The 'Ore' Wars

Includes: BHP, FXI, PGJ, RIO
by: Jim Delaney

Towards the end of the 19th and beginning of the 20th centuries, there were the Boer Wars, an attempt by Britain to expand it imperialist empire. If there was any good to those wars, it was that a young lieutenant by the name of Winston Churchill made it through alive.

Today, some 129 years later we are witnessing the 'Ore War'. Unlike Britain’s conflict with the Transvaal and Orange Free State then, this one is not being fought on the battlefield, at least not one that yields physical casualties. It is instead being fought in the markets as China looks to secure supplies of the natural resources its economy requires to continue to be a world leader in GDP growth.

While this situation might not have all of the gruesome accoutrements of war there is espionage as on July 5th four executives from the global mining giant, Rio Tinto (RTP), were detained after being accused of bribing Chinese steelmakers to obtain secret information related to iron-ore price negotiations.

Australian Prime Minister Kevin Rudd admonished the Middle Kingdom that their actions could have repercussions with other trading partners, “A range of foreign governments and corporations around the world will be watching this case with interest, and will be watching it very closely.”

Xiangfan Ren, with HIS Global Insight was a bit more direct in saying, “This may be the strongest message sent by authorities that China is trying to assume control over iron-ore price talks.”

Although China denies the allegations, some believe the action could be the result of being left at the alter last year when, like Katharine Ross in The Graduate, Rio Tinto ran back into the arms of BHP Billiton (NYSE:BHP) after originally spurning their fellow Aussie suitor for being a bit too short-armed leaving Chinalco with little else but pent up ambition.

As for its ambitions, China seems able to fight on multiple fronts. The nation recently became the world’s largest car dealership and adding Hummer and Opel, should GM turn a deaf ear to Ms. Merkel, could add much needed choice to the product line offered to a fast growing middle class.

The Great Wall nation has also been flexing its muscles in the financial markets calling for the removal of the Dollar as the world’s reserve currency while using its time in the spot light to comment on the problems with the U.S. financial system and blaming Uncle Sam for the current global economic crisis. Recent purchases of U.S. debt have been concentrated on the shorter end of the curve, giving China much more flexibility in its dealings with America.

China’s current power streak comes, to some extent, from the $586BN stimulus package which has focused on infrastructure which is putting people to work and keeping existing jobs intact. That this is much different than the politically motivated transfer payments that we have been told are stimulative in this country is a story for another day.

Chinese authorities have also been pushing banks in the country to make loans and to date it appears there has been $1TN in new credit extended, per J.P. Morgan (NYSE:JPM). This lending could eventually sow the seeds for a little bubble bursting itself as while the money is making its way into the economy it is not necessarily be used for the intended purpose.

Chinese companies and individuals seem eager to invest these newfound funds in the stock market as there were 1.6MM stock trading accounts opened in June of this year, a 68% increase over June of ’08. Companies are using their access to credit to buy real-estate (didn’t we just see this movie?) as J.P. Morgan says the winners of some recent land auctions were firms that were long on cash but very short on real estate experience.

When oil was trading at $147/bbl there was a lot of grumbling from the Russia and a renewed flexing of military might. With oil hovering around $60/bbl the Bear seems to have gone back into hibernation.

If China’s domestic stimulus efforts flame out the repercussions could require all of the resources the government has to keep an increasingly hungry consumer sated and an economy that has been kick started like no other in this crisis running at a rate that will prevent riots in the streets.

CDS’ on the U.S. of A. closed at 32.5bps last night and are now just 6bps away from the lows seen on 5/12/2009.

China’s CDS’ have broken to new lows closing at 67.5bps last night. The previous low was 69.5bps seen on June 3rd of this year.