china

China may swallow mining major to satisfy ore appetite
June 20, 2007

By Karen Norton

London - China may yet target a mining major as it scours the world for natural resources to feed booming domestic demand for raw materials to satisfy infrastructure needs.

Its strategy may also speed the emergence of Chinese mining firms big enough to compete with major western counterparts, analysts say.

China is the top producer and consumer of many metals and has bought into numerous mine projects or smaller firms in recent years, including copper, bauxite and iron ore.

"There's definitely a short-term strategic requirement, but there's a wider political dimension," independent consultant Angus MacMillan said.

"There's an element of central planning, China is looking to control a large proportion of natural resources on a long-term basis."

He said the country was looking at where it stood in the global picture and deciding where it wanted to be. "We're seeing the next global empire."

Magnus Ericsson, a senior partner at Stockholm-based consultancy Raw Materials Group, said consolidation in China's metals industry would ultimately create big companies there, which in turn would look overseas.

"This is the first ripple on the surface of a big wave," he said.

Most saw the buys as symptomatic of China's tendency to plan, looking to feed its needs in the long term.

Aluminium Corporation of China (Chalco) last week bought Peru Copper, giving it an option on a big project that may start up around 2010.

China said in March it was creating an investment vehicle to diversify part of its $1.2 trillion (R8.5 trillion) in foreign reserves. Part of the $200 billion fund is expected to be invested in commodities, given China's lack of many key resources, including oil.

Chinese firms have invested heavily in Australia, Africa, Latin America and parts of Asia, often in countries shunned by western firms due to perceived high political risk.



"I don't think they've done anything untoward in terms of controlling the supply. They have a strong economy and need those resources," said Andrew Cole, a director at Baring Asset Management.

Andrew Keen of Bernstein Research said: "The Chinese want to supply their domestic requirements and no more than that. Every time they cross that path you see government policy come out against it."

Cole said Chinese firms had long-term plans. "The West will pay the price of that at some stage," he added.

Lex Hoogduin, the chief economist at Dutch asset manager Robeco, thought the $200 billion fund could be invested using private equity.

"The private equity fund will make a selection of companies to invest, but they will probably also gradually buy some equities of miners," he said.

Stockholm-based Ericsson said: "It can't be far off a company like Minmetals buying a major company. It's a bit speculative, but a bid for Anglo American is possible later this year."

Minmetals, China's largest state-owned metals trader, failed in 2005 in a bid for Canada's Noranda, whose operations are now owned by Xstrata. Last month Minmetals said it planned to boost investment in Latin America.

Others think aluminium majors Alcoa and Alcan might be looked at by Chalco. There has also been recent talk of Chinese interest in BHP Billiton, the world's largest mining group.

Chinese firms have already bought iron ore companies in Australia to satisfy fierce steel industry demand.

China produced just over a third of global crude steel output last year and accounted for 43 percent of imports of iron ore for steel products. - Reuters