China’s Africa resource scramble goes platinum

Reuters/Ledig, South Africa

China’s scramble for resources is breaking new ground on South Africa’s platinum belt.

As older and less profitable shafts face closure, Chinese money is bank rolling one of a handful of new platinum mines being built in South Africa, which sits on about 80% of known global resources of the white metal.

Wesizwe Platinum’s Bakubung mine, which aims to start production in 2018 and churn out 350,000 ounces of platinum group metals a year by 2023, is China’s first direct investment in the sector and it likely won’t be the last.

A Chinese consortium headed by mining giant Jinchuan has a 45% stake in Wesizwe and the China Development Bank (CDB) last week provided a $650mn loan, providing the project with the capital needed to complete the mine.

Platinum is primarily used for catalytic converters in motor engines and for jewellery. Demand for both is seen soaring in China as its car production goes into overdrive and its burgeoning middle class consumes luxury items.

The rugged hills of the Pilanesberg Game Reserve rise up just to the east of the site, where bulldozers move earth and shafts slowly sink toward the reef which lies between 600 and 800 metres below.

In some ways, this Chinese foray into Africa’s resource sector follows a similar pattern.

Wesizwe’s chief operating officer Paul Smith told Reuters the loan’s interest is Libor plus 350 basis points — an exceptionally low rate for a South African company that highlights one advantage of having Chinese shareholders.

At current Libor rates, this would be around 3.8% against the 8% or more South African companies would normally expect, especially in the wake of the country’s sovereign credit ratings downgrades triggered in part by a wave of mine labour unrest Last year.

“I think this is typical of the Chinese model. The terms and conditions they are offering are extremely generous and competitive. And they would be looking for some long-term benefit for their outlay at the moment,” said Gary van Staden, a political analyst with NKC Independent Economists.

Competitive debt conditions are the norm for Chinese financing when it comes to resource-related projects in the region. Examples include the soft loans China has provided to Angola, Africa’s second-largest oil producer.

Smith also told reporters who visited the mine site this week that Wesizwe would “make use of the Chinese supply base” — which follows a well-worn script of companies from there sourcing equipment from their home base.

But Wesizwe also represents a departure from other Chinese approaches to Africa, as Jinchuan has partnered with local investors and is making use of domestic expertise.

The prevailing stereotype of Chinese investment in Africa is that its companies snap up the assets and then bring in their own skilled labour forces to get the stuff out of the ground.

But if you want to mine platinum, then it is best to have South African accents on your engineering team, as few other countries have experience in this area for obvious reasons.

This was driven home in Zimbabwe, where South Africa’s Impala Platinum acquired Zimplats and made a success out of platinum assets in the country after companies such as BHP Billiton were stymied by the geology.

Chinese companies also have tended to swallow assets in Africa and then de-list them, which was the case when Jinchuan acquired Johannesburg-listed cobalt and copper producer Metorex.

Smith told reporters who visited the Wesizwe mine site this week “there is no way we are going to delist,” so that approach is off the table for the moment.

The mine is one of the few being built in South Africa’s platinum belt at a time when Anglo American Platinum, the world’s top producer of the precious metal, is planning to mothball two unprofitable operations and cut 14,000 jobs in the face of stiff government and union resistance.

“People are shutting shafts on old ore bodies, but here we have a virgin ore body,” Smith told reporters.

Amplats is also tentatively planning to sell its Union mine as part of a restructuring process to return to profit and Smith said Wesizwe and its shareholders would “look at it” if it came up for sale.

Chinese oil imports likely to rise more in second half

The easy thing to predict about China’s crude oil imports this year is that they will be higher than in 2012, the trickier question is by exactly how much.

Once again it appears that the major factors determining the extent of the gain will be how much new refining capacity comes online and how much new strategic storage is commissioned.

These two factors are uncertain, making an estimation of likely gains in crude demand a bit of a guess, but there is enough information to help make some early forecasts.

Some of China’s top refineries plan to raise crude runs by about 4% in 2013, according to a Reuters poll of 18 major plants, which have a combined capacity of 4.83mn barrels per day (bpd) or 44% of total capacity.

If this 4% increase in runs is applied to the total refining capacity, it implies an increase in crude processed to 9.73mn bpd from 2012’s 9.36mn.

This means a jump of about 375,000 bpd in crude processed, and it’s likely that this will mainly be met by increased imports as domestic oil output is likely to be little changed at around 4.1mn bpd.

However, it’s worth noting that refinery runs reached a record 10.493mn bpd in December, well above what the poll suggests they may average for the whole of 2013, suggesting there is upside risks to crude demand if operating rates continue at near last month’s levels.

In what may just be little more than coincidence, the Reuters poll figure of a 4% rise in refinery runs is exactly the same as the International Energy Agency’s latest forecast for China’s oil-product demand growth in 2013.

The agency expects China’s demand to rise to 9.984mn bpd in 2013, up from 9.595mn last year.

The IEA figures, being product demand, doesn’t correlate exactly to crude demand, but suggests that crude and net product imports will have to total almost 6mn bpd this year.

Crude imports averaged 5.42mn bpd in 2012, a gain of 6.8% over 2011, while net product imports were around 300,000bpd.

Together, crude and net product imports were around 5.72mn bpd in 2012, meaning to reach 6mn bpd, an additional 280,000bpd would have to be imported.

Given the refiners polled say they will process about 375,000bpd more, this implies that net product imports will decline in 2013.

This is likely to take the form of lower imports of fuel oil and higher exports of diesel that would be enough to offset a likely decline in gasoline exports.

Fuel oil imports may decline as small refineries, known as teapots, are allowed to import crude directly, while increased refinery runs will boost the diesel surplus.

Rising vehicle sales will boost gasoline demand and maybe by more than the increased refining capacity, thereby cutting the surplus of the motor fuel available for export.

In addition to higher refinery runs on units that were operating by the end of last year, China is likely to add more capacity in 2013.

PetroChina’s Sichuan complex is slated to add 200,000bpd by the end of the first quarter, and Sinochem and Sinopec may add another 340,000bpd between them by the end of the year.

However, for the bulk of this year, it’s only the PetroChina facility that is likely to boost crude imports, and then probably not even by as much as the full 200,000bpd capacity.

However, building up inventories for the new refining capacity will also serve to boost crude demand over the year.

Another X-factor is strategic storage, with some second stage facilities due for completion in 2013.

It’s by no means certain that even if the tanks are ready, that China will decide to lift imports to fill them, but it’s nonetheless an upside risk to crude demand, especially for the second half.

Putting together what is known and speculating on what’s likely, and a picture emerges of additional imported crude demand of at least 300,000bpd in 2013, but more likely closer to 400,000 bpd.

This will meet the planned increase in refinery runs, which is turn will meet the gain in actual demand from higher economic growth.

If oil is bought for strategic storage, it will most likely be in the second half, meaning demand may rise more in that period than in the first half.