SeptemberApril 20142013 І www.thebeijingaxis.com/tca

China’s Continued Quest for Natural Resources

China in the Developed World

Features China’sFeeding Increased a Billion: PresenceChina’s Transforming in the Developed Agricultural World Sector TheChinese Growing Mining Global Firms In infuence the Year of Chineseof the Horse: Consumers a Trot, a Canter or a Gallop? China’sChinese Transformation: Super Majors: Tilting Implications the Global for GlobalOil and Supply Gas Playing Chains Field

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www.thebeijingaxis.com The Middle Kingdom’s Growing Appetite

With slower economic growth of 7.7% in 2013, the story of China’s contribution to global demand for commodities is still far from over. In March 2014, China unveiled its long-awaited plan to have approximately 60% of its more than 1.3 billion people living in urban areas by 2020 in a bid to boost economic growth and efciency. These new urbanites will demand greater quantities of disposable goods, electronics and white goods to furnish their new dwellings – ushering in a new wave of consumption.

China will undeniably experience some growing pains as it begins to rebalance, yet the country will continue to grow – and from a larger base than when GDP was expanding at a double-digit pace. Multinationals who have not yet entered (or succeeded in) the Chinese market should note the scale of the opportunity in the Middle Kingdom and readjust their long-term strategy accordingly.

China’s % of global resource consumption Coal Steel AluminumCopper Gold Oil

2% of China’s population consumes 25% of global luxury goods 1,066 metric tons of gold were imported in 2013, 1.2 billion the world's largest mobile phones were in

circulation in China in 2013 GOLD GOLD $1.6 trillion was the overall market value of China's e-commerce market in 2013 54,720 children are born every day in China

50% of the world’s pork 197 mn is eaten in China increase in urban dwellers 2000, highest globally

240 mn vehicles 97 million registered by 2012 122 Chinese traveled billionaires abroad in 2013 in 2013, compared to 0 in 2000

Source: Various; The Beijing Axis Analysis The At the Highest Level China Underscoring China’s commitment to sustained economic reform, Chinese Analyst Premier Li Keqiang mentioned the word “reform” a remarkable 77 times in his opening speech at the National People’s Congress, China’s annual rubber April 2014 stamp legislative assembly held this past March in Beijing. Published by The Beijing Axis The delegates of the National People’s Congress global value chain will assure steadily rising 3806 Central Plaza revealed a GDP growth target of “around” 7.5% for demand for mineral products and advanced 18 Harbour Road Wanchai 2014 while prioritising mining technologies. As the mining industry Hong Kong, PRC other key socio- cools from its 2012 boom, resource nationalism, Tel: +86 (0)10 6440 2106 economic issues. Over an increase in price volatility, higher operating Fax: +86 (0)10 6440 2672 the past year, Beijing costs and declining mineral grades will increase www.thebeijingaxis.com has repeatedly pledged risk and complexity in the global mining sector. Publisher to tackle corruption, As resource constraints continue to arise, Chinese Kobus van der Wath reduce production mining frms will continue their trek into deeper [email protected] from key polluting mineral deposits domestically and abroad. industries – aluminium, Advisor cement, glass and Trends in China’s fnance and banking sectors will William Dey-Chao steel – and increase be instrumental in demonstrating the direction [email protected] consumer spending the Chinese economy will take. The rapid growth Senior Manager levels. of shadow banking, along with its inherent risk, Barbie Co demonstrates the Chinese economy’s need for [email protected] The Chinese government also hopes to continue a more transparent and accountable financial implementing reforms by opening state- system. Editor dominated industries up to private, and even Daniel Galvez foreign investment, coerce banks into becoming It is against this backdrop that China’s [email protected] more market-sensitive and further ease exchange policymakers will continue to dictate the pace Associate Editor rate controls. Beijing hopes these structural and of change through their policy of coordinated Tim Quijano fnancial reforms will unlock additional sources of reform, which will continue to initiate remarkable [email protected] economic growth and improve the efciency and opportunities both in the Chinese market and market-sensitivity of the Chinese economy. abroad. Designer Qing Lei In line with China’s increase in consumption, In the April 2014 edition of The China Analyst, we [email protected] China’s agricultural sector will undergo structural outline the implications of China’s continued quest To view the contents of previous changes starting in 2014. China’s State Council for natural resources as the country redefnes itself editions of The China Analyst, see recently announced plans to abandon the once more through the implementation of key Previous Editions on page 35. To country’s 95% grain self-sufciency policy, which economic reforms. subscribe free of charge to The China Analyst, please visit www.thebeijingaxis. has been in place since the days of Maoism. This is com or www.thebeijingaxis.com/tca. expected to result in rapid growth in the amount I trust that our readers will enjoy this edition of of imported foods consumed locally. Moreover, The China Analyst and, as always, I welcome your For advertising opportunities, please the population’s continued shift toward a more feedback. contact Barbie Co at barbieco@ thebeijingaxis.com. protein-rich diet will further strain global food supply chains. Genetically modifed foods, greater mechanisation and market-oriented central Kobus van der Wath policies can lead to greater efciency in China’s Founder & Group Managing Director agricultural sector. The Beijing Axis [email protected] Increasing consumption at all levels in China will also lead to growth in demand for oil and minerals. Though China has recently become the world’s largest importer of oil, China’s per capita DISCLAIMER oil consumption lags well behind the levels of This document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections the developed world, which demonstrates room and estimates are subject to change without notice. This document is for information purposes only, and solely for private for further growth. As China’s consumption of oil circulation. The information presented here has been compiled from sources believed to be reliable. While every efort has been made ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible has ballooned, China’s state-owned oil and gas for any loss, irrespective of how it may arise. In addition, this document does not constitute any ofer, recommendation or enterprises have developed into global players solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past representing key collaboration opportunities for performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as international firms, especially in areas such as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned in this document. tapping unconventional resources. China has also All readers are advised to make their own independent judgement with respect to any matter contained in this document. hinted at opening up the Chinese market to more Copyright notice: Copyright of all materials, text, articles and information contained herein resides in and may only be foreign participation. reproduced with permission of an authorised signatory of The Beijing Axis. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests in and shall remain copyright of The Beijing Axis and should not China’s interest in advancing its climb up the be reproduced or used except for business purposes on behalf of The Beijing Axis or save with the express prior written consent of an authorised signatory of The Beijing Axis. All rights reserved. © The Beijing Axis 2014.

4 І The Beijing Axis Table of Contents April 2014

FEATURES REGIONS Feeding a Billion: China’s Transforming Regional Focus: CHINA-AFRICA Agricultural Sector 26 6 China-Africa trade and investment analysis and a Opportunities resulting from the shift in China’s agriculture focus on China’s relations with the South African Development market Community (SADC)

FEATURES REGIONS Chinese Mining Firms in the Year of the Regional Focus: CHINA-AUSTRALIA Horse: a Trot, a Canter or a Gallop? 28 9 China-Australia trade and investment analysis and An analysis of how Chinese mining frms will develop during ‘Australia State Watch’ on Queensland the mining industry’s expected recovery in 2014

FEATURES REGIONS Chinese Super Majors: Tilting the Global 30 Regional Focus: CHINA-LATIN AMERICA 12 Oil and Gas Playing Field China-Latin American trade and investment Implications of China’s sustained increase in overseas analysis and a special focus on China’s relations with Costa Rica production of oil and gas

The Beijing Axis News MACROECONOMY The latest news from The Beijing Axis Group Macroeconomic Monitor: Balancing 32 16 Reform with Growth China executes on its plans to reform the world’s second-largest economy

PROCUREMENT 18 How to Procure from China #13 In this edition, we focus on the thirteenth stage of the procurement process: Installation and Commissioning

INVESTMENT China Capital: Inbound/Outbound FDI & Overseas Resource Investment 19 Analysis of the latest on FDI in China and OFDI by Chinese frms with a focus on overseas resource investment

STRATEGY Mapping China in the Global Production 22 and Consumption of Oil and Gas Global patterns in the consumption and production of oil and gas

STRATEGY CNOOC: Expansion into Unconventional 24 Expertise A focus on China’s third-largest oil and gas company to demonstrate trends in Chinese overseas investment in this strategic sector

5 І The Beijing Axis Feeding a Billion: China’s Transforming Agricultural Sector

As China’s agricultural sector struggles to keep up with the country’s growth in demand, many opportunities are arising for companies interested in capitalising on this challenge. China’s struggle to consistently secure adequate food supplies of a sufcient quality has resulted in its agricultural sector being placed under increasing scrutiny. The State Council, China’s highest decision-making body, released guidelines in February 2014 that suggest that the country will no longer aim to match demand for grain through domestic production alone, as has been the case since the days of Maoism. These are the frst public signs that Beijing is coming to terms with the realities facing China’s agricultural sector. China’s shrinking farming capacity, as well as some of its archaic agricultural policies, will hamper its ability to achieve food security in the long term. China’s ability to meet the agricultural demands of its population will usher in a new era of opportunities for agricultural companies. By Dominique Scott

The situation released by the State Council in February 2014. Analysts have proposed that land and water-intensive products, like beef, ofer f China were self-sufcient with regard to agricultural products, it higher proft margins than vegetables, fruits and grains. Beijing may would have to feed 20% of the world’s population with only 10% be attempting to ameliorate China’s high inequality by allowing Iof the world’s arable land and 6% of global water resources. In the farmers to choose to farm more proftable produce. However, this past, this situation was manageable due to the fact that Chinese policy alone will be insufcient to overhaul China’s agricultural citizens generally depended on vegetables and grains for energy sector. with only small portions of meat for favour. Arguably, these dietary preferences arose as a consequence of many not possessing the Furthermore, food scandals, whether it’s comical glow-in-the- wealth to buy more expensive food products, as many can today. dark pork chops or melamine-tainted milk, emerge in China with alarming regularity. Unsurprisingly, China’s growing middle However, China’s meat and calorie intakes have climbed in class is demanding imported food and beverages so long as conjunction with the country’s GDP. In 1980, for example, China’s there is apprehension regarding the quality of local products. average level of protein consumption was a mere 12% of the The apprehension around the quality of domestically-produced average of Japan, Malaysia, Australia and New Zealand, a culturally powdered baby milk, in particular, has had profound efects around diverse sample. By 2009, China’s protein consumption had risen to the world. Supermarket stores in Hong Kong, Australia, New 56% of the above sample’s average. China’s large population and Zealand and even as far as the UK have implemented policies aimed the apparent remaining growth in China’s appetite illustrate how at rationing baby formula due to a surge in demand from China. much food will be needed to meet future demand. Regardless of whether Beijing abandons its ‘self-sufciency’ targets, One of Beijing’s responses to China’s lack of food security was to set opportunities for investors lie in the Middle Kingdom’s future a 95% ‘self-sufciency’ target on key grain products—corn, rice and nutritional needs. The Chinese market’s sustained growth will result wheat—to shape the way land and water resources were prioritised in an increase in demand for a wide range of food commodities – and insulate the country from fuctuations in global grain prices. foreign intervention and innovation will help meet this demand. The production of meat is more land and water-intensive than the production of vegetables, fruit and feed. Putting extra pressure on China’s Milk Powder Consumption by Type already strained resources was thought to be unwise. A pound of (‘000 tonnes, 2012 vs 2022F) beef requires a staggering 6,810 litres of water, pork 2,180 litres, soybeans 818 litres, potatoes 450 litres, corn 409 litres and apples 2012 70 litres. 2,000 CAGR 2.1% 1,908 2022F Additionally, the low quality of China’s natural resources is 1,500 1,438 exacerbating the country’s resource shortage. The Organisation for Economic Cooperation and Development (OECD) estimates that 70% of China’s arable land is low-yielding, and erosion, salinisation 1,000 and acidifcation are leading to a further reduction in the quality of China’s soil. Further, these estimates do not take into account the 500 efect of pollution on China’s arable soil. Some analysts say between CAGR 5.0%314 8-20% of China’s arable land is contaminated by heavy metals. 184 0 Interestingly though, this ‘self-sufficiency’ target has been Skim milk powder Whole milk powder abandoned for a more open policy according to guidelines Note: 2012 refers to an average of 2010-2012. Source: OECD-FAO Agricultural Outlook; The Beijing Axis Analysis

6 І The Beijing Axis The outlook China’s Consumption of Selected Commodities (mn tonnes, 2012 vs. 2022F) If President Xi Jinping follows through on his commitment to double 300 2012 China’s GDP per capita by 2020, demand for the more expensive 270 categories of food, such as animal protein, will rise the fastest. 2022F 250 Most of this increase in demand will be met through an increase 201 in imports due to China’s aforementioned shortage of high quality 200 agricultural inputs. 150 The OECD and Food and Agriculture Organisation (FAO) have 129 102 estimated that by 2022, China’s consumption of food commodities 100 86 will increase considerably across all categories, as demonstrated 61 66 51 50 in the chart to the right. Possibly as a result of China’s struggle 30 37 17 22 with tainted milk, the dairy category holds one of the largest gaps 7 8 between domestic production and consumption. Notably, these 0 projections were made before the State Council announced its Beef and veal Poultry Vegetable oil Pork Other meat Oilseed Grain abandonment of the 95% grain self-sufciency guidelines, which Note: 2012 refers to an average of 2010-2012. will expand farmers’ control over which commodities they grow. Source: OECD-FAO Agricultural Outlook; The Beijing Axis Analysis Now that these targets will likely be removed, China is projected to experience a rapid expansion in grain imports. Even if new policies could maximise the amount of arable land, China will continue to sufer from its unproductive use of land. While The solutions China’s agricultural total factor productivity, a measure of a country’s long-term technological change, has risen in the reform era, it still There is little doubt that Beijing faces a challenge in solving the lags behind that of developed nations. Advanced agricultural country’s dramatic mismatch between supply and demand of food techniques and technologies for fertilisation and irrigation, for products. While many propose that it is inconceivable for China to example, could help with increasing productivity. Gradually opening achieve food security due to its scarcity of water and land resources, up the agricultural sector to foreign investment, which the central Beijing can reduce its dependence on imports in the long term government currently forbids, is a potentially efective strategy to through the implementation of strategic policies. transfer such techniques and technologies. Unfortunately, Beijing may not have the luxury of time if it wants to reduce its reliance on Remnants of Maoist collectivism, for example, remain present imports. in China’s rural land policies and reduce motivation to increase agricultural production. Providing farmers the opportunity to own, Beijing’s ‘Going Out’ policy, through which the central government sell and borrow against land to expand business opportunities aids firms, private and state-owned, to make acquisitions and and profits may solve some of China’s food woes. Allowing for investments abroad with the intention of securing physical assets consolidation could create an environment that makes unproftable and the associated intellectual property, could complement the enterprises fnancially unsustainable and rewards those that are reform of the agricultural sector. From 2010 to 2013, Chinese food proftable. The economy of scale achieved through the consolidation and beverage companies made over USD 9 billion worth of deals of farms will likely achieve higher production volume at a lower unit overseas according to the National Australia Bank. Deals such as cost. Shuanghui’s acquisition of Smithfield, the world’s largest pork producer and processor, in May 2013 and COFCO’s March 2014 Since 1997, an estimated 8.2 million hectares of arable land, roughly acquisition of majority stakes in Noble Group’s agribusiness unit the area of Austria, has been lost to property developers catering and Nidera stand out, but there are countless examples from around to a growing urban population. While increasing the size of China’s the world. With China already having established good relationships urban population is an important step towards shifting China to a in Africa, Australasia and South America, where some of the most consumption-driven economy, this process has been administered fertile farmlands in the world exist, the opportunity for increased in a haphazard fashion, which has jeopardised the country’s limited OFDI in agriculture is certainly available. fertile land. A policy that preserves the most fertile land while using infertile land for infrastructure could provide for greater efciency Genetically modifed (GM) food may provide a partial solution to and productivity in the agricultural sector. China’s urbanisation and China’s food supply woes as well. GM crops have the potential to property development also presents an opportunity to increase overcome many of the challenges of agriculture in China, such as productivity in the agricultural sector. low-yielding arable land and decreasing soil quality. Furthermore, the benefts of lower costs will also aid in keeping infation in check. Urbanisation has resulted in roughly 25 million Chinese farmers However, GM food is a sensitive topic in China—the public remains becoming defacto urban residents every year, which has led to the cautious as to whether the government has fully addressed the rapid development of labour-saving machines, such as tractors, potential risks. Nevertheless, the Ministry of Agriculture has taken produce sorting machines and refrigeration systems, for farms and the lead in publicly declaring the safety of GM food and is slowly food processing factories. According to a report by the Ministry pushing domestic production ahead. According to Han Changfu, of Agriculture, only 33% of China’s corn and 69% of its rice are the Minister of Agriculture, 17 GM products from fve plant species mechanically harvested every year. The report also stated that China are currently sold on the domestic market: soya beans, corn, oilseed performs 72% of its post-harvest processing tasks, such as sorting rape, cotton and tomatoes. Currently, the only GM crops approved and packaging, by hand. The opportunity for the mechanisation for domestic commercial production are cotton and papaya. of the agricultural sector is evident. Mechanisation may, however, result in unforeseen consequences related to unemployment Lastly, frms can mollify China’s food safety fears by exporting from in China’s labour market, so policymakers and the business their home country or by producing strategically within China. community would beneft from a coordinated approach to solving Tyson Foods, one of the world’s largest processors and marketers challenges in the agricultural sector. of chicken, has shifted from its conventional business model of

7 І The Beijing Axis sourcing from independent chicken farmers and has built its own players desire advanced labour-saving technology and will network of farms in China, providing direct oversight over the undertake joint ventures to attain it. Agricultural exporters production process. In 2010, Tyson did not have any farms in China; around the global will beneft from increasing levels of demand today, they have 20, and they plan to own and operate 90 by 2015. for agricultural commodities and increasing fows of capital from China. The companies that see the magnitude of China’s agricultural The opportunity challenges will recognise the opportunities available.

The problems that lie ahead are not unique to China. Numerous Dominique Scott, Consultant countries face the prospect of having to rely increasingly on [email protected] importing food to meet domestic demand. What magnifes China’s challenges is the size of its population, which has the potential to create shocks on global markets. If China cannot meet demand with domestic supply, global prices of certain food commodities will undoubtedly rise. Should prices rise too much, afordability will become a crucial issue around the world. While farmers may beneft the most from this situation, worldwide consumers will be on the receiving end. China’s challenge, to a certain extent, will become the world’s challenge.

China’s growth in domestic food production in the last thirty years is an astonishing feat, yet the country’s deteriorating quality and dwindling availability of natural resources mean that this growth is still not adequate. Pollution must be minimised. Arable land must not be sacrifced for urban sprawl. Land policies should reward proftable agricultural enterprises. Together, these actions could alleviate pressure on China’s agricultural sector.

Companies able to navigate China’s shifting agricultural landscape will be primed to beneft from this key market. China’s agricultural Chinese Mining Firms in the Year of the Horse: a Trot, a Canter or a Gallop?

The global mining boom created a sense of euphoria in the sector – mining frms could export what was produced at record profts as the world underwent sustained economic growth. As a result, mining companies de-emphasised cost-control practices because commodity prices were high enough to cover lingering inefciencies in the sector. In today’s market, mining companies must reduce expenses and explore alternatives to traditional mining processes and equipment as costs increase and mineral grades decline. Further, resource nationalism and regulation have resulted in increasing risk and complexity for mining frms operating internationally. Though the Year of the Horse has brought signs that this year will be easier on Chinese mining frms than in 2013, it is unclear how far the recovery will go and how Chinese mining frms will respond to the changing environment. By Walter Ruigu

ast year was particularly challenging for the mining sector Success* Rate of Mining Deals (USD bn, 2008-Q2 2013) by many measures – a falling number of M&As, a record low Success Failure number of IPOs in both the Toronto and Australian stock 100% L 42% of Chinese exchanges (traditionally the hot-bed of global mining fnancial 90% mining deals 180 unsuccessful activity) and the headwinds experienced by many junior miners. The 80% 45 sector felt both the global economic crunch and China’s economic 70% 32% of global 60% mining deals slowdown. As China transitions from an investment-driven unsuccessful economy to a consumer economy, less fxed-asset investment will 50% 40% result in a reduction in the demand for minerals. China will continue 382 to be a key demand centre, but consumption growth will slow. 30% 62 20% The development of the central and western regions of China will Chinese mining 10% frms still face contribute to commodity demand, but the boom-time levels seen challenges overseas 0% from 2003 to 2008 are unlikely to return. Worldwide China *Note: Success refers to a completed transaction only. Source: Reuters; Various; The Beijing Axis Analysis China’s OFDI in Mining (USD mn, 2004-2013E)

14,000 of the Belinga iron project. In fact, Wang Jiahua, Vice Chair of the Beijing abolished China Mining Association (CMA), a juridical association approved by 12,000 quotas on the purchase of foreign exchange for SASAC the State Council that acts as a bridge between the mining industry overseas investment tightens 10,000 regulations and the government, suggested that up to 80% of China’s overseas on SOEs 8,000 overseas mining investments since 2005 have failed. investments 6,000 Most frms remain reticent and are seeking ways to curtail the risks 4,000 of overseas mining investments. Beijing has increased pressure 2,000 on the industry to reduce the number of risky ventures overseas, which has resulted in increased prudence amongst Chinese frms, 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E particularly SOEs, a trend which is expected to continue. Source: MOFCOM; China Mining Association; The Beijing Axis Analysis Nevertheless, China still recognises the strategic importance Chinese frms moving up the learning curve: A trot of acquiring overseas mineral assets. For instance, in order to reduce reliance on the ‘Big 3’ iron producers – Vale, Rio Tinto and Chinese companies interested in investing overseas have not BHP Billiton – China plans to increase its imports of iron ore from been spared from the sector’s unfavourable conditions. Since Chinese-owned overseas assets, primarily those operated by SOEs, 2005, when Beijing abolished quotas on the purchase of foreign from 40% in 2015 to 50% in 2020. While the viability of achieving exchange for overseas investment, Chinese mining frms have been these targets within the stated timeframe is debatable, Beijing’s eager to ‘go out’ to acquire assets needed to fuel the growth of the ambition is clear – despite an unfavourable global investment world’s second-largest economy. Nearly a decade later, much of the environment, China will continue to seek overseas iron ore targets optimism has faded. China’s initial overseas mining ventures have for strategic purposes. been marked by some large-scale setbacks, such as the infamous MCC-CITIC Sino-Iron project, Zijin’s inability to acquire Indophil Similar strategies are in place for other non-ferrous and precious Resources’ copper and gold project and, most recently, CMEC’s loss minerals. For example, as China’s central bank seeks to diversify its

9 І The Beijing Axis currency reserves from US dollars to gold, it has become clear that Chinese Overseas Mining Investment Destinations (%, 2013) the country will require a large physical quantity of gold. Rather than directly importing bullion, which would alter the global price Other of the commodity and result in unfavourable terms for China, the 9% country has sought to slowly acquire gold overseas while boosting Western Southern Africa Africa domestic production. These acquisitions will range from greenfeld 8% 25% projects to operating assets.

Chinese Overseas Mining Investments by Firm Classifcation (%, 2013) Australia Canada 30% 10%

North Latin Asia ASEAN America 4% 6% 8%

SOEs Private Firms 40% Source: China Mining Association; The Beijing Axis Analysis 60% projects or publicly-listed assets with extensive feasibility studies due to government pressure to avoid risky investments. Mid-sized private frms, which unlike SOEs are not subject to regulations, such as those set by China’s State-owned Assets Supervision and Administration Commission (SASAC), will likely set their sights on non-traditional mining countries in Africa. SASAC’s regulations, in efect, are opening investment opportunities for private frms. Source: China Mining Association; The Beijing Axis Analysis Given that these private frms have become key players in Chinese overseas investment deals, this development will be a boon for the Private Chinese companies overtaking SOEs in mining region. OFDI: A canter Chinese frms, traditionally known to favour late-stage projects, are As SOEs lead the pullback in overseas mining investments, private beginning to consider brownfeld projects as well. In Africa, for instance, enterprises have become the main source of Chinese overseas the Fenxi Mining Group’s recent investment in a greenfeld coal project mining investments. According to CMA data, Chinese overseas in Kenya, Yinfu Gold’s acquisition of a Zambian copper mine and investment in the mining sector reached USD 5.1 billion in 2013 Dingyi GP’s potential investment in Congo’s brownfeld potash project – USD 2.3 billion of which came from SOEs and USD 2.8 billion of illustrate the shifting investment patterns of Chinese frms. which was invested by private frms. The fgure for private frms likely represents an underestimation because private Chinese companies Mining in Africa is no longer focused on Simandou, Tonkolili frequently do not report their investments to the central authorities or Chambishi and other well-known mega-projects. Mid-sized if the capital originates from Hong Kong or other regions, especially projects, such as the scaling up of artisanal mines with high returns, tax-havens, as is common in the industry. are likely to be the targets of Chinese mid-sized and private frms. These ‘scaling up’ ventures have been seen in an incredible diversity Concurrently, non-traditional funding sources, such as private of projects: tantalum projects in Rwanda; gold projects in Ghana, equity firms and firms in the cash-rich real estate sector, are including the controversial projects involving Guangxi miners; becoming increasingly involved in overseas mining projects. The iron ore projects in Uganda; copper projects in Congo; and alluvial Yuxiao Group, a real estate frm, and Cathay Fortune, a private equity gold mining in Zimbabwe. Investors in such projects are usually frm, exemplify this trend. Experienced engineering and project subsidiaries of larger frms or nimble private companies capable of management frms may beneft from collaboration with these frms navigating the local environment with the goal of exporting back in their internationalisation eforts. These new players, despite being to China. Interestingly, these investments are not always in the capital-rich, are at higher risk because they lack industry experience. form of equity or debt; they are sometimes in the form of capital Taking note, Chinese authorities have consistently warned frms to equipment imported from China and trainings on how to operate be aware of the risks of investing in overseas markets. Although said equipment. For instance, given the low-grade iron ore available these new private actors will likely assume a growing role in the in China, Chinese processing technology has advanced to process industry, the overseas mining investment learning curve is steep, lower grades, which presents an opportunity for Chinese investors which means there will likely be more failures as the new frms to integrate the export of capital equipment into the growing develop expertise. On the other hand, companies that have already number of African mining projects with a lower mineral quality. experienced the industry’s challenges will either continue with their global ambitions by engaging in new overseas projects, as MCC has China’s exploration bureaus represent another group of done, or re-evaluate their ‘going-out’ strategy, as many SOEs are non-traditional players who are expanding their role in Africa’s currently doing. mining scene. Although they have initially focused on government- backed projects, such as geological surveys, these organisations Chinese frms sustained activity in Africa: A gallop are broadening their presence. Once these bureaus understand a region, they form partnerships with other mainland firms to As mining firms continue to dig deeper and assets become develop these opportunities, with the latter investing funds while increasingly scarce, risk-averse firms may focus investment in the bureaus provide their mining expertise. Canada and Australia, where there are already over 50 Chinese SOEs in operation. SOEs are likely to focus on government-backed Resources will remain a key part of China’s foreign policy as

10 І The Beijing Axis demonstrated in China’s ‘Angola Mode,’ which fnances infrastructure Chinese Overseas Mining Investments by Mineral (%, 2013) construction with natural resource development. This strategy will remain a core method of government-to-government cooperation. It will also ensure that the mining sector remains a central part of Other minerals Coal China’s development policy and a key target for Chinese investment. 18% 19% Large public projects will most likely see SOEs take the biggest slice Lithium of the cake, but SOEs’ participation in new investments, particularly 4% in unfamiliar mining environments, will continue to decrease. Aluminium 7%

Looking ahead in the Year of the Horse Steel 10% Copper With the mining boom long gone, frms around the world have 32% reformulated their strategy as proft margins have decreased. As Gold many junior miners struggle to raise the necessary capital for their 20% projects, they will increasingly rely on debt markets. Given the high-risk and temporary nature of this solution, the fnancing gap will continue to be a challenge for these frms. Mid-sized Chinese Source: China Mining Association; The Beijing Axis Analysis frms will continue to play a key role in project fnancing, albeit with increasing scrutiny from experienced players. Chinese SOEs will continue to be driven by political considerations, especially strategic resource acquisition, in addition to profit. Going forward, private Chinese frms will continue to be key players Chinese companies are learning from their failures. Many companies in the global mining scene, and despite being newcomers, they will will continue to be reticent about investment in foreign mining likely be quick learners and operate on market principles similar projects. If international companies hope to increase cooperation to other global companies. Meanwhile, resource nationalism will with China’s key mining players, they will have to come to China and continue to constrain Chinese mining frms operating abroad. A convince cash-rich frms that their projects are proftable and that focus on corporate social responsibility, community relations and they have implemented adequate risk-control measures. stakeholder engagement will remain the most efective methods for addressing this challenge. Walter Ruigu, Consultant Manager: Eastern Africa Desk [email protected]

11 І The Beijing Axis Chinese Super Majors: Tilting the Global Oil and Gas Playing Field

Buoyed by the country’s sustained economic growth, and its resulting need to secure stable energy supplies, Chinese national oil companies have been expanding their international reach by competing and partnering with foreign counterparts. The Chinese government has set a clear target of achieving China’s overseas oil equity production of 2.8 million barrels/day by 2020, indicating that Chinese national oil companies will continue to structurally shift the overall industry landscape with far reaching implications for global peers, EPCMs and oilfeld service providers. By Ankit Khaitan

tarting from a mere 767 kg per capita in 1990, China’s energy the global O&G industry, making it the world’s second-largest oil consumption has nearly tripled to 2,029 kg per capita in 2013 consumer, largest oil importer, and fastest-growing overseas O&G Swith apparent oil consumption at 10.1 million barrels/day (b/d). investor. This also catapulted the three largest Chinese players: This rate, however, still remains far lower than that of developed Sinopec, China National Petroleum Corporation (CNPC) and China countries, such as the US, who consumed 7,069 kg per capita in National Ofshore Oil Corporation (CNOOC), to the global stage 2012. This phenomenal increase in demand is fuelled by China’s among the super majors, who today control roughly 27% of global sustained economic growth, rapid industrialisation and widespread reserves. urbanisation. As domestic oilfelds age and domestic reserves‐to‐ production ratios remain low, China’s rapid rise in demand for oil Chinese NOCs ‘go global’ – emerging dynamics and has also led the country to increase its reliance on imports. This is variability underscored by the fact that China surpassed the United States to become the largest oil importer on a monthly basis in September On June 15, 1993, when CNPC acquired a 15% operating interest in 2013. China’s frst overseas oilfeld in Canada’s North Twining project in northern Alberta, critics referred to this acquisition as an audacious With a push to secure and diversify China’s energy needs, Chinese manoeuvre and raised questions regarding Chinese NOCs’ supposed national oil companies (NOCs) embarked on an all-out efort to inability to identify quality assets, overcome challenges in pursuing acquire upstream oil and gas (O&G) assets overseas in the early deals independently and the tendency to pay above market values. 1990s. Since then, they have invested approximately USD 180 Today, with more experience in foreign markets and deep pockets, billion to expand their overseas oil equity production from a mere Chinese NOCs have established a successful track record in acquiring 0.15 million b/d in 2000 to a staggering 1.6 million b/d by the end and managing assets of increasingly high-quality in complex and of 2013. These investments have bolstered China’s importance in risky environments such as Angola, Niger and Sudan.

Map of Selected Chinese Oil & Gas Investments Overseas by Country and Value (1993-2013)

2 12 Norway 2 Canada 17 Kazakhstan UK Azerbaijan 4 2 Mongolia 5 US Syria 4 1 Iraq Colombia 3 Niger 1 Mexico 1 Sudan 1 UAE 3 2 13 Indonesia 1 Numbers mentioned Venezuela 2 1 in circles indicate Thailand Ecuador 2 Chad 2 total number of 6 Yemen 2 Angola deals Peru 1 1 Singapore Total Value of Nigeria Mozambique Brazil 5 12 Deals (USD mn) 20,000 3 10,000 Australia 2,500 Investments in Angola, Argentina 500 Nigeria and Sudan 100 account for the majority of investments in Africa

Source: Various; The Beijing Axis Analysis

12 І The Beijing Axis Stage of Investment for Identifed Chinese O&G Investments Value Chain Focus of Chinese O&G Going Overseas (%,1993-2013) (%, 1993-2013)

Early Stage Post-feasibility Exploration Operational Upstream Mid-downstream Integrated

Most early-stage Investment in mid- investments have downstream assets has been focused on been used primarily to 9% unconventional unlock access to 5% upstream assets in risky O&G assets 11% countries

19%

49%

23% 84%

Total Number of Projects Analysed: 121 Total Number of Projects Analysed: 121

Source: Various; The Beijing Axis Analysis Source: Various; The Beijing Axis Analysis

Over the years, Chinese O&G investments have begun to shift have invested in an estimated 140 O&G projects overseas, over from being concentrated in a handful of developing countries – one-third of which took place in the last fve years. More than 50% largely Sudan, Venezuela and Kazakhstan – to becoming a global of these projects have been in the form of JVs with oil majors or phenomenon (see map on p. 12). Central Asia (Kazakhstan), the other NOCs. For example, China’s CNPC and India’s NOC, the Oil and Middle East (Iraq and Yemen), Latin America (Argentina and Brazil) Natural Gas Corporation (ONGC), recently collaborated to develop and Africa (Angola and Nigeria) continue to remain prominent, but the Greater Nile Oil project in South Sudan. In another project, CNPC more mature and stable destinations such as the US and Canada and Sinopec jointly invested USD 2.5 billion to acquire the private have recently started to gain traction as destinations for Chinese Peruvian O&G driller, Petro-Tech Peruana. NOCs’ O&G investments. In fact, in 2012 alone, North America attracted more than 70% of the total value of deals pursued by Secondly, market conditions have encouraged a major adjustment Chinese NOCs, the largest share of any region around the globe. in their approach to ownership of such assets. Chinese NOCs have The nature of investments in the US and Canada difers from deals in increasingly sought minority, passive stakes investments in strategic other regions. The US and Canadian markets have seen some of the ‘learning’ assets, which contrasts with their historical practice of largest deals vetted by Chinese NOCs. On the other hand, developing paying above market prices to own controlling equity stakes in markets across Southeast Asia, Africa and the Commonwealth of projects to lock-in supply. Independent States (CIS) have seen the highest participation from Chinese NOCs in terms of number of projects invested. Lastly, Chinese NOCs have expanded from their traditional focus on upstream assets and begun to develop pipelines and refneries. At the same time, rising uncertainty over new oil discoveries, largely NOCs now view strategic investments in mid-downstream as a in unfamiliar or ultra-deep territory (i.e. hard to extract, expensive, mechanism to unlock access to key upstream resources, particularly and politically unstable), limited foreign acreage and increasing in risky and politically unstable countries. This strategy is also driven competition from other emerging NOCs and super majors means by China’s need to diversify the supply routes of its petroleum that the era of ’easy‘ O&G period has ended. In light of evolving reserves. Chinese NOCs are actively investing in transnational market dynamics, Chinese NOCs are adapting their overseas pipelines to diversify supply routes and reduce their dependence on strategy to overcome these challenges. the Strait of Malacca; this will alter the dynamics of regional energy supply patterns and future investments. Firstly, Chinese NOCs have become less risk-averse and more willing to invest in early-stage exploration projects and fields with no Fomenting China’s own shale gas revolution proven reserves, albeit with a more prudent approach and certain risk-management practices. Traditional exploration, production At the same time, China hopes to develop its own untapped domestic and stand-alone investments have become less viable options source of energy, i.e. shale gas. According to the International Energy due to Chinese NOCs’ lack of experience in dealing with complex Agency, China holds reserves of at least 26 trillion cubic meters of geological assets, oil felds with complex chemistry and, at times, recoverable shale gas, more than any other country in the world. complexity emerging from energy geopolitics. These restrictions Beijing has previously announced that it aims to produce 6.5 billion have opened the door for various multi-level cooperation platforms. cubic meters (cm) of shale gas annually by 2015 and an ambitious 100 billion cm by 2020. However, China only achieved half of its The recent partnership model pursued by Chinese NOCs involve announced 2010 target of 8 billion cm due to limited exploration the forming of joint ventures (JV) with super majors and local NOCs success, drilling a fewer than expected number of wells and having to jointly develop projects and, in some cases, even form Chinese a narrow focus on only the most attractive shale gas locations. While NOC consortiums to avoid head-to-head competition and allow progress has been slow thus far, there are signs that a spike in shale for better competition in the international market. Chinese frms gas production is on the horizon.

13 І The Beijing Axis Chinese NOCs have invested billions of dollars in North America contract and later integrated project management contract for the to acquire the hydraulic fracturing technologies that are driving Rumaila oil feld in Southern Iraq, the world’s second-largest oil feld the unconventional revolution. NOCs have established partnerships and jointly owned by BP, CNPC and Iraq’s State Owned Marketing through JVs and acquisitions to gain access to these technologies. Organization (SOMO). However, Chinese investors prefer foreign For example, CNPC recently announced a new joint venture with EPCMs to use cost-effective engineering capabilities available Encana, Canada’s largest producer of natural gas, to develop some through their high-value engineering (HVE) centres in China/Asia, of their holdings in Canada’s Montney Shale Formation and Horn as well as procurement services out of China, in overseas projects River Shale Formation. in order to sustain a favourable cost profle. Most foreign EPCMs have only started to develop such capabilities, indicating that only Leading the pack on the domestic front is Sinopec, which stated in a handful of them are likely to receive contracts from Chinese NOCs March 2014 that its frst commercial shale-gas feld, in the Fuling for overseas projects. district of Chongqing, will produce around 1.8 billion cm of gas in 2014, 5 billion cm in 2015 and 10 billion cm by 2017 – all ahead Furthermore, the Chinese market has been historically closed of of schedule. Overall, far fewer than 100 shale-gas wells have been to western service companies for the most part. Service activity is drilled in China, compared with around 40,000 wells in the US, done primarily by the service entities of Chinese oil companies, but underscoring the long road ahead before China realises its own shale and deep-water projects demand the experience of traditional shale gas revolution. western services companies as many Chinese oilfield service providers lack the necessary capabilities. Foreign oilfeld service The development of China’s shale-gas industry has moved forward providers, such as Schlumberger, Halliburton and Baker Hughes, over the past few years, but far more remains to be done than has have already announced cooperation plans with their Chinese been accomplished if the nation’s ambitious production targets are counterparts, such as Anton, and Honghua. These collaborative to be met. The country must build-up its still nascent, countrywide eforts will allow Chinese companies to gain access to high-end feeder lines and pipeline network. Moreover, complex geology, technology and experience in integrated project management. water resource constraints near major shale fields and local exploration and drilling companies’ lack of adequate capabilities Looking ahead remain major hurdles. Whereas the development of PetroChina’s frst shale gas exploration project in the Sichuan basin took 11 Today, investments by China’s big three oil majors remain small in months, a similar-sized project in North America usually takes only comparison to those of IOCs. Upstream endeavours, such as securing two to three weeks. a diversifed energy supply, will remain high on the agenda for these companies in the next decade. CNPC announced that it would seek China’s recent decisions to boost private-sector participation and to derive 40% of its crude oil from overseas by 2015 and 60% by implement reforms are expected to help the shale-gas industry, 2020, which represents rapid growth from its current ratio of 28%. To although a lot more needs to be done. NOCs will need to open the achieve this goal, the frm plans to invest more than USD 60 billion upstream and downstream to private capital in order to expedite in global oil and gas assets by 2020. At the same time, a number of the timeline for shale production. private oil & gas companies in China have been quietly carrying out overseas asset acquisitions as well. For example, Zhenghe Group, a Implications for global peers, EPCMs and oilfield company based in Shandong province, acquired a Pre-Capsin basin service providers block in Kazakhstan late last year for USD 526 million.

The implications of China’s growing role in the global O&G market China’s funding capacity and consumption appetite paired with are profound. The synergies drawn from complementary needs (i.e. IOCs’ technical know-how and project management skills, especially strategic capital, equipment from China and technological skills to for unconventional sources, presents the greatest potential venture into new markets and optimise recovery in mature felds for a valuable complementary relationship. Relationships and back home) has opened up opportunities for further cooperation collaborations with Chinese NOCs will become even more crucial, between international oil companies (IOCs) and Chinese companies complex, challenging and largely unpredictable for IOCs. The to learn from, partner with and complement each other across core determinant then should not be whether or not to embrace shared competencies. Additionally, China recently opened its domestic resource ownership with Chinese NOCs, but how best to pursue resource market to some of the world’s major oil and gas producers. an integrated strategy that captures the opportunity of China’s For example, Royal Dutch Shell formed a shale gas JV with PetroChina integrated position as a global consumer, importer, source of capital to participate in a 15-well drilling program; ConocoPhillips signed and supplier of equipment. a joint study agreement with Sinopec to explore, develop and produce shale gas at the Qijiang block in the Sichuan Basin; Total has Ankit Khaitan, Manager frm plans to commence drilling this year for shale gas with Sinopec [email protected] in Anhui province; and Chevron is exploring shale gas deposits in Qiannan Basin with an unidentifed Chinese partner.

At the same time, cooperation with Chinese NOCs is spreading across the value chain. For instance, Saudi Arabia’s state-owned Aramco formed a joint venture with PetroChina for the construction of a refnery capable of producing 200,000 b/d in the south-western Chinese province of Yunnan while China’s Sinopec took a 37.5% stake in Saudi Arabia’s USD 10 billion Red Sea Refning Company.

Moreover, Chinese NOCs often tend to seek EPCM services from foreign players for their overseas projects. For example, in 2009, WorleyParsons was awarded the conceptual design, initial FEED

14 І The Beijing Axis

Macroeconomy

Macroeconomic Monitor: Balancing Reform with Growth

As forecasters around the world scour China’s latest statistics for clues regarding the direction of China’s economic performance in 2014, China’s policymakers seek to steer the world’s second- largest economy on the road to reform and wean the economy of its decades-long reliance on often inefcient state-driven investment. In a similar manner in which a successful business regularly tweaks its business plan to stay ahead of the competition, China already has its master plan for change in place and the focus is now on execution. By Daniel Galvez

oday, the world is focusing on the implications of slower Contribution to China’s GDP Growth (%, 2003-2013) growth in China. Companies around the globe have Tbeen sluggish to adjust to China’s decline in economic 140 growth and are scrambling to cope with constant changes 120 in the global economic environment. Over the past decade, China poured money into building new factories, highways 100 and apartment buildings, which propelled double-digit growth at home while giving commodity exporters favourable 80 Efect from investment returns. Now the story is changing as China has 60 stimulus package targeted a modest growth rate of ‘around’ 7.5% for 2014, with many analysts interpreting the word ‘around’ as giving the 40 government leeway if China does not meet its intended target Consumption overtakes 20 gross capital formation by a few percentage points. as largest contributor 0 China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009-Q1 -20 Net exports become 2014F) a drag on growth 12% -40 03 04 05 06 07 08 09 10 11 12 13 10% Source: China National Bureau of Statistics; The Beijing Axis Analysis Q4 2012 rebound 8% 5-year (2009-2013) average: 8.7% 2014. Industrial production, retail spending and the housing 6% market have all shown signs of weakness in the frst quarter of 2013 y-o-y GDP: 7.7% 2014. All this translates into more volatile Chinese demand for 4% a wide range of commodities. Moreover, China’s frst corporate 2% bond default in March sent a clear signal that the era of cheap 2012 y-o-y GDP: 7.8% credit is coming to a close. However, ahead of the release of 0% frst quarter GDP fgures, China’s State Council did unveil a Q1 Q1 Q1 Q1 Q1 Q1F mini-stimulus package including additional spending on 2009 2010 2011 2012 2013 2014 railways, housing for low-income households and tax relief Source: China National Bureau of Statistics; The Beijing Axis Analysis for small businesses.

Anticipating a hairpin turn around the corner, President Xi Jinping and company have gently applied the brakes on the YTD Growth of China’s Y-o-Y Growth of China’s infrastructure-building boom to move the economy into a Monthly Fixed Asset Monthly Retail Sales more consumer-oriented growth model. However, to depict Investments (%, 2011-Feb (%, 2011-Feb 2014) just how hard this transition will be for China, capital formation 2014) 30% actually accounted for 54% of China’s economic growth in 25% 2013, exceeding consumption’s 50% contribution rate. Net 25%

exports detracted 4.4% from overall growth, sustaining a 20% 20% Retail sales growth trend which began in 2009. target for 2014: 14.5% 15% 15% Fixed asset investment growth target for 2014: 17.5% Growth has marched steadily downward over the past two 10% years as Beijing clamped down on a spending boom which 10% 5% has pushed local government debt to now highly-publicised 5% dangerous levels. Investment in fxed assets, which has been 0% J-F 11 J-F 12 J-F 13 J-F 14 J-F 11 J-F 12 J-F 13 J-F 14 losing steam over much of the past year, will continue to Source: China National Bureau of Source: China National Bureau of decline in line with the government’s 17.5% growth target for Statistics; The Beijing Axis Analysis Statistics; The Beijing Axis Analysis

16 І The Beijing Axis Macroeconomy

Competitive forces take hold also inficted grave damage on the environment; China is now changing its strategy and aiming towards higher-quality China’s total annual trade in 2013 reached over USD 4 trillion development. Although the rate of economic growth slowed for the frst time ever, overtaking the US to become the world’s in 2013, business is still booming in China, and the new largest trader. While frst quarter fgures are always difcult to government is taking various measures to ensure that this interpret due to distortions caused by China’s weeklong Lunar continues. New Year holiday, the latest economic indicators suggest that China is experiencing growing pains as it weans itself off The government announced its blueprint for change following of investment in order to attain more balanced long-term the Third Plenum in November 2013, which promised growth. sweeping changes to the economy and the nation’s social fabric – leading many to label it as China’s most ambitious Tightened pollution regulations have made it harder for steel reform plan in 30 years. Some of the hardest reforms, however, mills to use China’s low-grade iron ore reserves and for power will require the government to break ranks with some of its plants to burn China’s low-quality coal. With the increasing traditional political allies, such as large SOEs. focus on the environment and high costs in some industries, China is importing more of the key commodities they need. Tackling pollution remains high on the agenda for the new administration. In 2013, China’s Ministry of Environmental China’s Monthly Consumer China’s Ofcial Purchasing Protection vetoed as many as 32 projects with a total Price Infation (%, 2011-Feb Managers’ Index (2011-Mar investment of USD 19.5 billion and is feverishly working 2014) 2014) to improve its environmental assessment capabilities and strengthen its ability to monitor and punish polluters. Some 60 8% PMI other important economic issues that will be closely watched

55 in 2014 include: 6% Infation target for 2014: 3.5% 50 • Banks following through on soldier’s orders to cut of 4% fnancing to sectors plagued by excess capacity such as 18 straight months 45 2% of expansion steel and cement Management of shadow banking activities and Room for mild • 0% stimulus 40 local government debt levels before they can infict Jan 11 Jan 12 Jan 13 Jan 14 Jan 11 Jan 12 Jan 13 Jan 14 widespread damage to the economy Source: China National Bureau of Statis- Source: China National Bureau of Statis- • Continued rollout of Shanghai Free Trade Zone policies tics; The Beijing Axis Analysis tics; The Beijing Axis Analysis aimed at attracting a new wave of FDI • Enforcement of property sector controls and the While seeking to avoid overcapacity, Beijing will continue management of subsequent fallout if prices do to encourage investment in innovative industries and eventually fall from their astronomical levels infrastructure. Also, private capital is set to play a larger • Accelerated liberalisation of China’s capital and foreign role. In a nod to Beijing’s latest eforts to reform SOEs and exchange markets, including the recent widening of the encourage a mixed-ownership economy, Sinopec, China’s Chinese Yuan’s daily trading band, aimed at turning the largest oil-refning company, announced plans in February to Yuan into a major reserve currency open up its domestic marketing and distribution operations • The rise of private and online banking channels aimed to both social and private capital. at raising the overall competitiveness of China’s fnancial sector China’s Monthly Exports and Imports (USD bn, %, 2011- Feb 2014) The road ahead 240 Exports Imports 60% While the emerging labour shortage and subsequent increase 220 Export Growth (rhs) Import Growth (rhs) in wages are cutting into proft margins, investment returns 200 and export competitiveness, it has increased household 180 40% income. Higher wages improve income distribution as 160 low-income households rely on wages and high-income 140 households rely more on investment returns. Consumption’s 120 20% share of GDP will rise as household income grows faster than 100 national income. But this is only the beginning. Completion of this transition depends critically on Beijing’s implementation 80 of the reforms announced at the Third Plenum. 60 0% 40 Import growth outpacing If only a portion of the proposed Third Plenum measures are export growth 20 implemented, China will be well on its way towards becoming 0 -20% the world’s largest economy and boasting a thriving consumer Jan 11 Jan 12 Jan 13 Jan 14 market. Based on China’s success in navigating its economy Source: China National Bureau of Statistics; The Beijing Axis Analysis through new territory, China’s performance for the whole of 2014 should be a cause for optimism. Reform is real and here to stay Daniel Galvez Consultant; Editor: The China Analyst While three decades of breakneck economic growth has [email protected] lifted hundreds of millions of Chinese out of poverty, it has

17 І The Beijing Axis How to Procure from China #13 – Installation and Commissioning

The Beijing Axis Procurement Services Flow Chart covers every stage in the procurement process, from the frst enquiry to the post-transaction services. In this edition, we focus on the thirteenth stage of the procurement process: Installation and Commissioning.

The Beijing Axis Procurement and Service Delivery Flow Chart

Strategic Procurement Facilitation

Supplier Analysis 1 2 Supplier identification 3 4 RFI, supplier Understanding product Supplier evaluation and universe list and long list pre-qualification Analysis specifications compilation and shortlist

Supplier Engagement 5 6 7 8 9 Site visit and Commercial and RFQ, RFP and RFT process Negotiation Contracting supplier audit technical evaluation

Supplier Process Management Process Management 10 11 12 13 14 Quality management Contract Logistics Installation and After sales (QA/QC) and administration coordination commissioning service support

Supplier Supplier expediting

Beijing Axis Procurement Guidelines for Installation and 4. Quality control. During the installation process, TBA will manage Commissioning a third-party supervisory supplier to oversee progress on the ground. Because minor quality concerns may impact the installation and In large procurement projects, installation and commissioning is commissioning process, TBA will liaise with the supplier to minimise a key process that involves various partners—designers, project delays and recoup cost claims. managers, consultants, subcontractors, and suppliers—across many countries. Coordination and communication are of vital importance 5. Meeting coordination. Further to its role as the key communications during this phase. In these complex, multinational projects, The interface, TBA will remain actively involved in day-to-day activities to Beijing Axis (TBA) provides key project management oversight, mediate misunderstandings before they arise. which is comprised of the following activities: 6. Documentation management. TBA can assume a hands-on 1. Technical clarifcation. Though our team attempts to resolve all documentation management approach during the installation and technical questions before the contract is signed, questions may commissioning phase to ensure that all parties are kept up to date. still arise. TBA’s team of engineers will assist installation partners in deciphering documents received from the suppliers. We provide 7. Translation. From written documentation to on-site an efective communications platform to ensure that all parties are interpretation, TBA will leverage its engineers and other technical kept abreast of each other’s status. staf to provide understanding on the technical documents of large procurement projects. 2. Project planning. Prior to shipping, TBA will assist with project planning communications to ensure a prompt delivery timeline. TBA also accommodates the admin requirements of the installation Though several factors may impact the project’s timeline, TBA will and commissioning process by ensuring the timely preparation do all within its power to minimise any delay. of invitation letters and housing arrangements. Our team also frequently manages an onsite office and arranges on-site 3. Logistics. With over ten years of procurement experience in accommodations depending on our client’s needs. China, TBA staf are familiar with the requirements for handling, shipping and warehousing goods. Further, TBA’s recent partnership By The Beijing Axis Procurement with Imperial Logistics expands the efciency of TBA’s logistical management of goods.

18 І The Beijing Axis Monthly Inbound FDI in China and y-o-y Growth Rate (USD bn, H2 2012-2013) China Capital: 16 FDI FDI Growth (rhs) 25% 14 20% 12 15% 10% Inbound/Outbound 10 5% 8 0% 6 FDI & Overseas -5% 4 -10% 2 -15% Resource Investment 0 -20% JASONJFMAMJJASONDD Source: MOFCOM; The Beijing Axis Analysis In 2013, China’s total FDI amounted to USD 118 bn, and China’s OFDI reached USD 90.2 bn, representing FDI in China by Country (%, 2013) France 1% increases of 5.6% and 16.2% year-on-year, UK 1% Holland 1% respectively. FDI continued to be largely sourced Germany 2% Other S. Korea 3% 7% from Asian nations, while China’s OFDI continued US 3% to spread across the globe. MOFCOM data indicates Taiwan that future levels of China’s OFDI are likely to exceed 4% the current level of FDI. By Beijing Axis Capital Singapore 6% Hong Kong Japan 66% 6% Foreign Direct Investment into China Summary • In 2013, FDI into China amounted to USD 118 bn, an increase of 5.6% y-o-y. Calculated on a monthly-basis, FDI into China fell Source: MOFCOM; The Beijing Axis Analysis sharply in the second half of 2013 but bounced back to 12 bn in December 2013 • According to the Ministry of Commerce (MOFCOM), FDI into the Notable Chinese FDI Deals in Q4 2013 – Q1 2014 services sector reached USD 61 bn in 2013, representing over half • In March 2014, SBI Group, a Japanese fnancial services frm and of China’s total FDI for the frst time former department of Softbank, acquired a Shanghai-based online education frm, TutorGroup, who is backed by Alibaba Group • Though eastern China received the majority of FDI with 78%, central and western China received increasingly shares in 2013 • In March 2014, Unilever, an Anglo-Dutch consumer goods frm, acquired a controlling share in Qinyuan, a Chinese water purifcation • In 2013, 86% of FDI into China originated from other parts of Asia. Traditionally the hub for investment into China, Hong Kong is still company. Without stating the size of the deal, Unilever stated that the largest source of capital for China, contributing USD 78 bn or this is the largest acquisition it has made in recent years 67% of total inward FDI, while Japan and Singapore were second • In February 2014, Danone, a French food producer and the world’s and third with USD 7 bn (6%) each. The US, the largest non-Asian largest yoghurt producer, more than doubled its stake in Mengniu, source of FDI into China, provided USD 3 bn (3%) in 2013 China’s largest dairy producer, from 4% to 9.9% for USD 663 mn. Danone has taken an aggressive approach in China, having • In 2013, the number of newly-established foreign-invested enterprises reached 22,773 acquired a 51% stake in Wahaha, China’s largest beverage producer in 1996 In November 2013, German automotive corporation, Daimler Annual Inbound FDI in China (USD bn, 2005-2013) • AG, acquired a 12% stake in BAIC Motor, one of the top Chinese automotive manufacturers, for approximately USD 84 mn 140 • In September 2013, Indofood, an Indonesian food processor and 120 subsidiary of Hong Kong-based holding company, First Pacifc, 100 acquired a 3.9% stake of China Minzhong Food for approximately USD 23 mn 80

60 Chinese Outbound Foreign Direct Investment

40 Summary of China’s OFDI In 2013, China’s non-fnancial OFDI amounted to USD 90 bn, an 20 • increase of 17% y-o-y 1 • In 2013, The Beijing Axis tracked 117 overseas investment activities 2005 2006 2007 2008 2009 2010 2011 2012 2013 by Chinese companies, including on-going transactions and Source: MOFCOM; The Beijing Axis Analysis the conclusion of previously announced deals. Among these

19 І The Beijing Axis transactions, 41 were resource-related investments and 76 were China’s Annual Outbound Non-fnancial FDI and y-o-y non-resource investments Growth Rate (USD bn, 2005-2013) • MOFCOM reported rapidly increasing fows of OFDI from China Non-fnancial OFDI OFDI Growth (rhs) into the US (USD 4.2 bn), Russia (USD 4.1 bn) and Australia (USD 100 140% 3.9 bn) in 2013 120% 80 • Private Chinese companies accounted for 37% of the total 100% 60 non-financial OFDI in 2013, while state-owned enterprises CAGR 33% 80% accounted for 63%, demonstrating the primary role of state-owned 60% enterprises as Chinese overseas investors 40 40% 20 • An overwhelming 90% of Chinese OFDI falls into the following 20% sectors: business services, mining, wholesale and retail, 0 0% manufacturing, construction and transportation. Construction 2005 2006 2007 2008 2009 2010 2011 2012 2013 and culture, sports and entertainment present the fastest growth Source: MOFCOM; The Beijing Axis Analysis in investment, with increases of 129% and 102%, respectively; mining, wholesale and retail trade, manufacturing, and real estate also achieved rapid growth • In September 2013, Zhongjin Lingnan (Hong Kong) Mining China’s number three zinc producer, proposed purchasing the remaining Looking forward, Chinese OFDI in natural resources, such as • 47% of Australia Perilya, which operates metal mines in Australia agriculture, will continue to increase due to increasing domestic and the Dominican Republic demand Trends in China’s Overseas Resource Investment Notable Chinese OFDI Deals in Q4 2013 and Q1 2014 • During the Third Plenary Session in November 2013, Beijing • COFCO, China’s largest food processor and grain trader, announced announced that it will continue to expand the scale of China’s OFDI. a joint venture with mainland private equity frm, Hopu Investment Large overseas resource investments will remain concentrated in Management, in March 2014. The new venture will acquire a 51% the oil and gas sector and the mining industry ownership of Hong Kong-based agricultural commodities trading • Reinforcing China’s growing role in Latin America, in November operation, Noble Group. This announcement came days after Cofco 2013, PetroChina purchased the Peruvian subsidiary of Brazilian announced a USD 250 mn acquisition of a 51% stake in Dutch Petrobras for USD 2.6 bn. The Peruvian subsidiary will hand over two grain trader, Nidera. These deals exemplify China’s rapid overseas oil and gas felds, which currently produce 800,000 metric tonnes expansion in the agricultural sector of oil equivalent a year, and a 46% stake in recently discovered Lot • In March 2014, Fosun, one of China’s largest privately-owned 57, a gas feld. This deal comes a month after CNPC and CNOOC conglomerates, invested USD 1.26 bn to develop 3.5 sq. km of each purchased 10% stakes in Brazil’s largest oilfeld, Libra, which Greek coastline, which was previously home to Athen’s Hellenikon is estimated to hold between 8-12 bn barrels of recoverable oil for airport. This deal marks a “buy low” strategy at a time when many USD 700 mn investors are avoiding the unsteady Greek economy • Though growth in China’s investment in the African mining sector • In February 2014, Wanxiang, China’s largest automotive group, had stalled over the past two years due to depressed metal prices and acquired American electric automobile manufacturer, Fisker tight credit, Chinese representatives attending the Mining Indaba Automotive, for USD 149 mn conference in Cape Town indicated that they would be seeking • In January 2014, Lenovo purchased Motorola Mobility, the to make investments ofering fnancial returns and raw materials. cell phone division, from Google for USD 2.9 bn. Google had Recent deals, such as China National Nuclear Corporation’s USD purchased this division of Motorola in 2011 for USD 12.5 bn but 190 mn purchase of a 25% stake of the Australian-owned Langer has experienced challenges in making the division proftable Heinrich uranium mine in Namibia demonstrate interest. Further, a recent document from China’s National Development and Reform • In December 2013, Henan Civil Aviation Development & Commission stressed that China needed more imports of iron ore Investment announced plans to buy a 35% share of Cargolux to balance steel prices Airlines International for USD 231 mn. This deal will give Henan Civil Aviation Development and Investment veto power on decisions • In September 2013, China signifcantly expanded its involvement made by the Cargolux executive committee and supervisory board. with Central Asia and Russia by making large investments in securing This deal also established a “dual-hub strategy” comprised of four energy resources from Russia and Kazakhstan. PetroChina and Russian weekly fights between Zhengzhou and Luxembourg state-owned oil giant, Gazprom, agreed on the basics for a deal that would send roughly 38 bn cm annually at a price of USD 10-11 at the • In December 2013, Belgian KBC Bank agreed to sell its subsidiary, Chinese border. The deal will require the construction of a pipeline, the Antwerp Diamond Bank, to the Chinese Yinren Group for USD which is predicted to be fnished in 2018, and the gas would beneft 270 mn Chinese policymakers interested in reducing emissions resulting from • In December 2013, Hepalink Pharmaceutical acquired the Scientifc coal combustion. China also signed a USD 5 bn deal with Kazakh Protein Laboratories (SPL) for USD 338 mn. SPL is an leading state-owned KazMunaiGas for an 8% stake in its massive Kashagan oil producer and supplier of active pharmaceutical ingredients, with project in the Caspian Sea over 40 years’ experience in drug marketing in Europe and the US • In November 2013, the Sinopec Group purchased a 33% stake in the American Apache Corporation’s Egyptian oil & gas assets for USD 3.1 bn • In October 2013, Beijing-based Sinoma International Engineering purchased a 59% stake in German mining equipment firm, Hazemag & EPR Gmbh, from the Schmidt Kranz Group for USD 140 mn, which will help Sinoma expand its reach in mining equipment

20 І The Beijing Axis Selected Chinese Outbound Investment Activities In Natural Resources, January 2013 - March 2014 Month # Announced Target / New Company Target country Acquirer / Investor( English Name) Commodities Value Stake Status 1 2014 Mar Noble Group’s agribusiness China (HK) China Oils and Foodstufs (COFCO) Agriculture USD 1.5 bn 51% Ongoing 2 2014 Mar Westside Corp Australia Landbridge Group Gas USD 160 mn 100% Ongoing 3 2014 Mar Transpacific Industries Group’s New New Zealand Beijing Capital Group Waste 800 mn 100% Ongoing Zealand waste management business management 4 2014 Feb Nidera Netherlands China Oils and Foodstufs (COFCO) Agriculture USD 250 mn 51% Ongoing 5 2014 Feb ERG Resources US Goldleaf Jewelry Oil USD 665 mn 95% Ongoing 6 2014 Feb Anadarko Petroleum China subsidiary US Brightoil Group Oil USD 1.08 bn N/A Ongoing 7 2014 Jan Mundella Foods Australia Bright Food Food N/A n/a Ongoing 8 2014 Feb Nesko Metal Turkey Jiangxi Copper Copper USD 65 mn 50% Ongoing 9 2014 Jan Paladin Energy’s Langer Heinrich operation Namibia China National Nuclear Corporation Uranium USD 190 mn 25% Ongoing 10 2013 Dec Carabella Australia China Kingho Group Coal USD 60 mn N/A Ongoing 11 2013 Dec JV with Energy Corporation of America US China Shenhua Shale gas USD 90 mn N/A Ongoing 12 2013 Nov ExxonMobil’s West Qurna 1 oilfeld Iraq PetroChina Oil N/A 25% Ongoing 13 2013 Nov Petrobras Energia Peru Peru CNPC Oil USD 2.6 bn 100% Concluded 14 2013 Oct Rosneft’s Taas Yuriakh unit Russia CNPC Oil N/A 49% Ongoing 15 2013 Oct ACV Solar Technology’s solar farm Romania Astronergy Clean energy N/A N/A Concluded 16 2013 Sep Tonkolili iron-ore project Sierra Leone Tewoo Group Iron-ore USD 990 mn 16.5% Concluded 17 2013 Sep NovusEnergy Canada Yanchang Petroleum Oil CAD 230 mn N/A Concluded 18 2013 Sep Glencore Xstrata copper project Peru China Minmetals Corporation Copper USD 5 bn N/A Pending 19 2013 Sep Petróleos de Venezuela Junin 10 Block Venezuela CNPC Oil USD 14 bn N/A Ongoing 20 2013 Aug Apache Corp Egypt Sinopec Oil & gas USD 3.1 bn 33% Concluded 21 2013 Aug Petrobras’s Block BC-10 Brazil Sinochem Group Oil USD 1.54 bn 35% Concluded 22 2013 Aug Inova Resources Australia Shanxi Donghui Coal Coking Copper, gold AUD 160 mn 56% Concluded & Chemicals Group 23 2013 Jul Rio Tinto’s Northparkes mine Australia China Molybdenum Gold, copper USD 820 mn 80% Concluded 24 2013 Jun Novatek’s Yamal LNG project Russia CNPC Gas USD 810 mn 20% Concluded 25 2013 Jun Marathon’s Angola oilfelds Angola Sinopec Oil USD 1.52 bn 10% Concluded 26 2013 May SPAusNet Australia State Grid Energy USD 810 mn 20% Concluded 27 2013 May BG Group’s Queensland Curtis LNG Project Train 1 Australia CNOOC Oil & gas USD 1.93 bn 50%/25% Concluded 28 2013 May Stonewall Resources South Africa Shandong Qixing Iron Gold USD 140 mn 100% Concluded Tower Company Limited 29 2013 May Smithfeld Foods Inc. US Shuanghui International Holdings Food USD 4.72 bn N/A Concluded 30 2013 May Barra Energia do Brasil Petroleo e Gas Ltda Brazil CNPC Oil & gas USD 2 bn 100% Concluded 31 2013 Apr Joint PE fund with Russia Direct Investment Fund Russia China Investment Corporation Agriculture USD 100 mn N/A Concluded 32 2013 Apr Sky Energy Holdings Cambodia Sino Bioenergy Corp Agriculture USD 119 mn 100% Ongoing 33 2013 Apr Oilhub Korea Yeosu Co. South Korea China National Aviation Fuel Oil USD 130 mn 26% Concluded 34 2013 Apr Ecuador Copper Mine Ecuador China Railway Construction Copper USD 2.04 bn N/A Concluded and China Nonferrous 35 2013 Apr Ashburton Project Australia Shandong Energy and Iron, gold USD 2 mn 65% Concluded Shandong Lunan 36 2013 Apr ConocoPhillips Kazakhstan CNPC Oil & gas USD 5.3 bn 8.4% Concluded 37 2013 Apr Elemental Minerals Limited Republic of Congo Dingyi GP INV Potash AUD 5 mn 4.8% Concluded 38 2013 Apr Kalgoorlie Mining Australia Zijin Mining Gold N/A 100% Concluded 39 2013 Mar Sintez Russia State Grid Energy USD 1.14 bn N/A Concluded 40 2013 Mar Eni SpA’s ofshore natural gas feld Mozambique PetroChina Oil & gas USD 4.21 bn 20.0% Concluded 41 2013 Feb Kuantan Port Consortium Malaysia Guangxi Beibu Gulf Port USD 650 mn 40% Concluded International Port Group 42 2013 Feb Chesapeake Energy Corp.’s oil and natural gas feld US Sinopec Oil & gas USD 1.02 bn 50% Concluded 43 2013 Feb ConocoPhillips’ exploration assets in Western Australia Australia PetroChina Oil & gas N/A 20%/29% Concluded 44 2013 Feb Alumina Ltd. Australia CITIC Resources Holdings Aluminium USD 468 mn 7.8%/5.2% Concluded Ltd. and CITIC Group 45 2013 Feb African Resources Zambian subsidiary Zambia Yinfu Gold Corp Gold USD 2 mn 65% Concluded 46 2013 Jan Alumina and Bauxite refnery project Guinea China Power Investment Aluminium USD 6 bn N/A Concluded 47 2013 Jan Solar Chile Chile SkySolar Clean energy USD 1.36 bn N/A Concluded 48 2013 Jan Pioneer Natural Resources US Sinochem Oil USD 1.7 bn 40% Concluded 49 2013 Jan Refneria del Pacifco Ecuador CNPC Oil & gas USD 1.2 bn 30% Concluded 50 2013 Jan Kichi-Chaarat Closed joint stock company Kyrgyzstan China CAMC Engineering Gold, copper USD 4.8 mn 16% Concluded 51 2013 Jan St Barbara Southern Cross operations Australia Hanking Holdings Gold USD 23.58 mn 100% Concluded Source: Various media; Company reports; The Beijing Axis Analysis 21 І The Beijing Axis Mapping China in the Global Production and Consumption of Oil and Gas

The global oil and gas industry has long been closely intertwined with geopolitics. China accounted for one-third of the world’s oil consumption growth in 2013 and is projected to surpass the United States as the largest net oil importer in 2014. Domestic production of oil falls woefully short of consumption across most of Europe, Eurasia and China, resulting in heavy dependence on outside sources of oil. China has extended oil-for-loan deals with Russia and select countries in Africa and Latin America to secure favourable terms in future oil supplies. With declining energy consumption per capita at home, the US is eager to cash in on its shale gas revolution by increasing exports to gas-hungry Europe and Asia. To meet domestic demand for a cleaner burning fuel, China has sought to raise natural gas imports via pipeline and overseas shipment (liquefed natural gas), and is also feverishly working to foment its own shale gas revolution. By Beijing Axis Strategy

7.6% 12.4% 17.1% 3.5%

13.1% 17.6% 20.1% 12.5% 18.1% Europe and Eurasia Russia 25.7%

32.8% 4.8% 26.8% 9.3% 11.4% 27.5%

North America 16.3% 3.2% 12.4% 4.3% Middle East China

4.8% 21.8% 8.5% 7.3% 11.0% 11.4% 3.9% 14.5% 5.3% Asia Pacifc 5.0% 6.4% Latin America 3.7% Oil Production, % of world total (2012) and Caribbean Africa

Gas Consumption, % of world total (2012)

Map Source: BP Statistical Review of World Energy; US Energy Information Administration; The Beijing Axis Analysis 22 І The Beijing Axis 23 І The Beijing Axis CNOOC: Expansion into Unconventional Expertise

Parallel to China’s growth in oil consumption, CNOOC has risen from a relatively unknown player in the oil and gas industry to one of the largest energy frms in the world. This article focuses on two of CNOOC’s overseas investments that exemplify both China’s attempt to diversify its energy sources and the benefts this development will bring to CNOOC and its international partners. By Tim Quijano

Background As a Chinese state-owned enterprise (SOE), CNOOC initially faced challenges in the international market. Thus, CNOOC Ltd., the main subsidiary, was listed on the Hong Kong and New York Stock The China National Ofshore Oil Corporation (CNOOC) Group is the Exchanges in 2001. The newly created frm was required to adhere to third-largest Chinese state-owned oil and gas (O&G) enterprise the regulations for public companies and answer to private investors, after PetroChina and Sinopec. It mainly focuses on exploration and providing most foreign investors, regulators and governments an production (the “upstream” value chain) of oil and gas onshore and acceptable level of transparency and accountability. Therefore, ofshore resources as opposed to PetroChina and Sinopec, who have CNOOC Group has subsequently undertaken the majority of its a more integrated value chain. overseas acquisitions through CNOOC Ltd.

CNOOC was the frst of China’s three O&G majors to be created As a result of CNOOC’s focus on upstream activities, the company by the State Council, China’s main governing body, in 1982. It was has targeted partnerships through which it can attain exposure granted the exclusive ability to leverage joint ventures with foreign to international expertise related to exploring and extracting companies to rapidly expand China’s ofshore assets in the Bohai unconventional and geographically-complex energy sources such Bay, the Yellow Sea and the South China Sea, among other sites. as deep-water, oil sands, and shale gas.

As China’s oil consumption has grown by more than three times in Though China is not yet a world leader in liquefied natural gas the past two decades, China’s O&G companies have been acquiring (LNG), CNOOC, having facilitated over 70% of China’s LNG imports overseas assets to provide China with greater energy security. This in 2012, has led the country’s expanding access to overseas gas development has catapulted CNOOC Group, through its main listed extraction and transportation through direct investment and imports. subsidiary CNOOC Ltd., into the top twenty global O&G frms in Correspondingly, CNOOC’s engineering, procurement and construction terms of production. (EPC) arm, China Ofshore Oil Engineering Co. (COOEC), leads China in the construction of the capital-intensive LNG port facilities. China does not only want to purchase O&G assets, it also wants to explore, extract and refine them. However, the majority of Through the lens of two CNOOC overseas acquisitions, this article reserves being discovered today are composed of unconventional examines the trend of Chinese NOCs in their overseas acquisitions. resources, which require advanced technology. Though China’s O&G companies are expanding their expertise and experience in this feld, their capabilities remain lower than their international Recent CNOOC deals in Africa and Canada counterparts. Outbound acquisitions are enabling Chinese national oil companies (NOCs) to close that gap while, conversely, ofering China has fostered strong political relationships with Canada and their partners the opportunity to tap China’s recoverable shale gas many nations on the African continent for decades. These ties have reserves, which are estimated to be the world’s largest. facilitated the expansion of Chinese companies into those markets. Both hold important global sources of energy. For example, Canada CNOOC global deals has the world’s third-largest oil reserves and the world’s seventh- largest recoverable shale gas reserves. Fittingly, China represents 28% (USD ~28 billion) of the foreign investment into Canada’s O&G Since the 1990s, CNOOC has maintained a diversifed approach to sector from 2007 to 2013, compared to the US’s 19% (USD ~19 its overseas acquisitions – gaining majority shareholder status in billion). Similar in importance to CNOOC, the African continent was some projects while serving a more passive, minority role in others. the source of roughly 10% of CNOOC’s O&G production in 2013, with The frm continues to diversify its supply of upstream resources to Nigeria, Angola, Uganda, Sudan and South Sudan being production reduce potential risks and vulnerabilities to its supply chain. In the hotspots. frst half of 2013, it earned roughly 25% of its profts overseas. CNOOC, however, has felt more resistance to its approaches in other The Beijing Axis has tracked 23 major overseas investments made by countries, especially the US. CNOOC’s failed attempt to purchase CNOOC in 17 countries over the past 12 years. The deals range in size Unocal for USD 18.5 billion in 2005 (compared to Chevron’s later- from a USD 1 million purchase of an Indonesian Widori Oil Field to accepted offer of USD 17.1 billion) is a prime example of the the USD 15.1 billion purchase of Canadian Nexen Energy, the largest US government blocking Chinese investment due to political Chinese outbound investment in history. considerations.

24 І The Beijing Axis OML 130 of CNOOC’s assets in Central and North America. This strategy of purchasing a minority stake in a frm before making a majority or China’s frst investment in the Nigerian O&G industry took place whole acquisition is not uncommon. in 2006 through CNOOC’s acquisition of a 45% equity stake in Oil Mining Licence 130 (OML 130) from South Atlantic Petroleum for Such strategies do, however, have their risks. So far, the Long Lake USD 2.3 billion. With depths ranging from 1,100 m to 1,800 m, OML Oil Sands Project has only been able to reach half its production 130 spans a 2,590 sq. km plot of the Gulf of Guinea in the Niger River goals. Some analysts suggest that CNOOC’s inability to overcome Delta. It is composed of four O&G felds (in order of viability) – Akpo, rising costs and technical difculties, and ramp up the project, has Egina, Egina South and Preowei – and a range of other exploration contributed to a decline in CNOOC Ltd.’s share price over the last few prospects. Akpo reached a production plateau of 175,000 b/d and years. CNOOC continues to be optimistic and has further injected 9 million cm of natural gas per day by early 2011. Egina is expected capital into the project. This year will be critical in determining to come on-stream in 2017. whether the acquisition of an efectively bankrupt project for access to a larger target was a prudent strategy. CNOOC’s interest in the oil block is related to two facets of the project. First, OML 130 was CNOOC’s frst venture into deepwater Key takeaways drilling, a key focus in China’s overseas investment agenda. Deals like this have allowed CNOOC to acquire key technology to explore CNOOC’s investments in OML 130 and Opti Canada demonstrate and develop O&G deposits in the South China Sea. New technology common themes followed by Chinese companies and provide also meant that COOEC, CNOOC’s EPC subsidiary, learned from and insights on how international O&G stakeholders, from suppliers and gained exposure to Samsung Heavy Industries, the leading deep- EPCs to project partners, can beneft from them. water engineering, procurement and construction (EPC) contractor for the Akpo oil feld. Secondly, as CNOOC’s frst project in the Niger Lack of expertise in unconventional energy resources. CNOOC’s Delta, a minority stake in OML 130 provided a unique opportunity expansion into unconventional O&G resources demonstrates the to diversify the frm’s geographical risk and establish a foothold in firm’s and China’s forward-looking business and energy security Africa that could be leveraged for future projects. strategy. However, Chinese O&G companies’ lack of experience in the necessary technologies has constrained its growth. Expect CNOOC CNOOC successfully secured the bidding process for OML 130 to continue seeking partnerships with firms that have access to partially due to its access to a USD 1.6 billion loan from China Exim advanced technologies that it can implement in China’s shale gas and Bank to develop Akpo. CNOOC also committed to rehabilitate a local deep-water reserves, as well as in markets that will provide CNOOC refnery, construct a railway line and build a hydroelectric power with a more diversifed energy and geographic portfolio. station; however, these three projects fell through due to a regime change soon after the deal went through. Access to cost-saving measures. Chinese companies, especially those with close ties to government, have the ability to borrow at As seen in the “Angola Model”, Chinese companies frequently signifcantly lower rates than what is otherwise available to their contribute to improving the local infrastructure as part of an international competitors. Furthermore, Chinese EPCs can also investment. Additionally, the inexpensive financing CNOOC leverage, albeit to a decreasing degree, cost-saving avenues, such received for this investment is an example of the unique beneft as Chinese raw materials and labour, to ofer more competitive Chinese SOEs bring in their overseas expansions. service and product oferings than international competitors. In this manner, the involvement of CNOOC and other Chinese frms can Opti Canada increase their and their partners’ return on investment.

Opti Canada, an Alberta-based oil sands developer with a 35% Opportunities for international stakeholders. CNOOC seeks stake in the Long Lake Oil Sands Project in the Athabasca region, advanced international frms’ expertise and technology in exploring was seeking a strategic partner after a series of equipment failures and extracting unconventional O&G resources. CNOOC can ofer its and lower-than-expected production figures. The firm filed for partners access to China’s underdeveloped domestic market that bankruptcy protection in early July 2011 after sufering from a may become the world’s largest. In the same way that Nexen has shortage of capital for several quarters. taken responsibility of managing over several USD billion worth of CNOOC’s Central American assets, many stakeholders hold valuable Shortly after their application was submitted, CNOOC Ltd. acquired experience operating in key markets without the same level of Opti Canada for USD 2.1 billion. CNOOC was well matched for scrutiny or political interference faced by Chinese NOCs. this project mainly because of its deep pockets and access to the Chinese market. However, from CNOOC’s perspective, this deal was Conclusion only the stepping stone to its 2013 acquisition of Nexen, who owned the other 65% of the Long Lake Oil Sands Project, and other strategic assets around the globe. Chinese companies will continue to acquire overseas O&G assets as the country’s demand for a diversifed range of energy resources CNOOC management leveraged this project to expand its oil and technologies continues to increase and domestic expertise sands expertise and gain access to Nexen to inform them on their remains limited. CNOOC and the other Chinese NOCs represent an acquisition intention. Nexen, as of February 2013, became CNOOC’s evolving opportunity landscape to international O&G stakeholders, wholly-owned subsidiary in a deal worth USD 15.1 billion. Increasing from foreign EPCMs, to oil service providers. These case studies CNOOC Ltd.’s total oil reserves by over 12%, the Nexen acquisition present examples of a key Chinese company’s strategies and how dramatically expanded CNOOC’s expertise in deep-water drilling, international stakeholders could beneft from such a trend. shale gas, as well as conventional O&G. Furthermore, Nexen held strategic assets in the North Sea, ofshore West Africa and in the Gulf Tim Quijano of Mexico. Nexen, whose management team has remained largely Associate Editor: The China Analyst the same following the deal, now manages around USD 8 billion [email protected]

25 І The Beijing Axis The China Analyst

China-Africa Trade (USD bn, 2002-2013) Regional Focus: 140 China’s Imports from Africa China’s Exports to Africa 120

CHINA-AFRICA 100 Even with a cooling of the Chinese economy, 80 the total value of China-Africa trade in 2013 60 reached USD 210.2 bn, an increase of 6.2% y-o-y – demonstrating the expanding relationship 40 between the two regions. In this edition, we 20 report the latest China-Africa trade data, review major China-Africa trade and investment deals 0 and spotlight China’s relationship with the South 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 African Development Community (SADC). Source: China Customs; UN Comtrade; The Beijing Axis Analysis

3.7% increase y-o-y China-Africa Briefng • Trade data for the frst three quarters of 2013 reveals that the • In January 2014, Ethiopian President, Mulatu Teshome, stated fve leading African exporters to China were South Africa, that Chinese investment is transforming the African continent. Angola, Nigeria, Egypt and Algeria Analysts suggest that Africa has the opportunity to capture a • Leading commodities China imported from Africa in 2013 large proportion of the manufacturing jobs China is expected were oil, platinum, copper and other minerals to outsource as domestic production costs continue to rise • In December 2013, African Development Bank compliance China Exports to Africa and safety experts developed social and environmental • China’s exports to Africa totaled USD 92.8 bn in 2013, an 8.8% guidelines for investment projects with Chinese policymakers. increase y-o-y Together, these partners proposed developing institutions to facilitate regular meetings and coordinate a reporting • Trade data for 2013 reveals that the fve leading destinations for China’s exports to Africa were Ethiopia, South Africa, platform to demonstrate the value of socially responsible Angola, Nigeria and Tanzania business practices and avoid adverse impacts of economic development • Leading commodities China exported to Africa in 2014 include clothing, toys, construction equipment and military The 2013 Africa-China Commodities, Technology and Services • equipment Exposition took place in December in Addis Ababa, Ethiopia. This expo marked the frst time a China-Africa trade expo China-Africa Trade, Ten Largest Partners (USD bn, 2012 vs. 2013) was held in Africa, which demonstrates growing demand South 2012 for Chinese business in Africa. More than 150 companies 70 Africa from across China participated in the event, including major 2013 Chinese firms such as Huawei, Sinosteel Corp and Chery 60 Heavy Industry 50 • At the 2013 African Investment Summit that took place in Angola Hong Kong in November, China Exim Bank committed 40 to investing USD 1 tn over the next 12 years in a series of transnational transportation projects including highways and 30 airports in Angola, Mozambique and other countries on the 20 African continent Nigeria Egypt In late November 2013, Chinese Vice Premier Liu Yandong led Libya Algeria • 10 Ghana Congo a three-day high-level Chinese delegation to Addis Ababa, DRC Sudan Ethiopia, to discuss health, education and technology with the 0 Ethiopian President, Prime Minister and Deputy Prime Minister Source: China Customs; UN Comtrade; The Beijing Axis Analysis China-Africa Trade Total Trade China-Africa Investment Total value of trade between China and Africa reached USD • Trends 210.2 bn in 2013, an increase of 6.2% y-o-y • The cumulative stock of Chinese investment in Africa has • African exports to China continued to grow faster than imports from China; China’s trade defcit reached USD 24.6 grown rapidly from less than USD 9.3 bn in 2009 to USD bn in 2013 21.2 bn in 2012. At the same time, the number of Chinese companies investing in Africa exceeds 2,000, mainly targeting China Imports from Africa the fnance, mining and manufacturing industries • Imports to China from Africa totaled USD 117.4 bn in 2013, a

26 І The Beijing Axis The China Analyst

Major Recent Deals and Developments country once construction is completed in 2015 • In March 2014, China Development Bank signed MoUs with • In October 2013, the China Machinery Engineering Societe Generale and Barclays to cooperate in corporate Corporation began a three-year overhaul of a water treatment fnance, retail banking, capital markets and structured fnance facility in Harare, Zimbabwe following a 2008 cholera in the African continent epidemic. The project was fnanced by a USD 144 mn loan from China Exim Bank • In February 2014, China Africa Cotton fnalised plans to build a cotton factory in Mozambique. The USD 3 mn factory will • In October 2013, CAD Fund disclosed that it has invested USD process 30,000 tons of seed cotton per year and will also have 880 mn in the frst phase of an afordable housing project, the capacity to produce 3,000 litres of cooking oil per year which includes a hospital, school and shopping centre, in Mozambique. Much of the frm’s USD 200 bn of investments • In January 2014, China Powerway Renewable Energy, through its regional subsidiary Powerway South Africa, revealed plans in Africa are targeting the African housing industry to invest about USD 160 mn in the construction of a 100MW • In September 2013, Chinese mineral and resources company, solar plant in Zimbabwe. Powerway, a solar farm engineering Tewoo, agreed to purchase a 16.5% stake in the Tonkolili and construction company, will partner with Mobility project, an iron-ore mine in Sierra Leone, for USD 990 mn Holdings, a local company that specialises in renewable from African Minerals. Observers suggest that the deal has energy projects guaranteed China’s supply of iron ore for the next 20 years • In January 2014, China Development Bank provided Wesizwe • In September 2013, CNOOC won a USD 2 bn deal to develop Platinum, a Johannesburg-listed mining company in South the Kingfisher oil field in Uganda. An estimated 195 mn Africa, USD 650 mn to support the development of the barrels of oil are recoverable from the oilfeld. CNOOC will Bakubung platinum mine, which is expected to reach full develop the Kingfsher feld over the next four years production capacity by 2021 • In January 2014, the China National Nuclear Corp (CNNC) purchased a 25% share in the Langer Heinrich uranium mine Africa Regional Focus: China and the South African in Namibia from Paladin Energy, an Australian uranium Development Community (SADC) producer, for USD 190 mn Brief Regional Profle In January 2014, the Reserve Bank of Zimbabwe announced • • Headquartered in Gaborone, Botswana, SADC consists of 15 its plans to add the Chinese yuan to its list of ofcial currencies African countries: Angola, Botswana, Democratic Republic following its challenges with infation. In the same month, the of the Congo, Lesotho, Madagascar, Malawi, Mauritius, Nigerian central bank announced that it would increase its Mozambique, Namibia, Seychelles, South Africa, Swaziland, holdings of Chinese yuan from 2% to 7% by selling roughly Tanzania, Zambia and Zimbabwe USD 2.2 bn of US dollars and replacing them with Chinese yuan • In 2012, SADC countries had a combined GDP of USD 651 bn and an average real GDP growth rate of 5.1%. SADC is the • In January 2014, Chinese construction firm Huasheng largest African regional bloc in terms of GDP and GDP per Jiangquan Group committed to invest over USD 2 bn for the capita construction of an industrial park in Western Ghana. This project is expected to create 5,000 jobs and open the region • SADC nation states make up a population of roughly 277 mn to future economic growth people and cover nearly one-third of the African continent • In December 2013, Chinese engineering firm Sinoma • SADC was formed in 1992 to promote economic development, International Engineering, a subsidiary of China National security and poverty alleviation, and to support disadvantaged Materials, signed a USD 536 mn contract with Nigeria’s groups through greater regional integration. It is one of the Dangote Cement. The firms will be building two clinker largest intergovernmental organizations in Africa cement production lines in Nigeria, each with a daily capacity • In 2000, SADC instituted a free trade agreement, which covers of 6,000 tonnes all SADC member states except Angola, the DRC, Congo and • In December 2013, China UnionPay signed a deal with Seychelles Tanzania’s B-PESA to allow the Tanzanian pre-paid bank • By the end of 2012, Chinese investment in SADC amounted to loop card to expand their operating territory beyond Tanzania USD 9.4 bn to cover 1.6 mn ATMs and over 12 mn merchants in 142 countries. Observers view the deal as an attempt to facilitate China-Tanzania business projects and tourism Chinese OFDI Stock into SADC (USD mn, 2004-2012) • In November 2013, the China-Africa Development Fund (CAD Fund) and Shandong-based Shankou Steel Pipe 9,000 Zimbabwe group signed a cooperation agreement in order to capture 8,000 Zambia more opportunities in West African energy, logistics and Tanzania infrastructure markets. The two firms will build a welded 7,000 pipe-processing plant in Ghana. With an annual capacity of 6,000 South Africa 250,000 metric tonnes, the pipe plant will supply a growing 5,000 Mozambique number of oil and gas projects in Africa with rebar, wire rod 4,000 Mauritius and welded pipe 3,000 DR Congo In November 2013, the Ethiopian Railways Corp. purchased • 2,000 Botswana thirty railway coaches from China’s CNR Corp. to be used on the 1,000 Angola Addis Ababa-Djibouti railway, which is expected to increase regional development by providing modern transportation 2004 2005 2006 2007 2008 2009 2010 2011 2012 links between the Ethiopian capital and its main shipping port in Djibouti. The rest of the trains will be used on the Ethiopian Note: Others includes Lesotho, Malawi, Namibia and Seychelles. railway network, which will travel 2,600 kilometres across the Source: Statistical Bulletin of China’s OFDI; The Beijing Axis Analysis

27 І The Beijing Axis The China Analyst

China-Australia Trade

Regional Focus: Total Trade • China Customs figures demonstrate that China-Australia trade totalled roughly USD 136 bn in 2013, which represents CHINA-AUSTRALIA a CAGR growth of 26% from 2003-2013 • According to China Customs, China’s exports to Australia shrunk by 0.6% from USD 37.8 bn in 2012 to USD 37.6 bn In the last quarter of 2013, a new Australian in 2013, the frst decrease since 2009. Australian Bureau of Statistics (ABS) fgures showed a decrease of 1.2% from USD government reignited China-Australia free trade 46.0 bn in 2012 to USD 45.5 bn in 2013 negotiations. Sino-Australian trade continued to • Imports from Australia, on the other hand, continued to grow grow last year, with the value of total trade between by 16.9% from USD 84.5 bn in 2012 to USD 98.8 bn in 2013. the two nations exceeding USD 136 bn in 2013. ABS fgures showed a 20.5% increase from USD 75.5 bn in 2012 to USD 91.0 bn in 2013 Chinese investment in the Australian energy and natural resources sectors continued to rise in 2013. China Annual and Monthly Trade with Australia (USD bn, 2003-2013)

China-Australia Briefing: Tighter relations between the China exports to Australia (lhs) China exports to Australia (lhs) new governments and expanding tourism ties China imports from Australia (lhs) China imports from Australia (lhs) Annual trade Balance (rhs) Monthly trade balance (rhs) 100 0 10 0 • In March 2014, China signed a USD 31 bn currency swap 90 -10 9 -10 agreement with Australia. The deal is expected to further 80 -20 8 -20 70 -30 7 -30 promote bilateral trade and investment between the two 60 -40 6 -40 countries and will allow for the exchange of local currencies 50 -50 5 -50 40 -60 4 -60 between their central banks. The deal is also expected to 30 -70 3 -70 reduce cost and foreign exchange risk for businesses, as they 20 -80 2 -80 10 -90 1 -90 will be able to settle trade terms in local currency 0 -100 0 -100 Jul Jan Oct Jun Apr Feb Sep Dec Mar Nov Aug May • In March 2014, China signed an organic food deal with 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Australia worth USD 100 bn, which will allow a Beijing- Source: China Customs, The Beijing Axis Analysis based organic certification body, Beijing Wuyue Huaxia Management and Technique Centre, to assess local organic Australia Annual and Monthly Trade with China operators for export to the Chinese market (USD bn, 2003-2013) Australian exports to China (lhs) Australian exports to China (lhs) • Newly-elected Australian Prime Minister Tony Abbott, met Australian imports from China (lhs) Australian imports from China (lhs) 100 90 10 10 with Chinese President Xi Jinping, for the frst time during 90 Annual trade balance (rhs) 80 9 Monthly trade balance (rhs) 9 the Asia-Pacifc Economic Cooperation (APEC) meeting in 80 70 8 8 Bali in October 2013. The meeting reafrmed the strength 70 60 7 7 60 50 6 6 of Chinese-Australian relations, and Prime Minister Abbott’s 50 40 5 5 plans to visit China with a large delegation of business, trade 40 30 4 4 30 20 3 3 and government representatives during the frst half of 2014 20 10 2 2 10 0 1 1 • Australia and China have made progress toward fnalising 0 -10 0 0 Jul Jan Oct Jun Apr Feb Dec a free-trade agreement. After October’s APEC meeting in Sep Mar Nov Aug May 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Bali, statements from both China and Australia’s leadership Source: Australian Bureau of Statistics, The Beijing Axis Analysis indicated that the agreement would be finalised by late 2014. Australian and Chinese diplomats met in November • China’s monthly exports to Australia in 2013 peaked in and December 2013, which indicates the importance of October at USD 3.7 bn according to China Customs, and completing this deal within the stated time frame USD 4.5 bn in November according to ABS. China’s monthly • China and Australia are also involved in negotiations over imports from Australia peaked at USD 9.37 bn in November another free-trade agreement, the Regional Comprehensive according to China Customs, and USD 8.6 bn in December Economic Partnership (RCEP). The RCEP links ASEAN according to ABS economies with the largest economies of the Asia-Pacifc • Total monthly trade peaked at USD 13.0 bn in November region. The second round of negotiations was held on according to China Customs and at USD 13.0 bn in October September 23-27 in Brisbane, Australia. As China is not according to ABS currently a Trans-Pacifc Partnership member state, China is particularly interested in joining the RCEP Australia State Watch: Queensland • The tourism sectors in both Australia and China witnessed • With a gross state product (GSP) of USD 302.5 bn in 2012-13, signifcant growth in 2013. The number of Australian tourists Queensland is Australia’s third-largest economy, after New to China increased by 6.7%, pumping USD 877 mn into South Wales and Victoria the Chinese economy. The number of Chinese travelling to Australia rose by 17.1% over 2012, which injected an extra • The state is a net exporter with exports of USD 43.3 bn and USD 4 bn into Australia. These rates are particularly impressive imports of USD 40.2 bn in 2013 when compared to other developed nations such as the US • Main export commodities in Queensland for 2012-2013 were (0.1%), Britain (3.8%) and Germany (3.5%) coal, coke and briquettes (USD 19.0 bn, 41.6% of total exports), meat and meat preparations (USD 3.7 bn, 8.1%), non-ferrous

28 І The Beijing Axis The China Analyst

metals (USD 3.6 bn, 7.9%), metalliferous ores and metal scrap Australian Mining M&A Infow by Investor’s Origin (USD 3.45 bn, 7.6%), and sugars, sugar preparations and honey (% share of total, 2003-2013) (USD 1.4 bn, 3.0%) ChinaUS UK Japan Switzerland Canada Netherlands India Others • Key industries in terms of contribution to Queensland’s 2012-13 GSP are construction (10.0%), mining (9.5%), ownership of 2011-12 dwellings (8.1%), healthcare and social assistance (7.7%), and 2010-11 manufacturing (7.0%) 2009-10 2008-09 • China was Queensland’s largest trading partner in 2013, 2007-08 with total trade reaching USD 17.0 bn (20.3% of total trade), 2006-07 followed by Japan (USD 12.4 bn, 14.9 %) and South Korea (USD 2005-06 7.1 bn, 8.5%) 2004-05 • According to ABS, Queensland’s total trade with China reached 2003-04 USD 16.8 bn in 2013, a 22.2% increase y-o-y, with exports to 0% 20% 40% 60% 80% 100% China at USD 11.2 bn, a 38.3% increase y-o-y, and imports from Source: Australian FIRB, The Beijing Axis Analysis China at USD 5.6 bn, a 0.7% decrease y-o-y • Over 2003-2013, China-Queensland trade accelerated rapidly Pty, controlled by Jemena. The deal is conditional upon at at a CAGR of 25.6%. Total exports to China grew by a CAGR of least half of SP AusNet’s and Jemena’s board being Australian 30.5%, while total imports grew by 19.5% citizens that currently reside in Australia • In December 2013, Chinese steelmaker Baosteel increased China-Australia Investment its stake in Aquila Resources by 4.6%, taking its total stake to almost 20%. Baosteel initially acquired a 15% stake in Aquila Queensland Trade with China (USD mn, 2003-2013) Resources in 2009 and is represented by one member in the Aquila board 12,000 Queensland exports to China (lhs) 6,000 • In December 2013, the Australian government relaxed 10,500 Queensland imports from China (lhs) 5,000 restrictions on Yanzhou Coal Mining’s ownership of Yancoal 9,000 Annual trade balance (rhs) 4,000 Australia by allowing it to maintain its current ownership of 7,500 3,000 78%, rather than divest to 70% by the end of the year In December 2013, private Chinese company China Kingho 6,000 2,000 • Energy Group, announced a USD 52.6 mn bid for Carabella 4,500 1,000 Resources, an Australian coal exporter. The ofer is part of 3,000 0 Kingho’s plan to establish a headquarters for their global 1,500 -1,000 resources and development business outside of China. Carabella will respond to the ofer in early 2014 0 -2,000 • In December 2013, WesTrac acquired Caterpillar Global 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mining’s distribution and support business in northeastern Source: Australian Bureau of Statistics, The Beijing Axis Analysis China for USD 130 mn. The acquisition enables Seven Group’s heavy-machinery unit, WesTrac, to sell Caterpillar’s mining Major Recent Deals products in the country’s northeast provinces, as well as ofer • In April 2014, WH Group (previously known as Shuanghui support and maintenance services International Holdings), purchased Tabro Meat, one of In December 2013, a Chinese agricultural and food investment Victoria’s largest export beef processing businesses. The • company, New Hope Investment Fund, acquired the fourth- Tabro Meats business includes two USDA-licenced and Halal- largest abattoir in Australia, Kilcoy Pastoral Company (KPC), certifed Victorian abattoirs, with a combined capacity of for an undisclosed amount around 1,000 head per day. While the terms of the deal were not disclosed, Tabro ofcials say the purchase price was well • In October 2013, Hong Kong-based Noble Group acquired above USD 25 mn a 21% stake in the Australian coal mining frm, Cockatoo Coal. Noble Group, in collaboration with South Korean frm • In March 2014, Shandong-based Landbridge Group made SK Networks and Indonesian coal miner Harum Energy, an unsolicited USD 144.6 mn takeover ofer directly to the contributed USD 113 mn in equity for Cockatoo Coal’s USD shareholders of Westside Corp. Landbridge, which owns a 134 mn equity raising. In a separate deal, Noble Group agreed port in China along with refnery and real-estate assets, stated to sell its 51.2% stake in coal explorer, Blackwood Corp, to it approached Westside, which owns coal seam gas felds in Cockatoo for USD 19 mn Queensland state, with an ofer in February, but was rejected access to the company’s books. The board of Westside is • In October 2013, CNOOC fnalised a USD 1.7 bn Heads of currently reviewing the terms of the ofer Agreement (HOA) with BG Group for the acquisition of portion of the Queensland Curtis LNG project. Under a • In February 2014, Shanghai-based real estate developer, the separate agreement, BG Group will supply CNOOC with an Greenland Group, signed an MoU for a USD 1 bn residential additional 5 mn tonnes of liquefed natural gas per annum project in Melbourne, which includes a development near the Flemington Race course • In September 2013, China’s third-largest zinc producer, Zhongjin Lingnan, presented a takeover ofer to Perilya for • In December 2013, the Federal government approved a USD 244 mn. The Chinese frm acquired a majority stake in USD 3.9 bn proposal by the State Grid Corporation of China the Perth-based mining company in 2009 (SGCC) for a 19.9% stake in SP AusNet, an Australian energy infrastructure frm. The government also approved SGCC’s bid of an undisclosed amount for a 60% stake in Singapore Power’s energy assets, which are held by SPI (Australia) Assets

29 І The Beijing Axis The China Analyst

• In November 2013, Mexico and China engaged in bilateral discussions between senior government officials and key Regional Focus: business executives, including Mexico’s Secretary of Economy, Ildefonso Guajardo Villarreal, and Deputy Foreign Trade Secretary, Francisco de Rosenzweig, to help balance trade between the nations. In 2012, Mexico imported USD 56.9 bn from China while CHINA-LATIN AMERICA only exporting USD 5.7 bn, creating a trade gap of USD 51.2 bn • The Seventh China Latin America and Caribbean Business Summit was held in Costa Rica in November 2013. The objective In 2013, bilateral ties between China and Latin of the summit was to increase mutual understanding between America continued to strengthen, exemplified Chinese and Latin American businesses and help facilitate an by rising trade figures as well as the possible environment that would further increase trade. The Costa Rican Coalition for Development Initiatives, the China Council for formation of a high-profle forum between China the Promotion of International Trade and the Inter-American and Latin America, akin to the Forum on China- Development Bank collectively organised a separate investment Africa Cooperation. In this edition, we review these forum, which presented information on Costa Rica to Chinese evolving issues and highlight Costa Rica’s role as one businessmen of the most competitive economies in Latin America. China-LatAm* Trade (USD bn, 2003-2013) 140 China’s Exports to LatAm China’s Imports from LatAm China-LatAm Briefing: China-CELAC forum proposed; 120 Andean countries strengthen relations with China; and Latin America is recognised as a key food exporter to the 100 Chinese market 80 • In February 2014, the “Going to Latin America” forum was held in Guangzhou by the Association of Public Diplomacy of China 60 with support from the Ministries of Foreign Afairs and Foreign 40 Trade and the NDRC. The forum was attended by ofcials, envoys and scholars from LatAm who introduced LatAm investment 20 priorities and policies, their social and cultural characteristics and the path for Chinese enterprises to enter the region 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 • In January 2014, Ecuadorean Vice President Jorge Glas met with his Chinese counterpart, Li Yuanchao, in Beijing. Ecuador *Note: Latin America here refers to the Latin American Integration Association, whose members are Argentina, Bolivia, Brazil, Chile, Colombia, Cuba, Ecuador, México, is seeking financial support from China for the USD 10 bn Paraguay, Peru, Uruguay and Venezuela. Refneria del Pacifco project, the most essential infrastructure Source: CEIC; UN Comtrade; China Customs; The Beijing Axis Analysis project for President Rafael Correa’s administration. The Chinese government has indicated that a fnal fnancing deal for a 30% China-LatAm Trade stake could be reached with CNPC and ICBC this year • In January 2014, the Community of Latin American and Caribbean Total Trade states (CELAC), a regional organisation comprised of the 33 • In 2013, China’s total bilateral trade with LatAm reached USD countries in the western hemisphere minus the US and Canada, 261.6 bn, an increase of 7.4% y-o-y held its second summit in Cuba. One of the key outcomes of the • Brazil, Mexico and Chile were among China’s largest trading summit was a special declaration of the establishment of a China- partners in LatAm, accounting for 32.7%, 14.1% and 12.7%, CELAC forum, the frst of which is expected to be held in 2014 respectively, of China’s total trade with the region during 2013 • Bolivian President Evo Morales visited Chinese President Xi • China registered a trade surplus of USD 6.9 bn with the region in Jinping in Beijing to further promote cooperation between 2013, an increase of 1.6% y-o-y the two nations in late December 2013. The two heads of state China Imports from LatAm pledged to deepen cooperation in the mineral, high-tech and In 2013, China’s total imports from LatAm amounted to USD infrastructure sectors, with President Morales witnessing the • 127.3 bn, an increase of 7.5% y-o-y launch of Bolivia’s frst communications satellite at the Xichang Approximately 69.2% of LatAm’s exports to China in 2013 Satellite Launch Centre in Sichuan province • originated from just three countries, namely Brazil (41.4%), Chile • In December 2013, China’s Fifth Overseas Investment Fair was (16.3%) and Venezuela (11.5%) held in Beijing. Representatives from Argentina, Peru, Ecuador, Chile and Brazil participated and presented energy, tourism and China Exports to LatAm telecommunications projects to potential Chinese investors. • China’s total exports to LatAm in 2013 reached USD 134.3 bn, an Looking to gain greater access to foreign markets, hundreds of increase of 7.3% y-o-y representatives from Chinese companies attended, including the • In 2013, approximately 56.8% of China’s exports to the region oil giants - CNOOC and PetroChina - and banks such as ICBC and were concentrated in Brazil (25.9%), Mexico (21.6%) and Panama China Development Bank (12.2%) • In December 2013, Nobel prize-winning former chief economist for the World Bank, Joseph Stiglitz, stated that China’s demand for food and China-LatAm Investment agriculture will help LatAm grow despite China’s economic slowdown. China’s maturing middle class and higher disposable income levels Major Recent Deals and Developments have led to greater demand for imports of meat and cooking oils, both • In February 2014, ICBC ofcially commenced operations in Lima, of which LatAm has a comparative advantage in producing Peru, becoming the first Chinese-owned bank to enter the

30 І The Beijing Axis The China Analyst

country’s fnancial sector. ICBC will initially provide fnancing to China’s Total Trade with Costa Rica (USD bn, 2007-2013)

Chinese corporations operating in Peru, especially in the mining 6 Chinese Exports to Costa Rica sector, as well as Peruvian exporters looking to do business Chinese Imports from Costa Rica China and Costa in China. Peru has been a key mineral supplier to the Chinese 5 Rica’s FTA came economy. ICBC also has a presence in Brazil and Argentina into efect in 2011 • In January 2014, Chinese automaker, BYD, announced that it 4 was considering making what would be its largest overseas investment in two manufacturing plants in Brazil. The USD 3 100 mn investment would involve the purchase of an existing plant and the construction of a new one, which would enable 2 an annual production of 4,000 electric buses. BYD is currently in negotiations over the land-purchasing agreements with local 1 authorities 0 • In December 2013, China’s Shuanghui International Holdings 2007 2008 2009 2010 2011 2012 2013 established a joint venture with Mexican frozen food company, Source: China Customs; The Beijing Axis Analysis Sigma, to purchase Campofrio, a Spanish meat processor. The USD 957 mn joint venture will combine Shuanghui’s previous China-Costa Rica Trade Total trade between China and Costa Rica has grown at a CAGR 37% stake in Campofrio with Sigma’s 45% stake and a EUR 6.9 • of 21% since 2008, reaching USD 6.2 bn in 2012. Chinese imports per share bid for the remaining shares of Costa Rican products have accounted for the majority of the • In December 2013, China launched Bolivia’s frst communications increase, more than doubling in value since 2008—from USD 2.3 satellite into orbit. The satellite, built by China Great Wall Industry bn to USD 5.3 bn. Chinese imports from Costa Rica are comprised Corp., will improve telecommunications, radio, television and almost exclusively of electronic integrated circuits, accounting for Internet access in isolated rural areas of Bolivia. The USD 302 mn almost 95% of imports in 2011. China exports mainly textiles and project was fnanced primarily by a loan from China Development consumer goods such as mobile phones and shoes to Costa Rica Bank and included the training of 80 Bolivian personnel who will After the free trade agreement (FTA) came into efect in 2011, control the satellite from two ground stations in Bolivia • total trade between Costa Rica and China increased by 62.6%. • In November 2013, CNPC acquired the Peruvian subsidiary of Chinese exports in 2010 (before the FTA) were USD 688.0 mn Brazilian state-owned oil company Petrobras for USD 2.6 bn. and have grown to USD 901.8 mn in 2012, increasing by 31.1%. Petrobras Energia Peru was sold to CNPC as part of a move to Chinese imports from Costa Rica grew by USD 2.2 bn, increasing liquidate USD 9.9 bn in assets to ofset the company’s high level by 69.6% in the same period of debt. The subsidiary owns 3 oil and gas blocks in Peru, which currently produce 800,000 tons of oil equivalent annually China-Costa Rica Bilateral Ties • In 2007, Costa Rica became the only Central American country • In November 2013, China Construction Bank acquired a majority to establish diplomatic ties with the PRC. In turn, China gifted stake in Brazilian bank Banco Industrial and Comercial SA, known Costa Rica with a USD 100 mn National Stadium, which was simply as BicBanco, for USD 723 mn. The 72% stake in BicBanco constructed entirely by Chinese workers and completed in 2011 was the easiest way for the Chinese bank to obtain a licence in Brazil and marks its frst acquisition outside mainland China • China and Costa Rica signed a FTA in April 2010, which came since 2009 into efect in August 2011. Under the FTA, the two countries immediately allowed 60% of product categories, ranging from • In October 2013, the exploration rights to the Libra oil feld, China’s manufactured and agricultural goods to Costa Rica’s the largest in Brazil, were auctioned off to a consortium of minerals and processed foods, to enter each other’s markets 5 international oil companies, including 2 Chinese oil giants. duty-free. The gradual removal of tariffs will result in 90% CNOOC and CNPC both acquired 10% stakes in the oil feld for of product categories to be duty-free by 2026. The FTA also USD 700 mn each. The acquisition is essential for China’s growing liberalised services, as Costa Rica opened trade in services to 45 need for energy security, particularly considering its interest in sectors including telecommunications, construction, education reducing its reliance on the Middle East for oil and IT. China allowed free trade in seven service subsectors such • In September 2013, engineering and construction companies as IT, real estate, market research and translation China CAMC Engineering, China Railway Corp and Spanish In June 2013, Chinese President Xi Jinping met with his Costa frm Yapilo were awarded a USD 250 mn contract to construct • Rican counterpart Laura Chinchilla, engaging in bilateral talks a railway through the landlocked nation of Bolivia. The project that resulted in the signing of 13 agreements, including upgrades is considered a crucial upgrade of infrastructure in Bolivia and to oil and transport infrastructure. China also agreed to fund a will help facilitate trade through connections to existing railway USD 400 mn upgrade of a key highway connecting the capital, networks that extend to Atlantic and Pacifc Ocean ports San Jose, to the key port town of Limon • Negotiations to establish a special economic zone (SEZ) for China in Costa Rica could be completed by late 2014. A SEZ would China-LatAm Country Watch: Costa Rica boost Costa Rican exports to China, create new jobs and enable Brief Country Profle greater technology transfer • Costa Rica is a small, stable and progressive Central American • Chinese investment in Costa Rica is focused in bilateral nation with a GDP of USD 45.1 bn in 2012. With a population of agreements between the nations that fund key infrastructure 4.8 mn people, Costa Rica’s GDP per capita was USD 9,392 in 2012 projects for Costa Rica. Following President Xi’s visit in June 2013, • Costa Rica’s manufacturing sector produces 15.4% of its GDP, China agreed to fnance a USD 1.5 bn upgrade of an obsolete primarily producing electronics, but the economy also has strong oil refnery in Limon. Once complete, the refnery will currently tourism and agriculture industries be capable of processing 65,000 barrels of oil per day that China purchases from other Latin American countries such as Venezuela and Ecuador

31 І The Beijing Axis The Beijing Axis News August 2013 – March 2014

Roundtable Meeting for China-Africa Cooperation Project 4 December 2013; Beijing, China

Asia Copper Week 20 November 2013, Shanghai, China

National Australia Bank AustCham Beijing FTA Round Table 19 November 2013; Beijing, China

British Chamber of Commerce in China: The new age of procurement and supply 4 November 2013; Beijing, China

Melbourne Mining Club Dinner 1 November 2013; Beijing, China

Australian Resources Investment Kobus van der Wath, Founder and Group Managing Director, welcomes key stakeholders at the TBA Year-end Cocktail Forum Party (12 December 2013) 31 October 2013; Beijing, China

Greater China and Asia China Mining Congress and Expo 2013 SA Embassy Banquet for Deputy – Tianjin, China President of South Africa TBA Year-end Cocktail Party – Beijing On 2-5 November 2013, the China 29 October 2013; Beijing, China China Mining Congress and Expo 2013 was On 12 December 2013, The Beijing Axis held at Tianjin Meijiang Convention and Investing in Australian Agriculture hosted the TBA Year-end Cocktail Party Exhibition Centre in Tianjin. Kobus van 29 October 2013; Beijing, China for 2013. It was held at The Capital Club der Wath delivered a presentation on Music Room in Beijing. Mining in Africa. China Coal Index Seminar 21 October 2013; Beijing, China INSEAD Asia Forum – Shanghai, China Africa Infrastructure & Power Forum – On 22-24 November 2013, the INSEAD Beijing, China Myanmar Mining Investment Forum Asia Forum was held in the CEIBS On 31 October – 1 November 2013, 2-3 October 2013; Singapore Auditorium in Shanghai. The Beijing Africa Infrastructure & Power Forum was Axis was the lead sponsor of this event held at The Ritz Carlton in Beijing. Kobus South Africa Expo in China 2013 and Javier Cuñat, Associate Director, van der Wath, participated in a panel 12-13 September 2013; Beijing, China participated in the panel discussion discussion entitled The Political and entitled Can Asia Innovate? Economic Landscape for Infrastructure Chinese Cross-Border M&A Forum and Power Investments in Africa and The 12 September 2013; Beijing, China ChainBeat – Shanghai, China Impact on China’s Economy. On 7 November 2013, ChainBeat GMAC Monthly Meetings was held at The Westin Bund Hotel Other events attended by The Beijing Beijing, China in Shanghai. Kobus van der Wath, Axis in Greater China and Asia include: Founder and Group Managing Director, participated as a judge in this supply Victorian Government Delegation Africa chain startup competition. Breakfast 18 March 2014; Beijing, China Procurement and Supply Roundtable CHaINA’13 Live – Shanghai, China Breakfast – Johannesburg, South Africa On 6 November 2013, CHaINA’13 Live ProcureCon Asia On 12 February 2014, The Beijing Axis was held at The Westin Bund Hotel in 25-28 February 2014; Singapore hosted a Procurement and Supply Shanghai. Kobus van der Wath delivered Roundtable breakfast at The Maslow Hotel a presentation entitled China’s New China Chamber of Commerce of Import in Johannesburg. Dirk Kotze, Director Competitive Edge: Implications for Global & Export of Machinery and Electronic and General Manager: Africa, delivered Supply Chains. Products a presentation entitled Procuring from 5 December 2013; Beijing, China

32 І The Beijing Axis China/Asia: What Makes Sense, and What Doesn’t.

Investing in African Mining Indaba – Cape Town, South Africa On 3 - 6 February 2014, Investing in African Mining Indaba was held at Cape Town International Convention Centre. Kobus van der Wath delivered a presentation under the theme: The Impact of Asian Growth on African Mining.

African Mining in the Year of the Horse Cocktail Hour – Cape Town, South Africa On 5 February 2014, African Mining in the Year of the Horse Cocktail Hour was held at Brundyn+ Art Gallery in Cape Town. The Beijing Axis co-hosted the event with Cadiz Corporate Solutions.

University of Cape Town Graduate Dirk Kotze, Director and GM: Africa, presents at the Procurement and Supply Roundtable (12 February 2014) School of Business Lunch Time Chat – Cape Town, South Africa Chinese Contractors’ Success in Africa Australia On 10 October 2013, University of Cape was held at GIBS. Dirk Kotze delivered On 23 October 2013, The 9th CIPSA Annual Town Graduate School of Business Lunch a presentation entitled Understanding Conference was held at Crown Conference Time Chat was held at Cape Town. Kobus Chinese Contractors. Centre in Melbourne. Kobus van der Wath van der Wath delivered a presentation delivered a presentation entitled What entitled Dynamic Asia – New Markets that Other events attended by The Beijing Axis next for Asia – Economic Outlook and Matter for SA Companies. in Africa include: Supply Chain Implications.

University of Stellenbosch Business GIBS – Business Day Economic Outlook Other events attended by The Beijing Axis School Seminar – Cape Town, South 30 January 2014; Johannesburg, South in Australia include: Africa Africa On 9 October 2013, the University of Australia-China Business Week 2014 Stellenbosch Business School Seminar Australia 27 March 2014; Melbourne, Australia was held in Cape Town. Kobus van der Wath delivered a presentation entitled Oil & Gas Procurement Leaders Forum – WA Mining Club St Barbara’s Day Luncheon China and Asia: The strategic imperatives Brisbane, Australia 6 December 2013; Perth, Australia for the boardroom. On 25 November 2013, Oil & Gas Procurement Leaders Forum was held The CIPSA NSW Annual Gala Dinner University of Stellenbosch Business at Pullman Brisbane King George. Kobus 29 November 2013; Sydney, Australia School Leader’s Angle – Cape Town, van der Wath participated in the panel South Africa discussion entitled Key developments that Procurement and Supply Australasia On 8 October 2013, the University of will shape the future role of procurement Premier ConfeX 2013 Stellenbosch Business School Leader’s teams in oil and gas. 16-17 October 2013; Melbourne, Australia Angle was held in the Cape Town. Kobus van der Wath delivered a presentation Chinese Investment in Western Australia – ACBW 2013 FORUM entitled China’s changing role in the global Perth, Australia 28 August 2013; Sydney, Australia economy: How to tap the opportunities. On 15 November 2013, Chinese Investment in WA Breakfast was held in AABC 2013 Africa Down Under Breakfast Smart Procurement World – Perth. The Beijing Axis was the sponsor of 28 August 2013; Perth, Australia Johannesburg, South Africa this event and Christian Buttrose, Business On 10-12 September 2013, Smart Development, attended. WA Mining Club Cocktail Procurement World was held at Gallagher 21 August 2013; Perth, Australia Convention Centre in Johannesburg. The Procurement and Supply Roundtable Beijing Axis participated in the exhibit Breakfast – Perth, Australia CIPSA Strategic Procurement Forum along with joint venture partner Resolve. On 29 October 2013, The Beijing Axis 14-15 August 2013; Brisbane, Australia Dirk Kotze also delivered a presentation organised a procurement and supply entitled China’s Changing Role in Global roundtable breakfast at the Hyatt End-to-End Supply Chain Solutions. Regency in Perth where Kobus van der Wath delivered a presentation entitled Understanding Chinese Contractors’ Opportunities for Australian Firms to Tap Success in Africa – Johannesburg, South China and Asia Supply. Africa On 16 August 2013, Understanding CIPSA Annual Conference – Melbourne,

33 І The Beijing Axis Procurement Advisory

Outsourced & Strategic Managed Sourcing Procurement

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Comprehensive global procurement and supply chain outsourced services

Recognised as a leading, independent global procurement service provider for the mining and resources, industrial and engineering sectors Achieved average savings of approximately 25% for customers (within a range of 5-45% savings) Analysed almost USD 3 bn in China/Asia spend for clients Managed sourcing transactions of more than USD 600 mn for clients in the last fve years Experience in transacting more than 80 product categories across production consumables, MRO and CAPEX Database of more than 4,500 identifed suppliers, with close to 1,000 pre-qualifed

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Previous Editions of The China Analyst

September 2013 October 2012 Regulars October 2012 І www.thebeijingaxis.com/tca Regulars t
Macroeconomic Monitor t
China Commodities t
China Capital t
China Sourcing Strategy t
Mapping China t
China Capital t
Regional Focus: China-Africa, t
Mapping China t
China-Australia, China-Latin America and China’s Reform t
Regional Focus: China-Africa, at a Crossroads China-Russia China-Australia, China-Latin America and China-Russia

Features China’s Economy: Heading for a Firm Landing? China’s SOEs: Stalled Reforms or Agents of Change? FOCAC 2012: Sino-African Partnership Gains Momentum

China-focused International Advisory and Procurement

Features Features China’s Increased Presence in the Developed World China’s Economy: Heading for a Firm Landing? As China plays an increasingly larger role in the global economy, Chinese As China’s entire socio-economic superstructure evolves, it is necessary to companies are re-writing the rules of engagement in the global marketplace. interpret China’s current cyclical adjustments from a long-term perspective. The Growing Global Infuence of Chinese Consumers China’s SOEs: Stalled Reforms or Agents of Change? The growing global purchasing power of Chinese consumers is forcing Facing weaker growth prospects at home, China’s SOEs continue to expand multinationals and governments to re-think their China strategies to overseas, disrupting the global marketplace and ofering new cooperation capture the attention (and wallets) of Chinese consumers. opportunities.

April 2012 September 2011 Regulars Regulars t
Macroeconomic Monitor t
Macroeconomic Monitor t
China Sourcing Strategy t
China Facts & Figures t
China Capital t
China Trade Roundup t
Mapping China t
China Sourcing Strategy t
Regional Focus: China-Africa, t
China Capital China-Australia, China-Latin America and t
Mapping China China-Russia t
Regional Focus: China-Africa, China-Australia, China-Latin America and China-Russia

Features Features State of Change: Assessing China’s Competitiveness Resources for Infrastructure: China’s Role in Africa’s New Business Landscape Foreign companies are facing the prospect of a competitive landscape Chinese companies active in Africa are reshaping the continent’s business landscape, signifcantly altered by emerging Chinese competitors. yet at its core the relationship rests on one simple although vital exchange.

How to Engage: The Rise of New Chinese Manufacturers China and Latin America: Untapped Sources of Added Value Chinese machinery suppliers are producing increasingly sophisticated Trade and investment between China and Latin America have increased goods, but are still struggling to increase their efciency and adequacy of ten-fold in the last decade, yet the two regions are now set to enter a new internal support processes. higher value added stage of their relationship.

Other Recent Publications by The Beijing Axis

Procuring from China China and Asia’s Role China’s New and the rest of Asia in Africa’s Mining Competitive Edge Procurement and Future - Implications for Supply Roundtable African Mining Global Supply Chains Johannesburg, Indaba South Africa Cape Town, South CHaINA’13 Live Africa Shanghai, China February 2014 February 2014 November 2013

Mining in Africa Opportunities for What’s Next for Asia? – Towards an Australian Firms - New Economic Integrated Approach to Tap China and Outlook and Supply to China Asia Supply - Why, Chain Implications Where, What & How CIPSA 2013 Annual China Mining 2013 Procurement and Conference Supply Roundtable Tianjin, China Melbourne, November 2013 Perth, Australia October 2013 Australia October 2013

To view or download current or previous editions of The China Analyst or other The Beijing Axis publications, visit our website at www.thebeijingaxis.com.

35 І The Beijing Axis International Advisory and Procurement

The Beijing Axis is an international advisory and procurement frm. Combining extensive experience and comprehensive capabilities, we collaborate with clients across their value chain through strategy and management consulting, outsourced procurement services, commodity trading, and capital advisory to raise their performance and proftability.

Through a unique combination of complementary services that span strategic intelligence and planning support, transaction support and outsourced/managed services, we partner with clients over the long term in key areas of their value chain. Our clients are some of the world’s leading companies across various sectors and industries.

Strategy Procurement Commodities Capital

Beijing Singapore Perth Mumbai Johannesburg

www.thebeijingaxis.com