With this year's iron ore contract prices still up in the air, many Chinese steelmakers are taking a different approach, rather than wait on Rio Tinto (RTP), BHP Billiton (BHP) and Vale (VALE) to make an accord with the China Iron and Steel Association. The alternate route is to find small and medium-sized Australian miners for equity cooperation to enable them to avoid having much to do with the world's three monster iron ore providers.
Business data provider Dealogic says that Chinese companies' planned and completed investment in Australian mining firms has reached $9.7 billion so far in 2009, about triple that in 2008, and the trend is gathering pace. Most small and medium-sized iron ore projects in Australia are open to foreign investment, and are now under increasing Chinese scrutiny. China's steel firms have technological advantages and attractive demand, but it is their solid finances that these mining companies find truly attractive.
In early September, Baotou Iron and Steel (Baogang) set up a joint venture company with the Australian iron ore exploration company Centrex Metals on the Bungalow Magnetite project, aiming to establish a project with an annual output of three million tons of fine ores. Baogang is required to invest AU$40 million, paid in three phases, and as a result, will gain a 50% stake in the project.
Late August saw Australian miner Aquila Resources signing a strategic cooperation agreement with China's largest steel group Baosteel to develop iron ore, coal and manganese projects. Baosteel will invest AU$285.6 million to obtain a direct 15% stake in Aquila through the placement of 43.95 million shares at AU$6.50 per share, making Baosteel its second largest shareholder. The deal marks Baosteel first direct investment in an Australian mining company.
Wuhan Iron and Steel Group Corporation (WISCO) has also signed an agreement with Centrex Metals, with a view to developing a South Australian iron ore project. CXM is providing a private offering of additional shares to WISCO, making the latter CXM's second largest shareholder, and WISCO will also gain a board seat. The two sides are also joining up to develop mines in south Australia's Eyre Peninsula. Total iron ore output is expected to reach two billion tons, with 30% tenor, and more than 65% fine ore.
Meanwhile, Anshan Iron and Steel (Ansteel) has picked up 36.3% stake in Gindalbie Metals, for AU$162.06 million and as a result has become its largest shareholder. In addition, Ansteel and Gindalbie Metals will invest AU$143.68 million in the Mt Karara iron ore project.
This echoes Japan's strategy from the late 70s and early 80s, when Japanese firms went on a buying spree in the Australian commodity producers market. Current estimates value Japanese owned mining assets in Australia at circa $20Bn, with Australian miners exporting in the region of $15Bn worth of raw materials to Japan on an annual basis.
Australia currently exports AU$23 bn worth of commodities to China yearly and for China to get to parity with Japan, it would need them to triple their current investment. With most of the larger ore projects either tied to local giants BHP Billiton and Rio Tinto or Japanese owned concerns, China's steelmakers are securing what they can when they can and the miners seem all too happy to accept ready cash and also direct access to the Chinese market.
I have written about China's spending spree on assets before, but this latest trend shows a willingness even at lower levels than domestic giants Chalco and Baostell to gain access to strategic reserves. Now with China actively looking at investing in Africa via it's China-Africa Development Fund (CADF) vehicle, it would seem that the spending spree is not losing as much momentum as would seem.
Since 2007, CADF has cooperated with a number of large domestic firms, including Sinosteel Corporation, China National Building Material, and Hainan Airlines, advised on investment on over 20 projects, invested over $500 million of its own capital whilst promoting investment of more than $20 billion by Chinese companies.
Currently, there are over 1000 Chinese enterprises approved or filed with the Ministry of Commerce operating in Africa in fields such as trade, production and processing, resource development, transportation and logistics. So next stop Zambia and long FXI.
Disclosure: The author holds no current positions in any of the companies mentioned.