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Monday, 8 June 2009
More To Come As China Grabs Resources
Another week, another China resources deal in Australia. This time, it’s Metallurgical Corp. of China arranging $3.1 billion in financing for Waratah Coal and taking a 10% stake in the company.
Another week, another China resources deal in Australia. This time, it’s Metallurgical Corp. of China arranging $3.1 billion in financing for Waratah Coal and taking a 10% stake in the company.
China Inc.’s appetite for iron ore, coal, copper and such seems insatiable. So far this year, Chinese firms have proposed or completed $9.7 billion worth of deals in Australian resources companies, Dealogic figures show. That’s nearly three times more than all of 2008.
Using Japan’s resources deals in the 1970s and “80s as a benchmark, Citi Investment Research has estimated how large China’s stake in Australia could grow. Behind the Chinese M&A flurry Down Under is, in effect, an effort to bolster the security of its supply by ensuring its investments there match its resources needs.
Citi puts the net present value of Japanese stakes in Australian mining assets at $20 billion, while Australia’s mining companies sell around $15 billion worth of minerals to Japan each year.
With Australian mineral sales to China now around $22 billion a year, to achieve a similar ratio, the Chinese would need to own $30 billion worth of assets -- more than three times the value of their present stakes.
That could be a lower limit. Japan’s resource-buying spree was stalled by the 1990s downturn there. Moreover, Japan didn’t have ambitious champions like China’s Chinalco; most of its deals were done by trading houses such as Mitsui.
Still, China’s stake-buying in Australia could face constraints. Japan’s foray sprang from an official strategy to incentivize foreign firms to develop capacity in their countries, to help serve Japanese needs. Funding came with few strings attached.
By contrast, China -- a late entrant to the global economy -- is having to secure resources supplies quickly and more aggressively, with much of the world’s best mineral assets already held by big players.
As long as the credit crunch lasts and companies are starved of alternative funding, China’s window of opportunity will remain open.
Already though, the possible renegotiation of the Rio Tinto-Chinalco deal -- pointing to less favourable terms for the Chinese company -- shows how slightly improved markets could make life harder for Chinese acquirers. That’s not to mention growing political concern about Chinese investment, even in an open country like Australia.
More competition for assets could also come from resources majors that have survived the economic downturn.
There’s more potential for Chinese resources deals for sure. But the country may have to compromise more, and cast its net wider.
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More To Come As China Grabs Resources
By ANDREW PEAPLE
1 June 2009
Another week, another China resources deal in Australia. This time, it’s Metallurgical Corp. of China arranging $3.1 billion in financing for Waratah Coal and taking a 10% stake in the company.
China Inc.’s appetite for iron ore, coal, copper and such seems insatiable. So far this year, Chinese firms have proposed or completed $9.7 billion worth of deals in Australian resources companies, Dealogic figures show. That’s nearly three times more than all of 2008.
Using Japan’s resources deals in the 1970s and “80s as a benchmark, Citi Investment Research has estimated how large China’s stake in Australia could grow. Behind the Chinese M&A flurry Down Under is, in effect, an effort to bolster the security of its supply by ensuring its investments there match its resources needs.
Citi puts the net present value of Japanese stakes in Australian mining assets at $20 billion, while Australia’s mining companies sell around $15 billion worth of minerals to Japan each year.
With Australian mineral sales to China now around $22 billion a year, to achieve a similar ratio, the Chinese would need to own $30 billion worth of assets -- more than three times the value of their present stakes.
That could be a lower limit. Japan’s resource-buying spree was stalled by the 1990s downturn there. Moreover, Japan didn’t have ambitious champions like China’s Chinalco; most of its deals were done by trading houses such as Mitsui.
Still, China’s stake-buying in Australia could face constraints. Japan’s foray sprang from an official strategy to incentivize foreign firms to develop capacity in their countries, to help serve Japanese needs. Funding came with few strings attached.
By contrast, China -- a late entrant to the global economy -- is having to secure resources supplies quickly and more aggressively, with much of the world’s best mineral assets already held by big players.
As long as the credit crunch lasts and companies are starved of alternative funding, China’s window of opportunity will remain open.
Already though, the possible renegotiation of the Rio Tinto-Chinalco deal -- pointing to less favourable terms for the Chinese company -- shows how slightly improved markets could make life harder for Chinese acquirers. That’s not to mention growing political concern about Chinese investment, even in an open country like Australia.
More competition for assets could also come from resources majors that have survived the economic downturn.
There’s more potential for Chinese resources deals for sure. But the country may have to compromise more, and cast its net wider.
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