Mainland firms scouring the world for miners, projects find prices have fallen to appetising levels
Carol Chan 15 December 2008
The hunt for iron ore and other minerals during last year’s boom resembled a frantic search by treasure hunters certain their glittering prize was about to be snatched away from them by rivals.
Top dollar was offered for mines and mineral deposits by companies and governments fearful that if they did not buy or otherwise lock up resources, their economies would suffer and their factories could grind to a halt.
Things have changed. Commodity prices are slumping, and those previously high-flying mining companies and commodity producers are no longer sitting so pretty.
The reversed fortunes of the resources companies could provide rich pickings for cashed-up developing economies, such as the mainland and India, seeking to ensure future supplies of everything from iron ore to oil. Analysts say the global credit crisis may be the best time to buy mining assets.
Although there is no consensus on whether the time for “bottom-fishing” has arrived, or if commodity prices are nearing the end of their decline, many mainland companies are preparing to pounce.
“Now is a good opportunity for mainland steelmakers to buy overseas resources to secure long-term supply, as acquisition costs are much lower than in the first half of this year or than last year,” said Xu Xiangchun, chief information officer of steel data provider Beijing Ganglian Maidi e-Commerce.
Over the long term, mainland companies, especially those whose self-sufficiency in raw materials such as iron ore and copper is low, need to increase their investment in overseas resources, he said. Options include buying a mining company, taking a majority or minority stake or jointly developing a project.
As the world’s manufacturing hub, the mainland is the biggest consumer of numerous metals. But it has very limited domestic resources. It needs to import 75 per cent of its copper concentrate to produce refined copper and half of its iron ore to feed its steel-making capacity.
In the longer run, its reliance on imported ore will only continue to rise as the quality of domestic ore deteriorates, CRU International says.
The average iron content of mainland ore has fallen to 28 per cent, compared with an average of about 60 per cent in Australia. CRU forecasts that the mainland will rely on imported ore for 60 per cent of its consumption in five years’ time.
The falling quality of domestic ore and a foreseeable surge in demand has driven mainland steelmakers to pursue plans for overseas expansion despite recent industry-wide losses.
Mei Xinyu, a researcher at the Research Institute of Foreign Trade and Economic Co-operation at the Ministry of Commerce, agreed it was a good time for mainland firms to buy overseas mining assets or stakes in global mining giants. The end of BHP Billiton’s hostile bid for Rio Tinto meant the field was now more open.
Zhang Xiaogang, president of the China Iron and Steel Association and chairman of Anshan Iron & Steel Group (AnSteel), told the Economic Information Daily the current market situation gave mainland steelmakers a chance to regain bargaining power in price setting for iron ore.
In addition to increasing investment in domestic iron ore mines and reducing dependence on the global “Big Three” - Brazil’s Vale, Australia’s BHP and Britain’s Rio - by shifting to other ore producers, Mr. Zhang said, companies with financial strength could build new overseas raw materials bases.
Leading the way is AnSteel, the mainland’s second-largest steelmaker, which agreed last month to increase its stake in Australian partner Gindalbie Metals by buying A$162 million (HK$820 million) worth of new shares. The deal raises AnSteel’s stake in Gindalbie to 36.28 per cent from 12.6 per cent. The two companies have a 50-50 joint venture to develop the A$1.8 billion Karara mining project in Western Australia.
“Control of resources is very important to a company’s survival and development,” said Fu Jihui, executive director of AnSteel’s listed flagship, Angang Steel. “Prices of overseas assets have slumped a lot, and everything now seems relatively cheap.”
Bai Fang, a spokesman for Wuhan Iron & Steel Group, the mainland’s fifth-largest steelmaker, agreed it was time to consider and prepare for overseas co-operation and acquisitions, as prices were lower now.
“We need to import 80 per cent of our iron ore from overseas, and the control of resources is very important to our development,” Mr. Bai said.
“However, as iron ore prices are expected to fall over the next two years, I think it is better to wait until next year.”
Spot iron ore has fallen 60 per cent this year, dropping below long-term contract prices. The market expects prices to continue to slide next year after rising for six years, because steelmakers are cutting demand. Most analysts forecast a decline of at least 10 to 20 per cent - and perhaps as much as 50 per cent.
Iron ore is not the only material feeling the claws of the bear market. The commodities market overall is heading for the biggest annual drop in more than 20 years as the US, Britain, Japan, and the eurozone slip into a recession. Oil has plunged 70 per cent since reaching a record US$147.27 in July, and copper has fallen by half this year.
Although most of the price declines have already occurred, with funds quickly factoring in the downside, prices could drop a further 10 to 15 per cent before hitting the bottom of the cycle, Geoff Clear, executive director and head of commodities at Australia & New Zealand Banking Group, said. Commodities may bottom out in the first half of next year, probably in June, he said.
Wuhan Steel signed a memorandum of understanding last month with Australian iron ore miner Ironclad Mining to jointly develop two projects in Australia. The Hubei-based company said it was interested in acquiring a shareholding in Ironclad.
The two companies agreed to work on a financing study and set up a 50-50 joint venture for the development of the Perth-based company’s Wilcherry Hill and Hercules iron ore projects in South Australia, which are designed to produce up to 4 million tonnes of iron ore a year from 2011.
Besides AnSteel and Wuhan Steel, other mainland steelmakers have also sped up their investments in Australia as falling valuations of mining companies from this year’s record highs provide acquisition opportunities.
Shougang Concord International Enterprises, the listed arm of the mainland’s ninth-largest steelmaker, Shougang Corp, last month bought at a discounted price a stake in Mount Gibson, which is facing defaults on iron ore purchases from mainland buyers.
Shougang, whose earlier plan to invest in the Australian iron ore producer was rejected by Australian regulators, this time bought A$66 million worth of Mount Gibson shares and underwrote a further A$96.5 million rights issue together with sister company Apac Resources.
After the deal, Shougang owned 14.43 per cent of Mount Gibson, while Apac’s stake increased to 26.07 per cent from 20.
Shenzhen Zhongjin Lingnan Nonfemet, the mainland’s third-largest zinc producer, took advantage of tumbling market values and offered A$45.5 million this month for a 50.1 per cent stake in Australian zinc miner Perilya, which is wrestling with low prices for the metal.
“The drop in valuations provides the biggest opportunity for companies like us,” Chen Jinghe, chairman of gold producer Zijin Mining Group said at a mining conference recently.
“We have sufficient cash. We won’t have any problem in making an acquisition as big as 20 billion yuan.”
However, although the Fujian-based gold producer is still searching for opportunities to expand its reserves of gold and copper, it is turning more cautious. The amount it has set aside for buying stakes in domestic and overseas mining companies this year is only 1billion yuan.
Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission, the mainland’s top regulator of state assets, urged state-owned companies to tighten their purse strings to weather the worsening global economic climate and wait until next year for better acquisition opportunities.
“Companies must stop aggressive acquisitions while reserving more cash now,” Mr. Li was quoted by mainland newspapers as saying.
“You may find some companies worth investing in, but I think you will see better opportunities next year.”
Su Jiangang, executive director and general manager of Maanshan Iron & Steel, said his firm was adopting a “wait-and-see” approach on investment in overseas mining, since it was still unclear when the world economy would recover.
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Commodities Lines Cast Far and Wide
Mainland firms scouring the world for miners, projects find prices have fallen to appetising levels
Carol Chan
15 December 2008
The hunt for iron ore and other minerals during last year’s boom resembled a frantic search by treasure hunters certain their glittering prize was about to be snatched away from them by rivals.
Top dollar was offered for mines and mineral deposits by companies and governments fearful that if they did not buy or otherwise lock up resources, their economies would suffer and their factories could grind to a halt.
Things have changed. Commodity prices are slumping, and those previously high-flying mining companies and commodity producers are no longer sitting so pretty.
The reversed fortunes of the resources companies could provide rich pickings for cashed-up developing economies, such as the mainland and India, seeking to ensure future supplies of everything from iron ore to oil. Analysts say the global credit crisis may be the best time to buy mining assets.
Although there is no consensus on whether the time for “bottom-fishing” has arrived, or if commodity prices are nearing the end of their decline, many mainland companies are preparing to pounce.
“Now is a good opportunity for mainland steelmakers to buy overseas resources to secure long-term supply, as acquisition costs are much lower than in the first half of this year or than last year,” said Xu Xiangchun, chief information officer of steel data provider Beijing Ganglian Maidi e-Commerce.
Over the long term, mainland companies, especially those whose self-sufficiency in raw materials such as iron ore and copper is low, need to increase their investment in overseas resources, he said. Options include buying a mining company, taking a majority or minority stake or jointly developing a project.
As the world’s manufacturing hub, the mainland is the biggest consumer of numerous metals. But it has very limited domestic resources. It needs to import 75 per cent of its copper concentrate to produce refined copper and half of its iron ore to feed its steel-making capacity.
In the longer run, its reliance on imported ore will only continue to rise as the quality of domestic ore deteriorates, CRU International says.
The average iron content of mainland ore has fallen to 28 per cent, compared with an average of about 60 per cent in Australia. CRU forecasts that the mainland will rely on imported ore for 60 per cent of its consumption in five years’ time.
The falling quality of domestic ore and a foreseeable surge in demand has driven mainland steelmakers to pursue plans for overseas expansion despite recent industry-wide losses.
Mei Xinyu, a researcher at the Research Institute of Foreign Trade and Economic Co-operation at the Ministry of Commerce, agreed it was a good time for mainland firms to buy overseas mining assets or stakes in global mining giants. The end of BHP Billiton’s hostile bid for Rio Tinto meant the field was now more open.
Zhang Xiaogang, president of the China Iron and Steel Association and chairman of Anshan Iron & Steel Group (AnSteel), told the Economic Information Daily the current market situation gave mainland steelmakers a chance to regain bargaining power in price setting for iron ore.
In addition to increasing investment in domestic iron ore mines and reducing dependence on the global “Big Three” - Brazil’s Vale, Australia’s BHP and Britain’s Rio - by shifting to other ore producers, Mr. Zhang said, companies with financial strength could build new overseas raw materials bases.
Leading the way is AnSteel, the mainland’s second-largest steelmaker, which agreed last month to increase its stake in Australian partner Gindalbie Metals by buying A$162 million (HK$820 million) worth of new shares. The deal raises AnSteel’s stake in Gindalbie to 36.28 per cent from 12.6 per cent. The two companies have a 50-50 joint venture to develop the A$1.8 billion Karara mining project in Western Australia.
“Control of resources is very important to a company’s survival and development,” said Fu Jihui, executive director of AnSteel’s listed flagship, Angang Steel. “Prices of overseas assets have slumped a lot, and everything now seems relatively cheap.”
Bai Fang, a spokesman for Wuhan Iron & Steel Group, the mainland’s fifth-largest steelmaker, agreed it was time to consider and prepare for overseas co-operation and acquisitions, as prices were lower now.
“We need to import 80 per cent of our iron ore from overseas, and the control of resources is very important to our development,” Mr. Bai said.
“However, as iron ore prices are expected to fall over the next two years, I think it is better to wait until next year.”
Spot iron ore has fallen 60 per cent this year, dropping below long-term contract prices. The market expects prices to continue to slide next year after rising for six years, because steelmakers are cutting demand. Most analysts forecast a decline of at least 10 to 20 per cent - and perhaps as much as 50 per cent.
Iron ore is not the only material feeling the claws of the bear market. The commodities market overall is heading for the biggest annual drop in more than 20 years as the US, Britain, Japan, and the eurozone slip into a recession. Oil has plunged 70 per cent since reaching a record US$147.27 in July, and copper has fallen by half this year.
Although most of the price declines have already occurred, with funds quickly factoring in the downside, prices could drop a further 10 to 15 per cent before hitting the bottom of the cycle, Geoff Clear, executive director and head of commodities at Australia & New Zealand Banking Group, said. Commodities may bottom out in the first half of next year, probably in June, he said.
Wuhan Steel signed a memorandum of understanding last month with Australian iron ore miner Ironclad Mining to jointly develop two projects in Australia. The Hubei-based company said it was interested in acquiring a shareholding in Ironclad.
The two companies agreed to work on a financing study and set up a 50-50 joint venture for the development of the Perth-based company’s Wilcherry Hill and Hercules iron ore projects in South Australia, which are designed to produce up to 4 million tonnes of iron ore a year from 2011.
Besides AnSteel and Wuhan Steel, other mainland steelmakers have also sped up their investments in Australia as falling valuations of mining companies from this year’s record highs provide acquisition opportunities.
Shougang Concord International Enterprises, the listed arm of the mainland’s ninth-largest steelmaker, Shougang Corp, last month bought at a discounted price a stake in Mount Gibson, which is facing defaults on iron ore purchases from mainland buyers.
Shougang, whose earlier plan to invest in the Australian iron ore producer was rejected by Australian regulators, this time bought A$66 million worth of Mount Gibson shares and underwrote a further A$96.5 million rights issue together with sister company Apac Resources.
After the deal, Shougang owned 14.43 per cent of Mount Gibson, while Apac’s stake increased to 26.07 per cent from 20.
Shenzhen Zhongjin Lingnan Nonfemet, the mainland’s third-largest zinc producer, took advantage of tumbling market values and offered A$45.5 million this month for a 50.1 per cent stake in Australian zinc miner Perilya, which is wrestling with low prices for the metal.
“The drop in valuations provides the biggest opportunity for companies like us,” Chen Jinghe, chairman of gold producer Zijin Mining Group said at a mining conference recently.
“We have sufficient cash. We won’t have any problem in making an acquisition as big as 20 billion yuan.”
However, although the Fujian-based gold producer is still searching for opportunities to expand its reserves of gold and copper, it is turning more cautious. The amount it has set aside for buying stakes in domestic and overseas mining companies this year is only 1billion yuan.
Li Rongrong, chairman of the State-owned Assets Supervision and Administration Commission, the mainland’s top regulator of state assets, urged state-owned companies to tighten their purse strings to weather the worsening global economic climate and wait until next year for better acquisition opportunities.
“Companies must stop aggressive acquisitions while reserving more cash now,” Mr. Li was quoted by mainland newspapers as saying.
“You may find some companies worth investing in, but I think you will see better opportunities next year.”
Su Jiangang, executive director and general manager of Maanshan Iron & Steel, said his firm was adopting a “wait-and-see” approach on investment in overseas mining, since it was still unclear when the world economy would recover.
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