Coal mining companies in Shanxi Province have accumulated very substantial cash surpluses in recent years but have limited opportunities for reinvestment in their traditional industry. In addition government policy aims to fundamentally transform the Province’s economic structure and reduce its reliance on this single, polluting industry. As a consequence the mining companies need to seek alternative avenues for investment, and this offers opportunities for Australian businesses prepared to set up operations in Shanxi Province or those seeking to expand their businesses or undertake new projects within Australia.
Following on from its designation in 2010 as a Pilot Area to promote the transformation of economic activity in a resource-based region, Shanxi Province has encouraged its companies to diversify into non-core businesses. In 2011, coal companies in Shanxi generated 330 billion yuan ($51 billion) in non-coal sales revenue, accounting for 59 percent of the industry’s total revenue, and this proportion can be expected to grow.
Among the Shanxi companies actively pursuing diversification and a widening of scope of core activities is Shanxi Coking Coal Group Co Ltd, China’s largest coking coal producer and the world’s second largest by production capacity. Its 2012 sales revenues were 180 billion yuan ($28 billion), up 47.6 percent year-on-year. This giant group is mainly engaged in coal exploitation and processing but has now moved into mine construction, machinery manufacturing, mechanical and electrical appliances, power generation, chemicals, architecture, building materials, transportation, import and export, and tertiary services.
In 2012 Shanxi Coking Coal Group entered into a cooperative agreement with the Shuanghui Group, China’s largest meat-processing company, to build a pig slaughtering and processing plant. Located in Yangqu County in Shanxi Province, the enterprise includes slaughtering and fresh meat production, meat product processing, pig farming and fodder production. With a total investment of close to 1 billion yuan ($160 million), the project will slaughter 2 million pigs each year and produce 100 thousand tons of meat products to local consumers, with sales revenue reaching 3 billion to 4 billion yuan ($460 to $620 million). Shuanghui Group mainly contributed technologies and equipment, while Shanxi Coking Coal Group provided the land, labour and part of the financing.
On August 8 Shanxi Coking Coal Group signed a cooperation agreement with the China Datang Corp, marking a great step forward in the coal-electricity integration of the Province. China Datang is one of the five largest electricity generation companies in China. Its current installed capacity of around 113 gigawatts is more than double that of the whole of Australia. It can be seen that Shanxi Coking Coal has adopted a two-pronged approach to transforming its operations. On the one hand there is forward integration into coal-electricity and coal-chemicals, etc. On the other there is diversification into unrelated activities.
It is not just the mega corporations like Shanxi Coking Coal that have surplus cash flows and accumulated wealth which can be ploughed into other areas of enterprise. The owners of smaller mining companies and those who have sold their mines are also faced with the task of finding new projects in which to invest. Increasingly they have shown willingness to consider new areas of enterprise and to engage in investment offshore.
Faced with crowding out by large oligopolies in their domestic market and extreme difficulty in accessing venture capital, entrepreneurial Australian companies would do well to consider bringing their technologies and expertise to the attention of potential investors and co-venturers In Shanxi Province.
Bruce Ross Consulting can offer introductions, support and guidance for companies wishing to take advantage of the abundant opportunities in Shanxi Province.