China's Metal and Mining Industry to Focus on Domestic Consolidation

China's mining and metal industry is expected to shift its merger and acquisition (M&A) activity into domestic consolidation, with deals materializing at a fast pace in 2011, according to a report from Ernst & Young.


The government's intention to build multi-sector mining companies is likely to see the emergence over the next few years of a Chinese mining conglomerate with a global impact unrivalled by any other sector in State-owned enterprise, according to the report.


"Government-led domestic consolidation in the coal and steel sectors drove the value of domestic deals up 89 percent to $8 billion in 2010," says Raymond Ng, Ernst & Young's China Energy leader.


The report shows that the number of transactions in China increased 29 percent to 123 in 2010, of which 57 were outbound, 53 domestic and 13 inbound.


In a global context, the nation's M&A activity in mining and metals transactions accounted for 11 percent of the total for the year, down 14 percent from a year earlier.


"China's demand for raw materials will continue to drive offshore investment in mining and metals in 2011," says Paul Murphy, transaction leader for Ernst & Young Asia-Pacific Mining and Metals, adding that iron ore remains the most targeted outbound commodity.


The competition between emerging markets to secure raw materials and fuel growth will continue to be the key driver in deals relating to mining and metals.


"While Australia and Canada will remain preferred destinations for Chinese buyers, the increasing global competition for fewer available projects will see the nation's focus on frontier markets, such as Brazil, Ecuador and Africa, continues in 2011," says Eleanor Wu, Ernst & Young's partner in transaction services.