China's Global Mining Bets Failing to Pay Off
September 12, 2014
For the past decade China has been exerting its influence around the world through economic means. From buying up property in foreign countries to leading the way in oil exploration in remote parts of Africa, China is betting big on many projects and mining is one. However, as recent data shows, the mining bets have not been paying off well and in some cases have been considered flops.
Take for example a $10 billion iron-ore mine in Cape Preston, Australia. For starters, the mine has taken more than eight years to develop and is already four times over its initial budget estimate. Analysts say the mine will lose hundreds of millions of dollars in 2014, its first year of production. Add to this the legal hurdles that have parent company Citic Pacific fighting claims that they are not paying full price for the resources they are taking.
For the past decade, China has been busy buying up global commodities to keep its factories running and to decrease its reliance on western nations for raw materials. In 2013 alone China's investment in overseas resources reached $53.3 billion compared to the $8.2 billion it spent in 2005.
Unfortunately for China, many of the projects it has backed are either underperforming or not performing at all. Places that received generous backing at first, including mining locations in Africa, the Middle East and Latin America are now seeing that money being pulled and invested elsewhere as the Chinese appetite for resources sours.
Many analysts say that China was late to the global resources boom and only now is figuring out how complex and difficult mining projects are. Cost overruns are just one of the many problems company's face when dealing in energy resource projects and China is finding out the hard way how hard it can be
to manage costs in mining deals.
Recently Iran cancelled a $2.5 billion deal with China National Petroleum (CNP) after alleging China was overcharging for drilling equipment and services and causing projects to be delayed. CNP was going to develop an onshore oil field in South Azadegan but with that contract cancelled there is now concern that Iran may also pull the plug on a $4.7 billion contract to develop the massive South Pars gas field.
Whether these are the normal growing pains of a new player in the energy market or indications of a deeper problem with China's investing in mining remains to be seen but for the time being China will have to deal with heavy losses before seeing the profits once promised.