Another day, another Chinese grab for the Australian resources sector – or at least, that’s how it seemed on Friday after news of interest at Hunan Valin Iron & Steel Group in Fortescue Metals, the country’s third-largest iron ore producer behind Rio Tinto and BHP Billiton.
But in the view of some observers, who remain unruffled by scare-mongering over China’s growing “resources grab”, the country’s frenzied shopping spree Down Under “smacks of a regime in disarray”.
Valin confirmed on Thursday it had held talks to invest in Fortescue, but added it had concerns about the group’s “high” debt level and the “financial risks” of a deal, reports Bloomberg. The FT, meanwhile, reports that Fortescue, which has a long-standing supply agreement with China’s Baosteel, said Wednesday it held talks with Anglo American, the London-listed mining group, and China Investment Corp, the $200bn sovereign wealth fund, and had hired JPMorgan, Azure Capital and Grant Samuel & Associates to “review investment opportunities”.
The Australian Financial Review reported that Valin, backed by CIC, may invest A$3bn ($1.91bn) in Fortescue. Other reports put the figure at A$500m. Valin has not given details. As an aside, ArcelorMittal, the world’s biggest steelmaker, holds 33 per cent of Valin Steel’s Shenzhen-listed unit Hunan Valin Steel Co, but is not a player in this deal.
Meanwhile, Rio Tinto is in damage-control mode over its agreement for a $19.5bn investment from Chinese state-owned Chinalco, while Minmetals is working on its 100 per cent $1.9bn bid for diversified miner Oz Resources.
And the Australian government, particularly the Treasurer, Wayne Swan, is making more noises about applying strict tests to the Chinese investment plans – as it comes under ever more pressure to tighten rules for foreign investment in the country’s resources sector.
In a separate report on Friday, Bloomberg cites investors saying Australia needs to develop a uniform policy response to attempts by Chinese state-owned companies to buy mines.
The report quotes Shaun Manuell, of fund manager Equity Trustees, saying: “It’s going to be very difficult at a policy level to necessarily knock one back and allow one to go through… They are going to need a common policy towards allowing China and foreign investment.”
It seems a fair point. So… What next?
The picture of an intensifying Chinese shopping spree can be seen two ways.
First, the paranoid view: that the mandarins of Beijing have a grand, master plan to buy up cash-strapped western miners and gain control of Australia’s resources industry – and influence vital negotiations over commodities prices for Chinese producers.
The second view – and one that is beginning to seem more convincing – is that China’s deal frenzy is looking a little – well, piecemeal and even amateur. In the view of The Australian’s business columnist John Durie: “If there is a grand Chinese national plan to grab control of Australia’s commodities, its execution is atrocious.”
As Durie and others have noted, the Chinese could not have handled news of the recent deal between state-owned Chinalco to invest $19.5bn in Rio Tinto more badly. The deal has been met by growing uproar, with calls in Australian parliament for an inquiry into China’s resources investments in Australia, and a threatened revolt of Rio’s shareholders.
This week’s bid by China Minmetals for Oz Resources attracted similarly bad press – which could well have been minimised with some smoother footwork ahead of time.
As for Valin, there are suggestions that Fortescue was not opposed to letting the rumour mill work overtime – a fact that did wonders for the company’ s share price, driving it up 11 per cent on Friday after news emerged of Valin’s interest, before it closed down 3 per cent at A$2.90, after the company’s wary comments about Fortescue’s “high” debt levels. The shares have fallen 62 per cent in the past six months.
In Durie’s view: “The concept of a $19bn deal with Rio Tinto being followed up days later with a $4bn bid for 100 per cent of Oz Minerals, a smaller play for Arafura Resources and a $500m equity injection in Fortescue Metals Group, smacks more of a regime in disarray”.
This is somewhat different from the way China Inc is portrayed in Australia and supports the claims of Chinese companies that they are indeed competing with each other.
The China Development Bank is funding both Chinalco and Minmetals and the Government is keen to gain access to Australian commodities. This fact of course should put Australia in control and allay any fears.
But if the Chinese state-owned enterprises are looking for an easy passage from Canberra they have gone about it in precisely the wrong way.
From a PR, or political, point of view, the “optics are dreadful,” notes Durie, “which, frankly, is not unusual from China but is something it would, no doubt, prefer to have handled differently”.
It also highlights the reality that it is a regime still feeling its way in the mercantile world.
For China, however, the damage is now done, in terms of new and intensifying pressure on politicians and bureaucrats in Canberra to be seen to be doing something.
Durie echoes other analysts when he says the Rio-Chinalco deal “falls well within each of Swan’s principles, but Minmetals’ 100 per cent bid for Oz Minerals plainly contravenes them”. While Swan should have no problem in demanding changes from Minmetals, there is “no practical or logical reason why the Rio deal should concern him”.
The Chinese end game is clear: it wants to ensure access to commodities at the right prices. But, within China, there are indeed different agendas being played, somewhat like the old saying in Shanghai that Beijing is a long way away and the mountains are very high. The companies and provinces do compete within an overall national policy.
Land grab, however, as Durie concludes, is a “bad look”.
If there really is a master-plan, Beijing’s deal masters and spin doctors might do well to revise it before the politicians and angry shareholders in Australia and elsewhere succeed in pulling the drawbridge up.
Related links:
Chinese steel group talks to Fortescue – FT
China’s shopping spree riles the People’s Republic of Oz – FT Alphaville
Australia needs uniform China mines policy – Bloomberg
China’s end game is clear – its means are fuzzy – The Australian
Australia may hold inquiry into Chinese investments – Bloomberg
Minmetals makes A$2.6bn offer for Oz Minerals – FT.com
Oz Minerals trades at discount to Minmetals offer - Bloomberg
China’s resources swoop Down Under – Asian Eye, Long Room
People’s Republic of Oz – BusinessSpectator
Fun and games in the People’s Republic of Oz – FT Alphaville