China's economic slowdown has dealt a massive blow to the mining industry. With the prices of most commodities in the doldrums, however, the giant emerging economy looks like it could be set to use the downturn to strengthen its hand in the commodity markets. This is why you need to worry.
China falling
The commodity boom that pretty much ended in 2011 was largely backed by increasing demand from China, as the giant country rushed to build everything from roads to buildings to power plants. However, the emerging nation has started to slow down, with growth ratcheting back from 10.4% in 2010, according to the World Bank, to the mid 7% range more recently.
Iron Ore Spot Price (Any Origin) data by YCharts.
Seven percent is still pretty fast -- most developed countries are happy if they can reach low single-digit growth rates. But China has clearly slowed down, and with that slowdown has come reduced demand for commodities.
That, however, is a far cry from the cessation of demand. The problem for commodity players like BHP Billiton Limited (BHP 0.22%), Rio Tinto plc (RIO 0.43%), and Vale SA (VALE 2.87%) is that Chinese demand led to increased production. So supply is dwarfing demand right now, and commodity prices have fallen... hard.
An opportunity ahead, for China
Along for the ride with commodity prices have been the share prices and finances of the companies that mine them. That's bad for investors, but it looks increasingly like China is going to use this commodity downturn to its long-term advantage. For example, in late May, Fortescue Metals, a heavily indebted iron-ore miner in Australia saw its shares jump nearly 15% on the rumor that Chinese investors were looking to increase their stake in the company.
Beyond rumors, China's Zijin Mining Group is actively buying stakes in foreign assets. For example, it inked a deal to purchased a roughly 10% stake in Ivanhoe Mines, helping that Canadian company develop projects in Africa. In fact, Zijin's CEO has openly said his company is on the prowl, and this is just one of several moves. This highlights how Chinese companies are using the downturn to ensure access to commodities.
So what?
The reason this trend is so noteworthy is that China represented nearly 40% of Rio Tinto's revenues, and 34% of Vale's in calendar year 2014. That number was 35% for BHP in its fiscal 2014, which ended in June of that year. So China is a big customer for the world's major miners.
China may be slowing, but it has plenty more to build. Source: Public Domain, via Wikimedia Commons.
Further, a company like Fortescue counts Rio, Vale, and BHP as prime competitors. If Chinese companies have a major, and perhaps increasing, stake in Fortescue, would it be surprising to see future orders head its way over other players? The answer is clearly no. And that puts Rio, Vale, and BHP at a potential competitive disadvantage in a very important market.
While a company like Zijin is only taking a 10% stake in a foreign company, it doesn't mean that it won't increase that position over time -- especially if the commodity downturn lingers. This is basically the rumor going around about Fortescue. Thus, China could be looking to use "a foot in the door" to gain increasing control of more than just one miner.
Don't overlook this
Is this a doomsday scenario in which China takes over the world's mining industry? No. But because China is such a large customer to the world's major miners, it's an issue to keep in mind as you watch the industry shift and change in this deep and lingering downturn.
That's especially true now that the shares of miners are beaten down and money is increasingly tight. This is the exact environment in which Chinese money will prove most alluring. And that could leave some miners looking at weaker Chinese sales.
