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China Feasts on Miners as ‘Bank of Last Resort’ (Update1)
2009-02-18 07:55:21.250 GMT
(Adds China’s foreign currency plans in fifth paragraph.)
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 has agreed to acquire $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.”
For Related News and Information:
Top metals: METT <GO>
Rio Tinto stories: RIO AU <Equity> CN <GO>
Mining M&A: TNI MNG MNA <GO>
LME copper prices: LMCADS03 <Comdty> GPO <GO>
--With reporting by Jesse Riseborough in Melbourne, John Duce in
Hong Kong, Xiao Yu and Wang Ying in Beijing and Winnie Zhu in
Shanghai. Editors: Tan Hwee Ann, Richard Dobson.
To contact the reporters for this story:
Helen Yuan in Shanghai at +86-21-6104-7012 or
[email protected];
Rebecca Keenan in Melbourne at +61-3-9228-8721 or
[email protected].
To contact the editor responsible for this story:
Teo Chian Wei at +65-6212-1541 or
[email protected]