9.1 The Basis for Achieving Mutual Benefit in the Commodity Raw Materials Sector

9.1.1 The “Resource Curse”

Historically, developing countries with rich natural resources have often played the role of exporters of commodity raw materials in the process of industrialization and globalization, making their terms of trade susceptible to sharp fluctuations in commodity prices. While the boom cycle of commodities can improve the terms of trade for raw material exporting countries and temporarily boost their economic growth, it may have far-reaching negative impacts on economic and social structures in the long term. Meanwhile, the high volatility of commodity prices tends to make raw material exporting countries’ terms of trade more volatile than those for industrial countries, which may dampen their economic growth and optimization of economic structure over the long term.

First, in commodity boom cycles, although raw material exporting countries may witness an improvement in terms of trade, they could face pressure from deindustrialization. Since improving the terms of trade provides incentives to the raw materials industry, it also means lower relative prices of imported manufactured goods, thus impeding the development of the manufacturing industries of such countries, and making it difficult for them to embark on the development path to industrialization.Footnote 1 By contrast, industrialized countries could reduce costs and improve efficiency through growing economies of scale and technological innovation as they face pressure from rising commodity prices,Footnote 2 and further expand their market share in the raw material exporting countries.

Second, rising commodity prices exacerbate social inequality in raw material exporting countries.Footnote 3 Rising commodity prices drives up resource rents, which encourages rent-seeking behaviors, and disincentivizes technological innovation and risk-taking, thus hindering economic growth. A country relying heavily on comparative advantage in natural resources can easily give rise to mechanisms that inhibit economic growth, resulting in slower economic growth in these countries than those with scarce resources. For example, Spain could be considered a resource-rich country in the seventeenth century due to the gold and silver resources from the New World, but its economic growth was slower than that of the resource-poor Netherlands. In the nineteenth and twentieth centuries, resource-poor countries such as Japan and Switzerland were ahead of resource-rich economies such as Russia in terms of economic growth.Footnote 4

Third, the high volatility of the terms of trade has a negative impact on the economic structure and economic growth of raw material exporting countries. In general, commodity prices are more volatile than those of manufactured goods and services. The numerator of the formula for calculating raw material exporting countries’ terms of trade is mainly the price of exported goods, which often features a high concentration ratio, making it difficult to diversify price risk. The denominator is the price of a wide variety of imported manufactured goods and services. As such, raw material exporters’ terms of trade are inherently more volatile.

High volatility in terms of trade leads to lower investment in fixed assets, human capital, and technological R&D. Meanwhile, in economies with high price volatility, economic actors tend to commit to low-risk, low-return investments, thus adversely affecting economic growth and improvement in economic structure. From households’ perspective, faced with high uncertainty over income, they typically seek lower-risk, lower-return economic activities to support their families, and increase savings and reduce investment. Reductions in investment in health and education ultimately affect the next generation and long-term human capital accumulation.Footnote 5 From the government’s perspective, raw material exporting countries usually rely heavily on import and export tariffs. For example, tariffs accounted for an average of 58% of total fiscal revenue in 11 Latin American countries over 1820–1890.Footnote 6 The high volatility in terms of trade leads to high volatility in fiscal revenue, which also makes it difficult for such countries to access international credit support. Therefore, raw material exporting countries find it difficult to ensure smooth public investment in infrastructure, education, etc.Footnote 7

In summary, developing countries with rich natural resources are prone to the negative impact of the resource curse on their economic development. To address this negative impact, China and BRI countries can cooperate in areas such as commodity raw materials, achieving win–win results for both parties by leveraging their comparative advantages, and accelerate the process of industrialization, improve social welfare, reduce volatility in terms of trade, and thus break the resource curse in BRI countries.

9.1.2 Mutually Complementary Industrial Advantages to Break the Resource Curse

Do China and BRI countries have mutually complementary industrial advantages in commodity raw materials? Can BRI cooperation help developing countries break the resource curse and achieve win–win results? In order to answer the above questions, we selected 32 BRI countries with abundant resource endowments as samples in this section, and classified them into six regions (Southeast Asia, Central Asia, West Asia, Europe, Latin America, and Africa) based on the characteristics of commodity raw material endowments. At the same time, we divide commodity raw material-related industries into four major sectors, i.e., three primary raw material sectors—fuels, ores and metals, and agricultural raw materials—and the finished goods sector. We use the Revealed Comparative Advantage (RCA) index, a widely used index initially proposed by Hungarian-American economist Béla Balassa in 1965Footnote 8 to analyze the industrial comparative advantages of related countries in the four sectors, and their evolution from the 1960s to the present.

For the fuel sector, West Asia and Central Asia have significant comparative advantages. The RCA of China’s fuel sector exceeded 1.0 (unity) only in the 1980s, implying a comparative advantage over the global average at that time. However, it has stayed below 0.5 since the 1990s amid a gradual downward trend. For the ores and metals sector, Africa, Latin America, and Central Asia exhibit notable comparative advantages, while the RCA of China’s ores and metals has stayed below 1.0 amid a gradual downward trend, implying it has a comparative disadvantage over the global average. For the agricultural raw materials sector, Central Asia and Southeast Asia show visible comparative advantages. China’s RCA of agricultural raw materials exceeded 1.0 only in the 1980s, implying a comparative advantage over the global average. However, it fell below 1.0 in the 1990s and has been declining year by year ever since. For the finished goods sector, only China has a comparative advantage.

We note that the changes in the RCA of BRI countries and China in the raw materials and finished goods sectors exhibit some important characteristics. Due to the limited data available, we compared the current comparative advantages of these countries with those in the 1990s, and drew three main conclusions.

First, compared with the 1990s, the RCA of BRI countries and China in the raw materials sector have declined to different degrees. Central Asia and Europe recorded the sharpest declines, followed by Southeast Asia and China. The declines were more moderate in Africa, Latin America, and West Asia. RCA rose to some extent in the fuel sector in Latin America and the ores and metals sector in West Asia. Second, changes in the RCA of BRI countries and China in the finished goods sector were smaller than those in raw material sectors. Southeast Asia and China’s RCA in the finished goods sector increased notably, followed by West Asia. RCA in the finished goods sector declined in Latin America, Africa, Europe, and Central Asia. Third, Southeast Asia saw the sharpest decline in RCA in raw material and increase in RCA in the finished goods sector, followed by China and West Asia. This is possibly because the economic transformation and upgrading in these countries and regions have achieved positive results. Africa, Latin America, Central Asia, and Europe saw their RCA in both raw material and finished goods sectors decline over the years.

In summary, the RCA of BRI countries in the three major raw material sectors—fuels, ores and metals, and agricultural raw materials—remain notable, despite the downward trend in recent years. In the finished goods sector, these countries generally do not have comparative advantages. BRI countries in regions such as Latin America, Africa, Central Asia, and Europe even saw their RCA in finished goods decline. While China has a stable comparative advantage in the finished goods sector, its RCA in raw material sectors has continued to fall.

Based on this analysis, we conclude that the industrial comparative advantages of China and of BRI countries in commodity raw materials are, to a large degree, mutually complementary, and they lay a solid foundation for mutually beneficial cooperation. By leveraging its own mature manufacturing sector and strong overseas engineering capabilities, China can help BRI countries that rely mainly on upstream raw material production to gradually expand to midstream and downstream industries such as smelting, processing, and manufacturing. We believe this will facilitate the industrialization process in such countries, reduce the volatility of terms of trade, and hopefully break the resource curse that has long plagued developing countries.

9.1.3 Security of China’s Raw Material Supply and Transfer of Production Capacity

BRI cooperation in the field of commodity raw materials provides not only a solution to the resource curse faced by BRI countries, but also a significant opportunity to ensure China’s commodity raw material supply. Furthermore, it will advance the transfer of smelting and deep processing capacity overseas amid changes in the international political and economic environment.

From the perspective of upstream raw materials, as China is a large manufacturing country, commodity raw materials are crucial for the national economy, people’s well-being, and social and economic stability. However, risks associated with ensuring the supply of key raw materials have become increasingly prominent in China in recent years, including high dependency on imports of raw materials, relatively weak bargaining power of domestic industries, and cost disadvantage in the local supply of key commodities.

From the perspective of midstream smelting and processing, China accounts for a high proportion of global production capacity, which is under increasing pressure to shift overseas. For traditional metals, China accounted for a high proportion of the world’s total midstream smelting capacity for bauxite, iron ore, zinc, and tin in 2022 (61%, 55%, 49%, and 48%). For metals used in new energy technologies, China accounted for a high proportion of the world’s total midstream smelting capacity for rare earths, lithium, antimony, and cobalt in 2022 (94%, 76%, 71%, and 63%). By contrast, China accounted for a relatively low proportion of global processing capacity for oil, gas, and agricultural products, with the ratio for oil, sorghum, palm oil, and barley at 20%, 13%, 9%, and 7%.

We believe the high proportion of China’s midstream smelting and processing capacity in the global total is related to the strong demand for raw materials from China’s primary manufacturing industries. However, such high proportions might lead to environmental problems and high raw material costs. We analyzed China’s net exports of key commodities as a percentage of domestic output, and noticed that industries with a high proportion of net exports in total output are under pressure to transfer production capacity to other countries.

For traditional metals, net exports of processed aluminum and iron ore products accounted for 8% and 6% of total domestic output in 2022. As for metals used in new energy technologies, net exports of processed and smelted metals products such as lithium, cobalt, and nickel accounted for a relatively high proportion of domestic output (15%, 35%, and 17%), implying that related companies face pressure and are incentivized to transfer production capacity to overseas markets. However, processed products such as oil, gas, and agricultural products recorded net imports.

BRI cooperation in the field of commodity raw materials presents an important opportunity to mitigate China’s commodity raw material supply risks and accelerate the transfer of smelting and deep processing capacity overseas.

First, BRI countries have abundant resources and could help address the demand for raw materials from China’s manufacturing industries. As of 2022, BRI countries and China account for a combined 20–98% of the world’s total reserves of commodity minerals, with the average level at 51%, or 36% with China excluded. In addition, BRI countries and China account for a combined 17–95% of the global output of commodity ores, with the average level at 58%, or 32% with China excluded.

Second, BRI countries have high-quality resource endowments and show significant cost advantages in energy and mineral products. Statistics show that Saudi Arabia, Iran, Kuwait, and the United Arab Emirates have the lowest oil extraction costs in the world, and Qatar has the lowest natural gas cost. The net direct cash cost (C1) of copper mine production in the Democratic Republic of the Congo (DRC) and Peru are in the 10th–15th and 15th–30th percentiles of the global cost curve, and the production cost (C2) of electrolytic aluminum in Indonesia is below the 50th percentile globally. In addition, Russia and Belarus, Russia and Indonesia, and the DRC and Indonesia enjoy a low production cost for their potash mines, nickel mines, and cobalt mines.Footnote 9

Third, the transfer of China’s commodity raw material smelting and processing capacity to overseas markets would not only reduce the supply risks that China faces in sourcing energy, but is also in line with the reasonable policy aspiration of BRI countries to accelerate industrialization. Thus, China transferring its smelting and processing capacity would improve the social welfare of both parties and achieve mutually beneficial results. According to data on foreign direct investment (FDI) inflows in BRI countries, FDI flows from China as a percentage of their total FDI inflows in the corresponding year have shown a steady upward trend, ranging from 3 to 6% and averaging about 4%. As China continues to enhance economic integration and improve diplomatic relations with BRI countries, we are optimistic about the depth and breadth of production capacity cooperation between China’s commodity raw material industries and BRI countries.

9.1.4 A New Super Cycle is Slowly Unfolding

On the supply side, BRI cooperation in the commodity raw material sector would complement China’s infrastructure strength, extensive production experience, and large market size with ASEAN countries’ demographic dividend and the natural resources in the Middle East and Africa. At the same time, BRI cooperation would accelerate industrialization and economic growth in BRI countries by creating new economies of scale and synergies. It would thus initiate a super cycle from the demand side with industrialization in developing countries as the main engine, in our view.

First, we see significant room for industry chain restructuring within BRI countries, which could generate significant shocks to commodity demand. Compared with developed countries, there is significant growth potential in commodity consumption in BRI countries.Footnote 10 In 2019, the annual per capita consumption of fossil energy, metal, and non-metallic minerals in BRI countries was only equivalent to 18%, 21%, and 25% of that in developed countries. At the same time, the consumption volume in BRI countries in the past has largely stayed below the fitting line of the historical data of developed countries, indicating that there was still a large gap between BRI countries and developed countries. This conclusion holds even if we control for the level of GDP per capita. In fact, per capita consumption of fossil energy, metals, and non-metallic minerals in BRI countries in 2019 was only 25%, 37%, and 30% that in developed countries in the 1970s.

In order to seize the opportunities for development amid industry chain restructuring, BRI countries have introduced policies to promote industrialization. For example, according to its national industrial strategy, the Saudi Arabian government plans to invest SAR1 trn (about Rmb1.92 trn) to diversify its economy and double industrial output by 2030.Footnote 11 The Indonesian government has unveiled the National Industry Development Master Plan (RIPIN) 2015–2035, hoping to increase the industrial sector’s contribution to GDP to 30% by 2035.Footnote 12 Vietnam, Malaysia, Ethiopia, and some other BRI countries have also put forward similar documents.

Improving the quality of infrastructure construction is one of the preconditions for advancing industrial development. For BRI countries, there is room for improvement in both per-capita infrastructure investment and the quality of infrastructure construction. Infrastructure investment and the construction of new production facilities will play an important role in narrowing the global supply gap over the long term. As it will take some time to complete the infrastructure construction and begin production, we expect the demand for infrastructure investment to be sizable in the initial stage, which, coupled with the limited supply capacity of new production facilities, could make BRI countries “net consumers” of global physical assets. The resulting gap in the supply of and demand for physical assets will be an important factor driving the evolution of the new super cycle, in our view.

We made brief calculations on the supply gap of infrastructure facilities in the 10 largest BRI countries in terms of GDP in 2021.Footnote 13 Infrastructure investment gaps in these countries averaged 4.55% of their 2021 GDP (equivalent to annual investment growth of US $331 bn), with the power and transportation sectors seeing large gaps (1.47% and 1.81% of 2021 GDP). Within the transportation sector, the land transportation segment features a large infrastructure investment gap, especially road transportation, indicating room for improvement in cooperation among BRI countries. By country, the infrastructure investment gap-to-GDP ratio was the highest in Pakistan (9.04%). In particular, the ratio was 3.14% in the country’s electricity sector, the highest among all 10 countries,Footnote 14 whereas the infrastructure investment gap is relatively low in more developed countries like Türkiye, Malaysia, and Saudi Arabia. These infrastructure investment gaps, especially in the power and transportation sectors of key countries, reveal weaknesses that need to be addressed amid the restructuring of the industry chains, and the demand for real assets generated during this process would be an important impetus for a new super cycle.

9.2 Development Process, Experience, and Lessons

9.2.1 Development of BRI Cooperation in Commodity Raw Materials

When we consider the history of BRI cooperation in commodity raw materials between China and BRI countries from the late 1980s to 2003, we see a stage of initial exploration. Cooperative activities were mainly government-to-government collaborations that focused on key SOE projects, and were conducted on the basis of prudent decision-making and gradual implementation.

From 2004 to 2013, against the backdrop of a sharp rise in commodity prices, the Chinese government called for endeavors to give full play to “domestic and foreign markets and resources” in the 2004 Government Work Report, and it introduced a slew of policies that encouraged companies to “go global”. Against such a backdrop, China’s commodity raw material sector entered a period of accelerated growth driven by active participation of both SOEs and private-sector companies. Besides commodity raw material companies, companies in other industries such as manufacturing, trade, real estate, etc., also stepped up efforts to increase investment in overseas resources.

After 2012, as commodity prices trended downward, the “going global” boom gradually cooled. Amid cyclical fluctuations, China proposed building the Silk Road Economic Belt and a 21st Century Maritime Silk Road (i.e., the BRI), with policy coordination, connectivity of infrastructure, unimpeded trade, financial integration, and people-to-people exchanges being the “five pillars”. The proposal was well-received by China’s commodity raw material companies and BRI countries. With the ramp-up of policy support, China and BRI countries embarked on a new journey of cooperation in raw materials focusing on high-quality development, which helped both parties to achieve win–win results.

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    Stage 1 (before 2003): Initial exploration

China’s mining industry started to go global in the late 1980s, when cooperative activities were mainly government-to-government collaborations. Among the companies taking the lead to go global, most were mining companies (90%) and SOEs (70%). The forms of cooperation mainly included acquisition of mineral rights (41%) and establishment of joint ventures (39%).Footnote 15 In this stage, because of the prudent approach to investment adopted by related companies, projects in which they invested have reached 78% of their designed capacity.Footnote 16 After three decades of development, most of these projects today continue to hold high-quality mining capacity in overseas countries, e.g., Shougang Group’s Marcona iron ore mine in Peru and MCC Group’s Saindak copper–gold mine in Pakistan and Ramu nickel–cobalt mine in Papua New Guinea.

Since 1993, China has been a net importer of crude oil, and Chinese oil and gas companies have started to go global ever since, driven by the supportive policies aiming to give full play to “domestic and foreign markets and resources”. In 1993, PetroChina won the tender to develop Block 7 of the Talara Oilfield in Peru, pioneering Chinese oil and gas companies’ efforts to go global, and the firm recovered its initial investment in just five years through rolling exploration and development. In 1994, CNOOC acquired a 32.59% stake in an oilfield in Indonesia’s Malacca Strat Contract Area. In 2000, Sinopec signed an exploration service contract with the National Iranian Oil Co. (NIOC) in Iran’s Zavareh-Kashan block.Footnote 17

In the coal industry, at the end of the twentieth century, some companies faced issues such as aging mines and the inability to relocate coal miners due to the depletion of coal resources in some parts of China. By becoming contractors of local projects and “exporting” experienced workers to other countries, Chinese coal companies made initial progress in going global. They have successfully helped target regions develop and operate coal mines, achieving a win–win situation. For example, Xuzhou Coal Mining Group became the contractor of the two coal mine projects in the Philippines, and it helped two mines of the Indian firm South Eastern Coalfields reach full capacity.Footnote 18

In the agriculture industry, China’s first Distant Water Fleet (DWF) left for the West African coast in March 1985,Footnote 19 marking China’s first trial in distant water fisheries and opening a new chapter for the Chinese agricultural industry’s efforts to go global. China’s overseas agricultural investment in the 1980s was dominated by the establishment of joint ventures, which mainly involved cooperation in the development of fishery and forestry resources. In the 1990s, Chinese companies started making overseas investments in agriculture by undertaking agricultural assistance projects, with SOEs playing a leading role. For example, China National Agricultural Development Group (CNADC) invested in a farm in Zambia in 1990,Footnote 20 accumulating valuable experience in overseas agricultural investment. After 1995, China further clarified its aid policy of mutually beneficial cooperationFootnote 21 to encourage high-quality domestic companies to participate in aid projects, encourage the use of aid funds in productive projects that involve the use of local resources and or target the local markets, and encourage large agricultural companies to make resource development-oriented investments overseas. During this period, large SOEs such as China National Fisheries Group and CNADC played an important role. By 1998, the number of farms in Zambia in which CNADC invested increased to three,Footnote 22 and involved planting, breeding, and agricultural and livestock product processing.

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    Stage 2 (2004–2013): Accelerating cooperation

In the early 2000s, China’s industrialization process began to drive a “super cycle” in commodities markets. In particular, the government called for endeavors to give full play to “domestic and foreign markets and resources” in the 2004 Government Work Report, and it introduced a slew of policies encouraging companies to expand overseas. Against such a backdrop, China’s commodity raw material companies stepped up their efforts to go global.

A large number of companies spanning different segments ramped up global expansion. According to the China Geological Survey, non-SOEs (47%) overtook SOEs (46%) to become the main investors in overseas mining projects during this period, while geological exploration institutions also started to go global (accounting for about 6%). In addition, non-mining companies (24%) from trade, manufacturing, and real estate industries also moved to invest in overseas mining projects.

Chinese companies’ coverage of global mineral resources essentially took shape at this stage, and many companies reached milestones in going global, e.g., China Nonferrous Metals Mining (Group)’s Chambishi copper-cobalt mine in Zambia, Chinalco’s Toromocho copper mine in Peru, and Baowu Iron & Steel Group’s acquisition of an iron ore mine in the Bong mine area in Liberia. However, overheated investment and the influx of some non-mining companies also led to irrational investment activities, e.g., the Simandu iron ore project and the Kasempa copper mine project in Zambia, which caused the project’s capacity utilization rate to fall to 31% during this period.Footnote 23 The forms of investment became more diversified at this stage, including acquisitions of 100% stakes, gaining access to ore supply in the form of partial stake acquisition, acquiring stakes only at the strategic level, and establishing joint ventures with overseas companies to develop mines.

Oil and gas companies ramped up their efforts to go global. As China’s rapid industrialization fueled swift growth in oil demand, it turned from a country for which crude oil imports were largely equivalent to exports into a net oil importer. Therefore, identifying stable sources of oil supply gradually became the focus of domestic companies. During this period, Chinese companies conducted a large number of M&As. In 2004–2007, as crude oil prices had just come out of a downturn and resource nationalization had not yet become prevalent, Chinese companies generally acquired resources from independent resource companies and injected a large amount of funds to help them upgrade and expand production capacity. Typical examples include PetroChina’s acquisition of PK, the third largest oil company in Kazakhstan in 2005, CNOOC’s acquisition of Unocal, and M&As carried out by Sinopec International Petroleum Exploration and Production Corporation (SIPC).

In 2008, as crude oil prices hit a high at US $147, resource nationalization accelerated significantly, leading to fewer M&A opportunities from South America and Central Asia, which are rich in oil and gas resources. Chinese companies began to gradually enter the riskier African market. In the era of high oil prices over 2011–2014, unconventional oil and gas technologies such as shale oil and gas and deep-water exploration and development had advanced rapidly, and Chinese companies started to explore shale oil and gas projects.

The coal industry also stepped up the process of going global during this period. Apart from “exporting” labor services and related technologies into the coal industries overseas, Chinese firms started to invest in the development of overseas coal resources, helping the target regions expand from resource mining to coordinated development of the entire industry chain (from upstream to downstream). For example, Zhongding International invested in ABOK Coal Mine of Malaysia in 2003, and became the first Chinese company to invest in overseas coal resources. In 2009, China Shenhua cooperated with PT. Energi Musi Makmur of Indonesia to build a 2 × 150 MW coal-fired power project in South Sumatra province and a supporting 2.1 mtpa open-pit coal mine.

The strategy of going global was formally introduced to the agriculture industry during this period. Since China officially joined the World Trade Organization (WTO) in 2001, agricultural companies started to place equal emphasis on “bringing in” and going global. In 2006, China’s Ministry of Commerce, Ministry of Agriculture, and Ministry of Finance jointly issued opinions on accelerating the implementation of the going global strategy in the agricultural sector, while the Ministry of Agriculture also formulated the going global development plan for agriculture,Footnote 24 marking the formal establishment of the go global strategy for the industry. The “No. 1 Central Document” for 2007 proposed accelerating the implementation of the go global strategy for agriculture, emphasizing the importance of overseas agricultural investment. Meanwhile, China has faithfully fulfilled its commitments in the WTO, cutting tariffs on agricultural products from 23.2% in 2001 to 15.2% in 2010, among the lowest in the world. The opening-up of China’s agricultural industry has borne fruits, as evidenced by the expansion in the trade volume and increase in trade intensity of agricultural products.

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    Stage 3 (after 2013): High-quality development

FDI in China’s commodity raw materials sector has gradually declined since 2013 as commodity prices have been on a downward trend, and Chinese companies have adopted a more rational approach to the going global strategy. After the official launch of the BRI in 2H13, the efforts by Chinese commodities raw materials companies to go global became closely integrated with the BRI, entering a period of high-quality development.

At this stage, large Chinese non-ferrous metal mining companies seized opportunities from cyclical fluctuations in the international mining market and successfully acquired a number of high-quality overseas assets through counter-cyclical investment. Chinese mining companies made breakthroughs in overseas expansion, e.g., China Minmetals acquired Glencore’s Las Bambas project in Peru; China Molybdenum acquired Freeport-McMoRan’s (FCX) TFM project in the DRC, one of the world’s largest and highest-grade copper and cobalt mines; Ganfeng Lithium acquired a 22.5% stake in the Sonora Lithium Project in Mexico; and Zijin Mining acquired Ivanhoe Mines’ Kamoa-Kakula project in the DRC, the fourth largest undeveloped high-grade copper mine in the world.Footnote 25

Meanwhile, Chinese companies became more rational towards investment in overseas iron ore markets. The global economic slowdown and low iron ore prices since 2013 have weighed on Chinese companies’ confidence in overseas iron ore investment. At the same time, some overseas iron ore projects in which Chinese companies invested during the previous stage suffered losses upon the kick-off of mining operations due to management errors, outdated infrastructure, or complicated political environments. Against such a background, Chinese companies have adopted a more cautious approach to investing in overseas projects.Footnote 26 As a result, investment activities at this stage have mainly involved the restart and integration of existing projects, with only a few new projects added. After 2017, driven by the supply-side reforms of the domestic steel industry and the BRI, Chinese steelmakers reinforced preliminary feasibility studies on related projects, and paid more attention to the sustainability of the projects. This allowed them to successfully acquire many high-quality overseas assets.

Since 2014, overseas investment in the oil and gas industry has slowed across the board, with a focus on refined operation and capacity expansion. Oil and gas companies generally turned cautious about overseas investment as oil prices hovered at low levels and the high-cost projects acquired previously became a drag on their performance. However, China has strengthened the operations of the previously acquired assets. CNOOC’s Guyana project is a successful case, which was only one of the potentially high-return projects among assets acquired via the acquisition of Nexen, but has delivered stronger-than-expected returns. At the same time, as the world’s second largest primary energy consumer, China has stepped up trade cooperation with resource-rich countries.

As of June 2023, China’s overseas attributable oil and gas output had reached 185 mn tonnes, close to China’s domestic oil production in 2022,Footnote 27 mainly contributed by projects in BRI countries. Considering the long-term impact of the substitution effect from alternative energy, we believe Chinese companies that missed the opportunities for capacity expansion over 2014–2020, when oil prices lacked momentum, may also adopt a cautious approach to expansion in the oil and gas sector in the future. Meanwhile, China has nearly 300 oil and gas exploration and development projects in 46 countries, with a total annual attributable oil and gas output of 180 mn tonnes of oil equivalent (TOE).Footnote 28

Given China’s commitment to achieving peak carbon emissions and carbon neutrality, more factors need to be taken into account in BRI cooperation in the coal industry. In September 2020, China announced that it aims to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060. In such a context, China’s coal companies may need to consider more factors when going global. That said, Chinese coal companies still have incentives to expand overseas amid the increasing importance of energy security and closer cooperation under the BRI framework. For example, the South Sumatra No. 1 2 × 350 MW coal-fired power project jointly built by China Shenhua and Indonesian coal producer PT. Lion Power Energy is slated for operation in 2024.Footnote 29 Looking ahead, coal companies will need to explore new cooperation models to achieve mutual benefits and win–win results with BRI countries in a “greener” and more environmentally friendly way.

The BRI has made remarkable achievements in facilitating agricultural cooperation under the BRI framework since 2013. As of June 2023, China had signed cooperation agreements on agriculture and fisheries with 86 countries, and established stable working mechanisms on agricultural cooperation with more than half of them.Footnote 30 Within the decade, BRI investment in agriculture has covered more than 820 projects, with a cumulative investment of over US $17 bn. Total agricultural trade between China and BRI countries reached US $95.79 bn in 2020 alone.Footnote 31 China has reached extensive cooperation with BRI countries on exchange in agricultural products, technologies, and talent.

In addition, the implementation of a series of rules, such as tariff reductions and exemptions under the Regional Comprehensive Economic Partnership (RCEP), has significantly reduced intra-regional trade costs and improved trade facilitation, helping more ASEAN agricultural products enter the China market. Moreover, with the progress of major projects such as the New Western Land-Sea Corridor in China and the China-Laos Railway, supporting infrastructure such as cold chain and cold storage has been improving within the region, which makes it increasingly convenient for agricultural products from ASEAN countries to enter the China market.

It is noteworthy that with the boom of the new energy vehicle (NEV) market, prices of metals used in new energy technologies have risen sharply. Since 2016, China’s investment in metals used in new energy technologies, such as lithium, cobalt, and nickel, in BRI countries has accelerated notably, and exhibited some new features.

First, private sector companies have taken a lead in going global, introducing a higher level of flexibility in decision-making. Second, they rely more on China’s booming capital markets for financing, and the amount and efficiency of financing have improved rapidly. Companies improve their capital strength through private placements, issuance of convertible bonds, and rights issuance in the domestic capital market, and support their acquisition and development of overseas projects by leveraging the diversified financing channels in international capital markets such as Hong Kong SAR and Switzerland. Third, thanks to notable improvement in technologies and equipment, Chinese firms have the ability to “export” their industrial capabilities. For example, Ganfeng Lithium has developed strong lithium extraction technologies and established leading R&D and engineering teams, and is also able to design and implement lithium resource development plans in overseas countries catered to local conditions. Liqin Resources has world-leading nickel hydrometallurgy technology and construction capabilities, and is deeply engaged in Indonesia’s nickel and cobalt resource markets. The firm “exports” production capacity, gains access to resources, and advances in-depth cooperation with local partners.

In summary, China’s commodity raw material sector has made significant achievements in going global through three stages of development, from prudent exploration under the go global strategy, through ups and downs amid cyclical fluctuations, to the current stage of high-quality development leveraging cooperation under the BRI. Up to June 2023, projects related to BRI cooperation with Chinese companies accounted for 5% of the oil, 5% of the natural gas, 8% of the iron ore, 0.2% of the coal, 13% of the potash, 14% of the copper, 57% of the bauxite, 19% of the lithium, 21% of the cobalt, and 2% of the nickel resources in BRI countries. Looking ahead, we believe the share will hold ample upside potential amid ongoing BRI cooperation.

9.2.2 Experience in BRI Cooperation

After the aforementioned three stages of development, a number of successful cases for global expansion have emerged in China’s commodity raw materials sector, providing valuable experience for future BRI cooperation. First, establishing a cooperation mechanism based on complementary industrial advantages and mutually beneficial cooperation. Second, empowering BRI cooperation and providing comprehensive solutions by leveraging China’s sound manufacturing base, strong overseas engineering and technology capabilities, and capital advantages. Third, contributing China’s wisdom and the country’s role in ESG and poverty alleviation in BRI countries.

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    Establishing a cooperation mechanism based on complementary industrial advantages and mutually beneficial cooperation to build a community with a shared future between China and its BRI partners

Zijin Mining’s Kamoa-Kakula copper mine project in the DRC is a typical example of the integration of Chinese and Canadian industrial capabilities and cooperation with the DRC government to build a mutually beneficial industrial ecosystem and achieve win–win results. Located in the DRC, the Kamoa-Kakula copper mine ranks among the world’s top 10 copper projects in terms of resource reserves. Canadian mining company Ivanhoe Mines obtained the exploration rights (covering an area of 50,000 km2) in 1996, started early-stage exploration in 2001, discovered the high-grade Kamoa deposit in 2008, and successfully put Phase I and Phase II of the project into operation in 2021 and April 2022.

During that period, the project faced many difficulties such as political changes and disruptions in project funding. However, thanks to the mutually complementary industrial advantages and mutually beneficial cooperation between the governments of China, Canada, and the DRC, Kamoa-Kakula has become one of the world’s top five copper mines in operation as of end-2022. It is a benchmark project for BRI cooperation in the non-ferrous mining industry.

We attribute the project’s success to three reasons. First, the designing of a reasonable equity structure to establish a stable mechanism for mutually beneficial cooperation. As of June 2023, the Kamoa-Kakula copper mine project is managed and operated by the joint venture Kamoa Copper, whose major shareholders include Zijin Mining of China (39.6%), Ivanhoe Mines of Canada (39.6%), and the government of the DRC (20%). Ivanhoe Mines introduced Zijin Mining and CITIC Metal as strategic investors in 2015 and 2018, with the two companies holding 25.9% and 13.6% stakes in Ivanhoe Mines as the two largest shareholders. The third largest shareholder, Mr. Robert Friedland, is the founder and executive chairman of Ivanhoe Mines and holds a 13.4% stake. Under this ownership structure, Zijin Mining has become the largest shareholder at the project level through its dual shareholdings in Ivanhoe Mines and Kamoa Copper, and the project has become one of the major growth drivers of total copper output of Zijin Mining as a listed company. Ivanhoe Mines has earned lucrative financial returns by introducing Chinese investors and leveraging China’s industrial capabilities. At the same time, the project has brought economic and social benefits to the government of the DRC.

Second, creation of synergies among shareholders and partners to achieve efficient project construction and operation. As a leading exploration company in a Western country, Ivanhoe Mines made important achievements in the preliminary exploration work for the Kamoa-Kakula copper mine, but the project almost came to a halt later due to the firm’s weak financing and development capabilities. CITIC Metal and Zijin Mining injected funds and “exported” industrial capabilities to Ivanhoe Mines and the Kamoa-Kakula copper mine project over 2015–2018 amid low commodity prices. Thanks to the efficient cooperation among China, Canada, and the DRC, since the start of construction in 2015, Ivanhoe Mines has contributed to the refined production scheduling design and ESG practices in line with Western norms in terms of design and operation, Zijin Mining has demonstrated China’s strength and efficiency in overseas project development and construction by keeping project costs under control and ensuring the timeliness of project delivery, and the DRC government has offered support to localized operations, especially in terms of utilities and community relations. The joint efforts of the three parties have enabled the project to be put into operation ahead of schedule in May 2021 and reach its design capacity in less than two years.

Third, building a community with a shared future between China and DRC’s coal mining industries under the development philosophy of green and sustainable production. Kamoa Copper implements Zijin Mining’s development philosophy of pursuing “green and eco-friendly development” and attaches great importance to mutual benefit with the local community and residents. It has introduced a series of strategies such as the Sustainable Livelihoods Program. The mine supports farmers by establishing agricultural demonstration parks and handing the parks over to the farmers. In 2022, the total social contribution made by the mine was US $2.35 bn, accounting for 4% of DRC’s GDP.Footnote 32 Looking ahead, Zijin Mining and Ivanhoe Mines are advancing plans for a 500,000 t smelting facility at the Kamoa-Kakula copper mine.Footnote 33 After completion, we believe that the project could further increase the industrial value added contributed by Kamoa Copper in the local economy, while creating more tax revenue, job opportunities, and extensive social benefits in the DRC.

  1. (B)

    Empowering BRI cooperation with China’s established manufacturing sector, strong overseas engineering and technology capabilities, and capital strength

It is well known that Western multinational companies have gained notable first-mover advantages in the exploration and development of high-quality resources, and in recent years, they have been optimizing their asset portfolios through M&As and strengthening control over high-quality resources. This also means that Chinese companies’ cooperation with BRI countries will face greater challenges in terms of resource quality, development conditions, and operating difficulties, which will inevitably require Chinese companies to further enhance their ability to empower greenfield projects and less efficient assets in BRI countries. Fortunately, as Chinese commodity raw materials companies faced similar pressure and difficulties in the early stages of going global, they have gradually developed strong problem-solving capabilities in the practice of BRI cooperation in overseas markets.

For example, China ENFI Engineering Corporation, a subsidiary of China Minmetals Corporation, is a pioneering engineering consulting and design company. The firm has gradually gained growth momentum amid the acceleration of BRI cooperation in the commodity raw materials sector. China ENFI is one of the few comprehensive service providers in the world that can simultaneously undertake mining, smelting and processing, power, chemical, environmental protection, and infrastructure projects. It also provides technical support for Chinese companies pursuing a go global strategy and are developing overseas resources.

According to corporate filings, China ENFI has designed and built more than 4000 engineering projects for more than 30 countries and regions covering almost all types of metals.Footnote 34 In September 2016, the China ENFI Mining Going Global Alliance, led by China ENFI, was jointly established by renowned Chinese mine equipment companies to integrate key equipment and engineering technology suppliers in the non-coal mining industry for the entire process—from mining, through ore dressing and tailings, to smelting. It also aims to provide global mining customers with one-stop services backed by Chinese technologies, Chinese solutions, and Chinese equipment, as well as integrated solutions ranging from technology R&D, consulting, and design, to equipment integration and general contracting.

In April 2023, the nickel sulfate facility of Liqin Resources’ OBI nickel–cobalt project in Indonesia, for which China ENFI undertook the design work and supply of core equipment, successfully produced the first batch of battery-grade nickel sulfate products. For this project, China ENFI applied its core extraction technology, with the scope of design ranging from the pressing and filtering of nickel–cobalt hydroxide slurry to the production of battery-grade nickel sulfate and cobalt sulfate products, including filtration, acid dissolution, extraction and separation, evaporation and crystallization, and other auxiliary works. According to Liqin Resources, the project has nickel sulfate design capacity of 240,000 t, making it the largest monomer nickel sulfate project in the world. It is also the first project in Indonesia to achieve mass production of battery-grade nickel sulfate products, marking a milestone in Indonesia’s new energy industry.

  1. (C)

    Contributing Chinese wisdom and solutions to ESG and poverty eradication in BRI countries

Eradicating poverty, improving people’s well-being, and facilitating economic development are important goals of BRI cooperation. Since the launch of the BRI, China has been increasing agricultural assistance to developing countries, making contributions to agricultural and rural development and poverty alleviation in related countries. To date, China has been one of the most generous developing countries in terms of amount of financial assistance offered, sending the biggest teams of experts and carrying out the largest number of projects under the South-South cooperation framework of the Food and Agriculture Organization of the United Nations (FAO).Footnote 35 China also works with African countries to help them alleviate poverty, which has always been the main theme of China-Africa relations.

Since 2011, China’s “Wanbao” rice farm project in Mozambique’s Gaza province has effectively alleviated the food shortage in Mozambique. More than 1500 farmers have been trained since the project commenced.Footnote 36 They have not only achieved food self-sufficiency and gained access to planting technologies, but have also increased their incomes. Since 2007, Yuan’s International Agriculture has sent agricultural technology experts to Madagascar to promote hybrid rice cultivation technology. After more than a decade of development, the country now boasts some of the largest hybrid rice planting areas and highest yields in Africa.Footnote 37 It became the first African country to develop a full industry chain for rice, covering links from hybrid rice breeding through seed production, planting, and processing, to sales.

9.2.3 Lessons from BRI Cooperation

The commodity raw materials sector is subject to cyclical fluctuations. The volatility of commodity prices determines the high level of cyclicality of related investment decisions. However, some Chinese companies do not have flexible decision-making mechanisms, and are prone to decision-making risks. In 2009, China’s leading nickel mining company Jien Nickel acquired two large nickel mining companies in Canada and Australia when nickel prices were in a boom cycle, and it subsequently boasted more resources to devote to overseas markets. However, as nickel prices later tumbled, and as the firm was unfamiliar with local investment and operation environments, Jien Nickel had to increase capex on the projects, leading to high debt pressure and lower-than-expected profits, according to the firm. Jien Nickel was later delisted from the stock market.

BRI cooperation involves cross-border operations. Faced with geopolitical risks, cultural differences, and uncertainties in the local business environment, Chinese companies tend to face difficulties in adapting to the local markets, and their international operation and risk control capabilities still need improvement. Multinational companies not only need to deal with the relationships with local governments, management, and employees in BRI countries, and integrate themselves into the local business environment and culture, but also need to cope with the many differences in management philosophy, management structure, and specific business practices across both management and employee levels.

Lack of supporting institutions and service systems for overseas mining investment and lack of professionals proficient in investment, M&A, and operation and management in BRI countries are important factors restricting the smooth development of BRI cooperation. At present, Chinese mining companies mainly rely on foreign institutions for technical, legal, and financial consulting services in the process of overseas mining acquisitions, while mature supporting institutions and service systems for overseas mining investment have hardly been developed in China.Footnote 38 Meanwhile, as China’s commodity raw materials companies have a short history of going global, they generally lack a team of professionals who are familiar with the rules of mineral resource exploration and development in overseas markets and have the ability to operate transnationally. This has also hindered the smooth development of BRI cooperation.

9.3 Reflections and Insights

To better promote cooperation in the raw materials sector between China and BRI countries, measures can be taken from the following three perspectives. First, overcoming multiple practical difficulties related to the business environment in BRI countries, and improving the public service system for cooperation. This includes:

  1. (1)

    Improving the information integration and sharing mechanism for BRI cooperation that provides support for investment decision-making and international operation of companies. Major industry associations can be encouraged to set up offices in BRI countries, improve communication and interaction with local industry associations in host countries, collect relevant industrial policy information in host countries, and provide consulting services to local firms. In addition, industry associations can help enhance communication and interaction among Chinese companies in the same industry, and try to achieve efficient competition between Chinese companies in BRI cooperation.Footnote 39 Intermediary service institutions can be encouraged to establish a presence in BRI countries, improve industry expertise and coordination with local governments in BRI countries, and cultivate a mutually beneficial and synergetic business ecosystem.

  2. (2)

    Establishing an overseas risk prevention and control mechanism for high-risk countries and regions, and improving the emergency response mechanism for overseas security incidents and various security issues in a timely manner.

  3. (3)

    Building a team of professionals for BRI cooperation. Companies can be encouraged to train and introduce managers and professionals who are well versed in international rules and situations in overseas markets; establish and improve incentive mechanisms for them; attach equal importance to higher education, vocational education, and social education; and facilitate interaction and organize training sessions for these professionals.

Second, advancing the use of RMB as the settlement and invoicing currency, and facilitating the internationalization of the RMB in the process of BRI cooperation in the commodity raw material sector. The financial systems of BRI countries have long been affected by sharp fluctuations in USD fund flows. With the deepening of cooperation under the BRI framework, it would be acceptable to both parties to settle in the local currency of the counterparty, boding well for the use of RMB as the settlement and invoicing currency. Such a move can not only reduce the impact of fluctuations in USD-denominated commodity prices on the terms of trade of BRI countries, but also reduce the vulnerability of their financial systems and exchange rate risks. It is also likely to enhance the convenience of cross-border investment flows among China and BRI countries, laying a solid foundation for RMB internationalization.

Third, attaching importance to the integration of ESG and cultural values to enhance mutual understanding among stakeholders. China can integrate itself into the mainstream international ESG framework and standards, and can build an ESG evaluation system featuring Chinese characteristics based on local conditions, effectively improve the ESG capability of BRI cooperation projects, and contribute to the improvement of social welfare in BRI countries. In addition, efforts can be made to attach importance to the integration of cultural values, enhance mutual understanding among stakeholders in BRI cooperation, and build a community with a shared future for mankind.