China, which dominated the world's mining and metal transaction sectors in 2009, will shift its merger and acquisition (M&A) activity into domestic consolidation, with deals reaching an unprecedented level in 2011, according to a report from Ernst & Young released on Tuesday.

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

"Given China's newly announced 12th Five-Year Plan (2011-2015), we predict domestic M&A in 2011 in these sectors will materialize at an even faster pace," he said.

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.

It also showed 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.

Canada, Australia and Brazil led the activity in 2010, as China was displaced from its top dealmaker spot in 2009 to fourth in 2010.

The nation's mining companies dominated the global mining and metals transaction sectors in 2009 because of their deep cash resources, according to a previous report from Ernst & Young.

"It's not because China's activity slowed, but because activity in other countries rose as the global economy recovered," said Eleanor Wu, Ernst & Young's partner in transaction services.

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

Steel companies from Japan, South Korea and India are building more certainty into their business models by acquiring upstream reserves of coking coal and iron ore.

"Japan's steel and iron ore demand will increase after the earthquake destroyed parts of the country's infrastructure. However, traditionally Japan acquires small stakes in upstream iron ore resources, which means the situation whereby emerging countries are leading the market will not change," said Murphy.

Acquisitions from developing economies accounted for 43 percent of the total deal value in 2010 and more than half of the top 20 acquirers were emerging countries, scrambling to lock up access to future supplies of the raw materials they need to fuel economic growth.

Chinese mining companies faced a tougher M&A environment in 2010 as more competition emerged from India and Brazil.

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.

"China's strategic investors have shifted their focus from Australia and Canada to the higher-risk, higher-return destinations including Brazil, Ecuador and parts of Africa," said Wu.

"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," she said.

"We are also seeing more Chinese buyers investing in exploration or early-stage development companies, rather than those already in production, to ensure supply security in the longer term."