China Commandeers Australian Commodity Players, Starts to Nibble in Africa

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.

Comments

[MikeOz]

In regard to Australia - there are quite a few other significant mining investments (iron ore, coal, base metals and and others) which have been made or are in the process of being approved which you have not mentioned. Scarcely a week now goes by without another major announcement of major Chinese mining investment in Australia.

In my opinion, there is growing disconnect between the attitude of the Australian Government - which on the face of it seems to be encouraging Chinese resource investment (without any apparent limits) - and the Australian population, which is less sure.

There has always been a (minority) element of Australian society who do not want any asian investment, but this has been added to recently as a result of Chinese central government action.

Currently the Rio Tinto iron ore negotiating team is sitting in a Chinese jail on trumped up charges of industrial espionage. As far as anyone can make out the reasons for this are:
- loss of face by the central government, after the Australian miners did not agree to the 40% reduction in iron are price demanded, and then Chinese provincial factories ignored the central government price guidelines and restarted buying at the price agreed by Japanese steel producers (about 10% over the guide)
- the canceled 15% investment in RIO itself by China. In the darkest days of the share market decline, RIO negotiated a fire sale of 15% of its stock to Chinese interests to reduce debt. When the markets improved, the board decided not to ratify their own agreement. (Personally I'd agree with Chinese on that one - the current RIO board are a disgrace.)

(Also note - there seems to be a cultural disconnect now going on - with Chinese hints that they now just need a small reduction in price (below what was agreed with the Japanese) for which they would give something in return - ie a face saver. This seems to have either been ignored or not picked up on by the Australian / UK boards and management.)

China has been the largest consumer of Iron Ore for about 5 years now, so some investment in the Australian Iron Ore industry makes sense.

BUT there is an increasing number of voices here in Australia who are saying that we should establish some guidelines now as to what the eventual type and size of Chinese mining investment should look like. This would be the best way of avoiding potential future conflicts in an area where both sides should really be winners.

2009 Sep 16 08:20 AM

[Paul Harper]

Mike, thanks for the balanced comment & yes I am aware that public
sentiment in Oz does not reflect the current governments
"love affair" with China.

2009 Sep 16 10:52 AM

[ArtfulDodger]

Good work, PH. Thank you.

2009 Sep 16 10:55 AM

[HaavBline]

Commandeer? Not really.

All the small acquisitions add up to only a small fraction comparing to BHP + Rio Tinto.

The two giants joining hands in iron ore are just too fishy and dangerous for the Chinese steel mills. They are on the defensive.

2009 Sep 16 11:36 AM

[Paul Harper]

"Commandeer" was not my title, thank the SA editors. Actually it was "take a chunk" ...

For me it is too dangerous for anyone in the steel industry globally, let alone China that RTP & BHP are being allowed to play this move, as Mike says, the Rio Tinto management are not exactly a shining example of how to run a company & it smacks of protectionism.
In this article, I have only spoken about iron ore, as it is of major focus at present, in the linked articles, you can see what China has been up to regards foreign acquisitions in a number of sectors.
I am of the opinion that this is all part of a longer term hedge against the dollar going forward, along with the recent IMF purchase, bilateral trade agreements & gold stocking that has been going on.
Having read through my past commentary on China here on SA, it seems to be quite a link through for the last 10 months or so, small parts of the puzzle so to speak.
Not setting myself up as an oracle btw, just how I see things from a fairly neutral (non-US) point of view.


On Sep 16 11:36 AM HaavBline wrote:

> Commandeer? Not really.
>
> All the small acquisitions add up to only a small fraction comparing
> to BHP + Rio Tinto.
>
> The two giants joining hands in iron ore are just too fishy and dangerous
> for the Chinese steel mills. They are on the defensive.

2009 Sep 16 12:17 PM

[Ben Gee]

It is a game of blinkmanship. Will the buyers or the sellers blink first. Last year, the buyers blinked. This year, we are waiting for someone to blink. How much difference Chinese investments in small player will make we will have to wait and see. I think buyers may have more clout in the long run, they have deeper pockets. Cooperation may be a better way to go but that is not in the Western culture.

2009 Sep 16 01:22 PM