owned overseas iron ore mining projects have accelerated

According to SMM tracking statistics, in the first three quarters of 2023, three Chinese-owned overseas iron ore mine projects had been put into production, involving a total iron ore production capacity of 34 million mt, with Chinese stakes accounting for approximately 9.6 million mt.

• On April 28, 2023, Baowu Group’s Bomi iron ore project in Liberia was officially put into operation, with a production capacity of approximately 2 million mt, and 90% of the stake was held by a Chinese partner.
• During the Labour Day holiday in 2023, FMG's Iron Bridge project in Australia, in which Baowu Resources participated, was officially put into production. The project can produce 22 million mt of iron ore annually, and Chinese companies hold an 8% stake.
• On August 28, 2023, Liberia’s Bong Iron Mine (Phase I) Project, in which Wuhan Iron and Steel Co., Ltd. participated, officially completed the first cargo loading, marking the successful commissioning of the project. The iron ore production capacity of this project is 10 million mt, and Chinese partner holds 60% of the stake.

In addition to the above-mentioned projects that had been put into production, other Chinese-owned overseas projects that are under planning have also accelerated since Q3 2023.

Newly commissioned overseas iron ore projects to contribute 33 million mt of output that is owned by Chinese partners by 2025

According to SMM tracking statistics, in the next two years, the number of Chinese-owned overseas iron ore mine projects to be successfully put into production will continue to increase, but at the same time, a few projects will end mining activity. Planned projects will still be coming on stream one after another. Newly commissioned overseas iron ore projects are estimated to contribute 33 million mt of output that is owned by Chinese partners by 2025 and China’s iron ore supply will continue to climb.

4. Cornerstone Plan will make it more likely for Chinese-owned overseas mining projects to be put into production, but risks and challenges also exist

In the past two years, with the advancement of the Cornerstone Plan, the progress of some of China's overseas equity mines development accelerated, but the development and production of most projects still face risks and challenges as follows:

• Political risk: Some projects may not be implemented due to changes in the national leaders of the country where the investment is located or the transformation of investment policies. China's overseas investment insurance system is not yet complete, so it is difficult for companies to tackle such sudden, forced, and difficult-to-compensate risks.
• Legal risk: The laws and policies of the country where the investment is located regulate and restrict the progress of each stage of the project. Legal continuity and stability are more important than preferential commitments.
• Labor risks: Some countries have strong trade union organizations and obvious labor protection policies, which are not conducive to the advancement of overseas investment projects by Chinese companies; such as restricting foreign workers and formulating minimum labor welfare standards.
• Cultural risk: Due to cultural differences, the project may be rejected by the local community, affecting the safety, stable construction, and operation of the project.
• Market risk: Since the construction cycle of overseas investment projects is generally 3-5 years or longer, there will be a risk of falling iron ore prices during the process.
• Internal risks: Many companies do not pay attention to early due diligence when selecting investment projects, resulting in a series of problems in follow-up progress. For example, in some iron ore projects, resource conditions differed significantly from what was originally promised, resulting in increased production costs. When selecting projects, we should not only consider the conditions of the project itself but should comprehensively investigate water supply, power supply, transportation, etc. Otherwise, it will be difficult to proceed later.
• Other risks: Local inflation factors, exchange rates, interest rates, and shipping price fluctuations in the target country will also have a certain impact on the project.