Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21
Scan Computers - How to Test New Systems CPU, GPU and Hard Drive Stability With Free Software - 4th Jun 21
Hedge Funds Getting Bullish on Gold - 4th Jun 21
THERE ARE NO SOLUTIONS When the Media is the VIRUS - 4th Jun 21
Investors Who Blindly Trust the ‘Experts’ Will Get Left Behind - 4th Jun 21
US Stock Market Indexes Consolidate Into Flagging Pattern – Watch For Aggressive Trending Soon - 4th Jun 21
Microsoft (MSFT) Stock Trend Analysis - 3rd Jun 21
No More Market Bloodbath – Beyond Cryptos - 3rd Jun 21
Bank run, or run from the banks? - 3rd Jun 21
This Chart Shows When Gold Stocks Will Explode - 3rd Jun 21
The Meaning Behind Gold’s Triple Top - 2nd Jun 21
Stock Market Breakout Or Breakdown – What Does The Next Big Trend Look Like? - 2nd Jun 21
Biden’s Alternate Inflation Universe - 2nd Jun 21
What You Should Know Before Buying Car Insurance - 2nd Jun 21
Amazon (AMZN) Stock Summer Prime Day Discount Sale - 1st Jun 21
Gold Investor's Survival Guide - 1st Jun 21
Silver and Copper to Benefit from Global Electrification Push - 1st Jun 21
Will Gold Shine Under Bidenomics? - 1st Jun 21
Stock Market Buy the Dip, Again?! - 1st Jun 21
Stock Market Consolidation Ahead - 1st Jun 21
Stock Market Summer Correction Review, Crypto CRASH, Bitcoin Bear Market Initial Targets - 31st May 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Companies Profiting from China's Commodities Crusade

Commodities / Resources Investing Feb 16, 2009 - 08:27 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleJason Simpkins writes: While the rest of the world is grappling with the global slowdown, China is figuring out ways to exploit it.

Over the past few months, China has capitalized on the financial turmoil that has paralyzed the world's "developed" economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.


Indeed, with China's economic growth projected at an enviable 8% for this year, that country's government has been able to spend less time promoting immediate growth and liquidity, and more time preparing for the economic renaissance that almost certainly seems to be the Asian giant's destiny.

By exposing Western free-market capitalism, undermining the United States economic clout, and eviscerating commodities prices, the financial crisis has provided China with the perfect opportunity to advance its domestic agenda.

That agenda begins with the recently unveiled $586 billion stimulus plan - a plan primarily focused on infrastructure.

China's financial institutions have little or no exposure to the toxic subprime assets that spawned this current global crisis. Thus, instead of having to spend hundreds of billions of dollars to bail out its banks, China can choose develop the stage on which it will display its future economic might.

And the first phase of that plan is key: Before its plans for a massive infrastructure overhaul can be realized, China must first load up on the raw materials crucial to its execution.

With Prices Down, China's Stocking Up

Prices for commodities like aluminum, copper, iron ore and oil are all down substantially from last year as the global financial crisis has torpedoed demand. And now that prices have gone down, China's commodities stockpiles are going up.

Imports of copper, iron ore, and oil all rose in December, as China took advantage of low commodities prices:

  • Iron ore imports were up 6.2% in December, on a year-over-year basis.
  • Copper imports were up 19.3%.
  • And imports of crude oil climbed 11.6%.

" The authorities are thinking about the issue from a strategic point of view ," a senior researcher at China's State Reserve Bureau (SRB) told Reuters . "As almost all raw material prices went sky-high in the last few years, China has not built up some of the key state reserves. Now is a much better time to stock up."

The government announced last month that it would purchase of 290,000 metric tons of aluminum from eight of the nation's largest smelters at about $1,806 a ton. And on Jan. 13, representatives from the SRB again met with domestic smelters, this time to discuss plans to build a stockpile of up to 300,000 tons of zinc - a metal used in galvanized steel.

A 300,000-ton zinc reserve could cost about $494 million (3.36 billion yuan), based on recent spot prices of $1,630-$1,640 a metric ton, as quoted on the Shanghai Nonferrous Metals Market.

Market participants speculate that the government is also mulling a 200,000-ton copper reserve, now that prices for that metal have tumbled more than 50% from a record $8,940 a metric ton last year.

"China will buy copper for its reserves," SRB Executive Director and Vice President Wang Chiwei said at a conference in Shanghai.

Prices right now are "attractive," Wang added, noting that purchases would "suit national interests."

Chinese copper demand is expected to grow moderately in 2009, despite the global downturn.  Officials expect growth of just over 2% next year, but Barclays Capital (ADR: BCS ) analyst Yingxi Yu told Forbes that demand growth could be closer to 3.5% .

The SRB may increase stockpiles of copper by as much as 74% in the next two years , Scotia Capital Inc . predicted in October.

China Digs for Bargains Down Under

Of course, China's recent drive for raw materials is only half the story.

China is already home to the world's largest population; now it is on the fast track to passing Japan as the world's second-largest economy . Access to resources will continue to be a priority in Beijing for decades to come, even long after the $586 billion stimulus plan is forgotten.

That's why China isn't just using the global financial crisis as an opportunity to stock up on raw materials, it's also loading up on foreign companies and assets while it is flush with foreign reserves. And while prices are cheap.

As they struggle with sluggish demand and falling commodities prices, many distressed foreign mining companies and materials suppliers have suddenly found themselves with a generous foreign backer. 

In December, China's third-largest zinc producer, Zhongjin , bought a 50.1% stake in Australian zinc miner Perilya Ltd. for $32 million.

Perilya has found "a strong and well-funded strategic partner committed to the long-term development of Perilya's assets," the Perth-based miner said in a statement. The deal included an initial cash deposit of $6.5 million.

Perilya's deal followed that of Albidon Ltd. , which started producing nickel in Zambia just as nickel prices crashed. Albidon raised $5 million from China's Jinchuan Group, Asia's largest nickel producer and a shareholder that now owns 18% of the West Perth-based Albidon. But more importantly, Jinchuan will take 100% of the nickel the Zambian mine produces over the rest of its life.

State-owned companies like Zhongjin and Jinchuan have access to China's massive cache of foreign exchange reserves, which allows them to make acquisitions at a time when few other companies have the resources to facilitate a merger. And while China has focused much of its attention on undeveloped mining assets in Africa, the current financial crisis has opened the door to a wider range of takeover possibilities.

"The Chinese realize there are massive opportunities in the market," Keith Spence, president of Global Mining Corp. (OTC: GBGD ), told The Financial Times . "A year ago, they were going to Africa to acquire early-stage development assets. But now they are looking for larger tonnage, longer life, later-stage assets. There is less of an emphasis on emerging markets, because now there is choice."

So far, Australia has been the country most often targeted by China for strategic investments.

Australia's Centrex Metals Ltd. , Mount Gibson Iron Ltd. , Gindalbie Metals , and Grange Resources Ltd. have all struck deals with Chinese companies in the past year , The Australian reported.  

  • Centrex Metals sold a 50% interest in two magnetite deposits to Wuhan Iron & Steel Co. Ltd. , China's third-largest steelmaker for $180 million.
  • Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of as much as 40% in the miner, while also securing discounted off-take agreements.
  • Angang Steel Co. Ltd ., also known as AnSteel, China's second-largest steelmaker, paid $162.1 million to boost its stake in Gindalbie Metals from 12.6% to 36.28%.
  • And Grange Resources is currently set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steelmaker.

Peter Vaughan, a partner at Blake Dawson, a Melbourne-based law firm, told The Australian that major Chinese steel mills kicked off a "wave of investment" in Australia from early 2000 - when China's global economic clout began first started to build. Vaughan said this trend will continue deep into the current year as depressed asset valuations stack the deck in China's favor.

"China is now in a much stronger bargaining position than they have been in the last few years," Vaughan said. "Conditions have previously been in the producer's favor, but demand drops and the tables turn. The Australian resources sector is now a lot cheaper to place an investment in."

Denis Gately, head of the resources and energy industry group at Minter Ellison , one of the largest law firms in the Asia-Pacific region, agreed that Chinese enterprises are among the few that have the wherewithal to acquire prized foreign assets.

"They have recognized they are the only people in that position and will likely wait until prices fall further south," Gately said. "The Chinese have an enormous amount of clout as the only potential buyers."

In addition to building stakes in smaller miners, Chinese companies will be using that clout to build upon stakes in larger mining giants, which every bit as desperate for cash as their smaller counterparts.

Aluminum Corp. of China (ADR: ACH ), or Chinalco, for instance has authorized a special team of analysts to watch for an opportunity to increase its stake in Rio Tinto PLC (ADR: RTP ) to the maximum 14.99% allowed by the Australian government. [Note: Since this article was originally published Chinalco has invested an additional $19.5 billion in Rio Tinto ]

"We have a special team monitoring Rio Tinto's performance and market movements in real time and will evaluate the best timing to do the stake increase," Youqing Lu, the vice president of Chinalco, told dealReporter . Chinalco teamed with Alco last year to acquire a 12% stake in the mining company.

Chinalco is one of ten Chinese companies considering further overseas mergers and acquisitions , Xinhua , China's official news agency reported.

"The crisis presents a rare opportunity for our domestic companies to initiate cooperation with foreign enterprises," Xiao Yaqing, Chinalco general manager told Xinhua . "When the time is ripe, overseas acquisitions, strategic investments and joint development could all be considered."

Canada to Profit From ‘China's New Deal'

There is no question that, given its proximity to the Chinese mainland, Australia will continue to play a vital role in quenching China's thirst for commodities. But on the other side of the globe, junior mining companies and exploration firms in Canada are hoping to attract prized Chinese investors.

In fact, the Canada China Business Council (CCBC), Canada's most influential organization in terms of influencing Canada-China trade relations, recently released a report detailing ways Canadian businesses can profit from China's recent infrastructure initiatives.

The report, entitled " China's New Deal: Will Canada Benefit From China's RMB 14 Trillion Stimulus Package ," was released earlier this month. The study details China's stimulus-spending plan, and outlines areas in which Canadian companies can support Chinese development by providing resources and technology.

"As one of the world's leading resource exporters, Canada will definitely benefit indirectly from the Chinese stimulus plan," the Jan. 9 report said. "As well as energy, other resources such as wood, steel, nickel, copper and aluminum will be in demand. There also will be collateral benefit for Canadian transportation companies and the ports authorities."

It hasn't taken Canadian companies long to heed the report's message, or its wisdom.

Earlier this week, for instance, China's Tongling Nonferrous Metals Group took a 13% stake in Canada Zinc Metals Corp.

Prior to that, China Mining Resources Group Ltd . announced that it would increase its stake in Canada's Quadra Mining Ltd . from the current 4.02% to a maximum of 19.9%.

D'Arianne Resources Inc. (PINK: DARUF ), a Canadian exploration company, could be next to announce a deal with Chinese partners, as it recently reported strong results from its Lac a Paul phosphorous-titanium property.

"As of today, the very encouraging results coming from this first serious exploration campaign on the Lac a Paul project combined with the interest showed by foreign companies during our visit in China, undeniably confirm the potential of our phosphorous project," D'Arianne Resources said in a statement.

Finally, Canada has the largest-and highest-quality uranium reserves in the world, making it the ideal partner in China's quest to develop clean reliable energy.

Delta Uranium Inc. (PINK: DLTUF ), engaged in the acquisition, evaluation and exploration of uranium in Ontario and Newfoundland, could also be high on Beijing's target list.

More than 40 developing countries have recently approached United Nations officials to express interest in starting nuclear power programs. And China alone is planning to build 30 new plants in the next 15 years - a venture that will consume an estimated $50 billion in capital. All told, the country may require as many as 200 plants by 2050.

As with Australia, depressed commodities prices have opened the door to investment in major mining corporations, as well as in juniors in the Canadian market. That means the Saskatoon-based Cameco Corp. ( CCJ ), the world's largest uranium producer, could also be in line for a large capital infusion.

"If I'm China Inc., and I have $10 billion, would I buy 60% of Xstrata (PINK: XSRAF ), or a lot of reserves out in the middle of nowhere?" Kalaa Mpinga, chief executive of Mwana Africa PLC , a London-listed junior, told The Financial Times . "If I had all these billions, I would do this: Buy 15% of Anglo-American PLC (ADR: AAUK ) and get a seat on the board."

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in