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Chinese investment in Australian mining to rise; fewer executives feel welcome


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Chinese investment in Australian mining to rise; fewer executives feel welcome

Chinese investment is expected to continue in Australia's mining sector, which bucked the 2017 trend when the Asian giant's global overseas direct investment fell 29% amid broader concerns among Chinese executives of feeling increasingly "unwelcome" Down Under.

KPMG International's latest "Demystifying Chinese Investment in Australia" report issued June 12 revealed that mining was the most significant sector for Chinese investment in 2017 with 35% of total overseas direct investment, followed by real estate at 33%, healthcare at 12%, food and agribusiness at 8% and infrastructure at 4%.

While China's overall investment in Australia dropped 11% to US$10.3 billion in 2017 from 2016, KPMG Australia's head of Asia and international markets, Doug Ferguson, said that was nowhere near as severe as experienced in the U.S., where the rate of growth of new Chinese overseas direct investment fell 35%, and in the EU, which fell 17%. The overall 2017 decline in Chinese investment in Australia was largely driven by an 89% drop in new infrastructure investment from A$4.3 billion in 2016 to A$485 million.

Ferguson said Chinese executives told KPMG that Australia remains a "relatively safer and more attractive country to invest than many others, yet only 35% of survey respondents feel welcome to invest Down Under, which is down from 52% in 2014."

This "unwelcome" feeling is "fairly acute in relation to issues playing out in the media around [politicians] registering a foreign influence; there's still fallout from the Ausgrid decision, some of the tightening up on infrastructure investment, and just generally a negative sentiment in Australian media around Australia's China relationship," he said.

Reuters reported China's commerce ministry saying in an August 2016 statement that Australian Treasurer Scott Morrison's decision to block the sale of Ausgrid to State Grid Corp. of China showed uncertainty in Australia's investment environment and would seriously hurt Chinese companies' willingness to invest Down Under.

Chinese investment in mining to pick up

While KPMG believes that the current downward trend in industrywide investment will continue this year, an exception would be seen in mining, and Ferguson told S&P Global Market Intelligence that there is more likely to be a "string of deals in commodities that China is most interested in, which looks like lithium, gold and non-ferrous, then some continuation into clean coal, where there's value to be had."

China's investment in Australia's mining sector in 2017 was driven by one big transaction — Rio Tinto selling its Coal & Allied Industries Ltd. to Yanzhou Coal Mining Co. Ltd. subsidiary Yancoal Australia Ltd. for US$2.69 billion — then 11 other smaller transactions.

Those 12 mining-sector deals announced in 2017 totaled A$4.6 billion, a 448% lift from 2016. Even without the Rio Tinto-Yancoal deal, mining investment would have risen 43% in 2017, which KPMG said was driven by global demand for lithium, cobalt and other nonferrous metals.

"They're an established part of the investor community now, and they're looking at most transactions and opportunities," Ferguson said, adding that some have been in Australia as early as 2008 and others even before that.

Private Chinese investors accounted for 83% of total deal volume by number and 60% of deal value in 2017, up from 78% and 49%, respectively, in 2016.

Talison Lithium Ltd., which is 51% owned by Tianqi Lithium Corp., invested A$320 million to double the capacity of the Greenbushes lithium mine in Western Australia, which supplies about 40% of the world's lithium. Tianqi Lithium has also invested another A$300 million in its lithium hydroxide processing plant in Western Australia that is under construction.

Other significant lithium investments included Jiangxi Ganfeng and Great Wall Motors SA Pty. Ltd. taking small stakes in new lithium producer Pilbara Minerals Ltd.

Strategy of Chinese investors

An executive from an ASX-listed junior who has had dealings with Chinese executives told S&P Global Market Intelligence on June 13 on the sidelines of the Association of Mining and Exploration Companies convention in Perth that they "still see Australia as a very secure place, with low political risk in terms of investing, so they're quite keen."

However, "obviously they've had some issues in the past with some of their investments so they're a bit more, I wouldn't say reluctant, but require a lot more due diligence and have to go through a lot higher process these days for their internal politics through the State-owned Assets Supervision and Administration Commission of the State Council, and others, before they can get approvals to do it," the executive said.

He said that for Chinese investors, it came down to "the deposit in terms of quality, grade and tonnes that make it worthwhile, then it's about the board and the working relationship they get set up with the Australian company and whether they can work with them and trust them."

While Australia retained its position as the second-largest recipient of accumulated Chinese investment, behind only the U.S. with just under US$100 billion since 2008, the gap is growing.