Energy & Resources

Being resourceful

The major M&A trend of our times: China scouring the world for commodities firms

Being resourceful

Xiao Yaqing, the former boss of China’s largest aluminum company, Chinalco, gained a reputation for being one of the more unorthodox bosses of a state-owned enterprise.

Case in point, the way he campaigned in an open, Western way for approval in Australia for what would have been China’s largest foreign investment ever: a proposed $20 billion stake in Rio Tinto, the world’s second largest mining company. The deal would have given Chinalco close to 18% of Rio, as well as outright control of some valuable copper and iron ore resources.

To lobby his case, Xiao travelled to Australia and made a series of television appearances. China watchers should understand: big, state-owned companies tend to be intensely conservative organisations. Top executives rarely make foreign public appearances and even when they do, they read from a prepared script.

Xiao’s performance was a lot punchier, needless to say, and much remarked upon at home.

Nevertheless, the showmanship failed to impress the Australians. Rio baulked at the last minute, claiming shareholder reluctance (most think the Australian government was none too keen, either).

Instead of taking Chinalco’s cash, Rio turned in June 2009 to its long time rival, BHP Billiton. Relations with the Chinese soured, and four Rio employees were arrested for alleged commercial corruption.

Analysts are quick to point out that it is not the first time that big Chinese investments have been spurned. Remember when state-owned CNOOC tried to acquire UNOCAL in the US five years ago? Political opposition in Washington led it to withdraw its bid (see WiC82).

The collapse of the Rio Tinto deal left a bitter taste in Beijing, which has been trying to secure access to resources like iron ore, copper, coal and natural gas that are critical in fuelling the country’s growth. Potential buyers have had little problem lining up financing from China Development Bank and other state-owned lenders.

The supply of iron ore is a particular bugbear for China’s steelmakers, who feel that they get the worst of the bargain from the three largest international ore producers, BHP Rio and Vale.

Since WiC was first published, we’ve tracked the tactics and tantrums at the heart of this crucial relationship, as the Chinese customers seek to undermine the ore oligopoly, and the foreign miners look to maximise returns on China’s poorly disguised appetite for their product.

Amid the tension, the annualised negotiations surrounding the contract pricing system have pretty much broken down.

Instead, commitments are being signed on a quarterly and even monthly basis. But the slow progression towards spot contracts (why not; most commodities can manage it?) has not gone in China’s favour. Although China’s steel mills are easily the world’s largest buyers of iron ore (in 2009, they nabbed 67% of internationally traded supply), they have struggled to improve their bargaining power (see issues 35, 56 and 59), in large part thanks to steel demand spiking from China’s national stimulus plan. This year prices are up again, by over 90% on a year ago.

One option is to widen supply. Last year Chinese firms spent a record $32 billion on mining and energy acquisitions, according to Dealogic.

Chinese dealmakers have popped up in Nigeria (WiC61) and Guinea, bought copper mines in Afghanistan, and signed up with the Iranians to develop the South Pars natural gas field. Further investments include access to oil in Brazil and Argentina, a 7,000km gas pipeline from Central Asia and shopping for uranium mines in Canada and Australia (see WiC74).

Which brings us back to Chinalco’s former boss Xiao Yaqing, who is said to have a senior role in some of the strategy behind these shopping trips, albeit one in which he works much more behind the scenes than in the public eye.

Despite the disappointments of the Rio deal, Xiao ended up with a promotion to the State Council, China’s cabinet, where’s he charged with coordinating government policy on key industrial matters.

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