MAC/20: Mines and Communities

China update

Published by MAC on 2008-02-04


China update

4th February 2008

China's environmental protection agency says that the country's banks will observe the "Equator Principles" - a set of voluntary social and environmental "safeguards" to which many US and European banks have signed up. It remains to be seen whether Chinese investors will be any more diligent and decisivein observing these guidelines than their western counterparts.

According to the Financial Times, China's ascendancy to the top of global gold producers may not be such a gilded achievement after all. The 1,300 licensed mines, operated by more than a thousand small companies, possess low grade ores extracted with scant regard for environmental protection, and could soon become exhausted


China to bring in green loan benchmark

By Sun Xiaohua (China Daily)

25th January 2008

The nation's environmental watchdog will work with the financial sector to bring in an international benchmark on green credit.

The State Environmental Protection Administration (SEPA) signed a deal with the International Finance Corporation (IFC) in Beijing yesterday to introduce the Equator Principles in China.

The principles are a voluntary set of guidelines based on IFC policies to incorporate social and environmental issues in project inancing.

Finance is provided only to projects that will be conducted in a socially and environmentally responsible way that's in line with the principles.

China introduced the green loan concept last July, part of its enforcement of eco-friendly economic policies. Communications between environmental monitors and banks saw some plants blacklisted from receiving loans because of their pollution record.

"It was proved an effective instrument to curb pollution and lower financial risk," said Yang Chaofei, director of the SEPA's policy epartment.

But increasing demand for green credit meant environmental groups and banks needed a set of international standards, Yang said.

Lian Gong, deputy head of credit management at the Industrial and Commercial Bank of China (ICBC), agreed.

The ICBC surveyed its 59,000 corporate clients last year to assess environmental performance. About 78 percent were cleared for green loans of more than 200 million yuan, accounting for about 80 percent of the total.

"As we pushed forward with the green loan concept, the biggest problem we faced was how to assess pollution risk for different industries," Lian said.

The Equator Principles cover 63 sectors that cause environmental problems, such as manufacturing, petrochemicals, energy and infrastructure construction.

Initial collaboration between the SEPA and IFC produced environmental, health and safety guidelines for pulp and paper mills and the mining sector.

Li Xiaowen, from the China Banking Regulatory Commission, said the benchmark's introduction indicated a shift in the banking industry's focus to environmental and social issues as a business risk.

She urged the financial sector to join with the environmental agency to meet the nation's energy conservation and environmental protection targets.


Rewards spur China’s gold rush

By Richard McGregor in Beijing, Financial Times

4th February 2008

After more than doubling production in the past two years, the managers at the Habahe Huaitai gold mine in Xinjiang have factored in a similar surge this year.

There are numerous reasons for the rise, including better knowledge about the project’s reserves, but above all, a spokesman said, increases are being driven by higher global gold prices.

China’s mini-gold rush made it the world’s biggest producer in 2007, the first time any nation has surpassed South Africa since the late 19th century.

“Because of the higher gold price, companies with enough capital are lifting production,” said an official of the China Gold Association, citing one mine in Shanxi province planning to quadruple output over the next two years.

Gold production in China rose by 12 per cent to reach 276 tonnes in 2007, according to GFMS, the London-based precious metal consultancy, ahead of South Africa, with 272 tonnes.

By the standards of some Chinese industries, gold output has risen at a stately pace. Local production of iron ore, the global price of which has also risen sharply, increased by 40 per cent year-on-year in 2006, as miners tried to profit from the resources boom. But in a year in which global, and South African, production fell, the additional Chinese output in 2007 of 27 tonnes was hugely significant.

Production, of gold, and other resources, has been spurred by small, semi­private mines, often producing low grades of ore in ventures that would have been unviable a few years ago. The lack of environmental scrutiny, at least compared with similar projects in western countries, also keeps costs down.

“There is so much money sloshing around in the economy that in many ways mining has become the new real estate,” said a China-based foreign mining executive.

China has more than 1,300 licensed gold mines and more than 1,000 gold mining companies, according to official figures. None of its gold companies ranks in the top five producers in the world.

The foreign share of Chinese production is small at about 8 per cent, with none of the large groups figuring significantly in the market.

With most potential mining leases divided up into small quilt-like plots, and the best prospects often reserved for locals, the big groups have had little incentive to invest in China, even though, officially, restrictions have been eased.

Besides price, the other spur for production is rising consumption, triggered by official approval for an exchange to trade gold and new investment products. The Shanghai Gold Exchange, opened in 2002, has provided real-time pricing.

Until the late 1990s, the central bank set the price daily. The second boost has come from banks, which market both bullion and “paper gold” notes, which can be bought and sold with ease across the counter.

“This has really helped make gold into an everyday investment product,” said a Hong Kong-based banker involved in the market.

The strengthening renminbi remains a constraint on the market, as gold is priced in US dollars. The gold lobby also continues to push for a removal of a 17 per cent value added tax on gold. “Gold has become a kind of alternative investment,” said Albert Cheng, of the World Gold Association. “But if the VAT was removed, that would be good news for investors.”

The Chinese market for jewellery is relatively small compared with the main ­centres and is only about one-quarter the size of India’s. For all the euphoria of the past two years, China’s mantle as the top producer may not last long.

Hussein Allidina, chief commodities economist at Morgan Stanley in New York, said output might begin to decline in six years because China lacks the “geology for large sustainable gold production”.

“Thus, we expect lower growth from China in 2008 and 2009, with marginal costs continuing to rise as higher grades are exhausted,” he said.

Even this year’s rise in production might not be all it has been portrayed, since in the past some production was kept off the books so it could be exported. The onshore investment market is now bringing such production to the surface.

Additional reporting by Wang Bing in Beijing and Javier Blas in London Copyright The Financial Times Limited 2008

 

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