China Feasts on Miners as ‘Bank of Last Resort’ (Update1)
By Helen Yuan and Rebecca Keenan
Feb. 18 (Bloomberg) -- Wuhan Iron & Steel Group and Jiangsu Shagang Group Co., China’s third- and fifth-largest steelmakers, are shopping for iron ore mining stakes in Australia and Brazil, executives said in interviews.
“We are evaluating and selecting” candidates in Australia and Brazil, said Shen Wenrong, Jiangsu-based Shagang’s chairman. “Going overseas is the government policy, so I believe we will get financing from Chinese banks.” Wuhan spokesman Bai Fang said his company is “looking for opportunities” amid lower acquisition costs for iron ore assets in Australia and “won’t rule out other countries.”
The world’s top metal user, China already has acquired $22 billion worth of commodity assets this year after a 70 percent drop in metals and oil since July ended a six-year boom in raw materials. With U.S. and Australian banks still hesitant to lend, Rio Tinto Group and OZ Minerals Ltd., laboring under combined debt of $40 billion, agreed this month to sell stakes to Aluminum Corp. of China and China Minmetals Corp., respectively.
“China has turned out to be the bank of last resort,” said Glyn Lawcock, head of resources research at UBS AG in Sydney. “China is a net importer of copper, bauxite, alumina, nickel, zircon, uranium. China is looking for ways to secure supply of these raw materials.”
Foreign Exchange Purchases
China, whose $1.95 trillion in currency reserves are the world’s largest, plans to spend more foreign exchange on imports and acquisitions. The State Administration for Foreign Exchange said today it will make it easier for companies to purchase foreign-exchange for their overseas investments.
Commodity acquisitions by China would put increasing amounts of the world’s raw materials under control of their biggest consumer and may allow it to influence prices. The investment by Aluminum Corp., or Chinalco as the state-owned entity is known, into Rio may bolster China’s bargaining power to set iron ore prices, China Iron and Steel Association said.
China’s plan to boost the economy with 4 trillion ($585 billion) yuan in spending on roads, bridges and other infrastructure has pushed up prices for steel and iron ore by as much as 37 percent and the cost of shipping commodities has more than doubled.
Oil Fund
The nation may set up an oil fund using part of the reserves to help companies buy fields abroad, according to a statement this week by the China National Petroleum Corp., the country’s biggest oil producer. China this week agreed to provide $25 billion of loans to Russia in return for oil supplies for the next 20 years.
Australia already has signaled concern that China is buying strategic assets on the cheap. Treasurer Wayne Swan last week tightened takeover laws when Chinalco announced its investment in London-based Rio Tinto, the world’s third-largest mining company.
Swan has the power to reject both that deal and Minmetals’ proposition with Melbourne-based OZ Minerals on national interest grounds. When Peter Costello was Australia’s treasurer in 2001, he blocked Royal Dutch Shell Plc’s bid for Woodside Petroleum Ltd. In 2004, Minmetals failed to reach an accord to buy Noranda Inc. amid objections from Canadian politicians.
China’s acquisition hunt is happening as the government ponders where to invest its currency reserves, which increased 27 percent in the past year to about 29 percent of the world’s total. The country already owns $696.2 billion in Treasuries, about 12 percent of the U.S.’s outstanding marketable debt and has been stung by losses of more than $5 billion on $10.5 billion invested in Blackstone Group LP and Morgan Stanley in New York and TPG Inc. in Fort Worth, Texas, since mid-2007.
‘Burnt’ Hands
“China has burnt its hands in the past buying liquid assets like Blackstone, but here they have the chance to buy tangible, useful assets,” said Professor Liu Baocheng at the University of International Business & Economics in Beijing. “There’s no point putting money in the bank or in deposits with low returns.”
China consumes over a third of the world’s aluminum output, a quarter of its copper production, almost a tenth of its oil and it accounts for more than half of the trading in iron ore. Last year, China bought $211 billion worth of iron ore, refined copper, crude oil and alumina.
The deals by Chinalco and Minmetals, both based in Beijing and controlled by the state, come amid difficulties that Australian mining companies face in borrowing A$26 billion to fund for new projects, as detailed in a September UBS report.
Chinalco agreed on Feb. 12 to spend $19.5 billion to acquire debt and stakes in Rio Tinto’s mines in Australia, Indonesia, the U.S. and Chile. Rio was forced to seek a deal from its biggest shareholder to help reduce $38.9 billion of debt largely incurred from its 2007 acquisition of Alcan Inc. Rio’s high-level of debt was one of the reasons why BHP Billiton Ltd. abandoned its $66 billion hostile bid for Rio in November. Chinalco will increase its stake in Rio to 18 percent should it convert the debt.
OZ Minerals Takeover
Minmetals on Feb. 16 said it will take over OZ Minerals for A$2.6 billion ($1.7 billion) and assume debt of A$1.2 billion.
In addition to Wuhan and Shagang, Zijin Mining Group Co., China’s largest bullion producer, may spend as much as 20 billion yuan on acquisitions, Chen Jinghe, chairman of the Fujian-based company, said Nov. 11. Yanzhou Coal Mining Co. said on Dec. 5 that it is looking at deals, following an Australian Financial Review report that the Shandong-based company wanted to buy Felix Resources Ltd. in Australia for more than A$3 billion.
Fortescue Metals Group Ltd., Australia’s third-largest iron ore exporter, surged 12 percent today after it said it held investment talks with China Investment Corp., the nation’s sovereign wealth fund, and Anglo American Plc. Talks are “preliminary and incomplete”, the Perth-based company said.
China Investment may bring in Baosteel Group Corp. and China Shenhua Energy Co. as partners to invest in Fortescue, the South China Morning Post said Nov. 17, citing people it didn’t identify.
‘Chunky Deals’
Excluding the $22 billion of spending this year, Chinese companies last year bought stakes or control of Australian iron ore producers Midwest Corp. and Murchison Metals Ltd. and metals explorer Abra Mining Ltd. In August, China Shenhua Energy Co., the world’s largest coal producer by value, won a coal exploration license in Australia for A$300 million.
“I would’ve thought there is probably many billions of dollars still to come because China does have enormous financial firepower,” said Peter Arden, an analyst in Melbourne at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “We will see some more chunky deals being done.”
GWR Price at posting:
41.7¢ Sentiment: Buy Disclosure: Held
