| Profit From China’s Shopping Spree |
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Written by Sara Nunnally, Senior Research Director, Taipan Publishing Group It’s no secret… Even in this global recession, China is throwing around money like mad. From hundreds of billions in stimulus money to multi-billion-dollar deals in the commodity sector, China is showing the world it’s ready and willing to spend, spend, spend… The reason? Things are cheap. Real cheap. It’s the perfect time for a shopping spree. This time last year, aluminum was $1.42 a pound. Copper was over $4 a pound. Oil averaged $126.16 a barrel… And where are we now? Aluminum is trading at $0.72. Copper is $2.25 a pound, and oil has fallen all the way to $66 a barrel. About a 50% discount on everything. And with an economy that’s still growing, China can’t afford to pass these deals up. That spells amazing opportunities for investors like you. As China pulls out its checkbook, here are three ways you can profit from its shopping spree. #1 The Mining Industry: Cancelled Deal Opens DoorOn the heels of Rio Tinto’s (RTP:NYSE) sudden change of heart, backing out of a $19.5 billion deal that would double state-owned Chinalco’s stake from 9% to 18% of the company, China is receiving a lot of mining industry attention. And, the company this week announced it might buy $1.5 billion in Rio Tinto stock, as Rio Tinto is issuing $15.2 billion in stock in order to raise capital, according to Bloomberg. But that wasn’t the only venture China’s involved in… In fact there are two other deals that have just been approved.
These deals have induced other mining companies to actually seek out China as a potential partner. Looking for a Better DealOne mining company that has approached China is Anglo American (AAUK:NASDAQ). Anglo American has recently rejected a bid from Swiss-based Xstrata (XTA:LON) that would have seen an all-share deal and savings of $700 million in costs. Anglo is struggling, and it’s going to let go 19,000 workers as a result of a 29% drop in net earnings in 2009. But it didn’t want to lose control of its platinum mines in South Africa. A cool 42% of the company’s earnings came from South Africa. A Reuters article on Forbes.com notes, “Anglo American is building its defenses against a 41 billion pound ($67.74 billion) merger approach from Xstrata by plotting talks about a major Chinese investment, the Sunday Telegraph reported.” Public Arm of the StateThe major Chinese company Anglo wants? Chinalco, or its public arm, Aluminum Corporation of China (ACH:NYSE), also called Chalco. “Aluminum Corporation of China Limited (CHALCO),” says the company Web site, “was established as a joint stock limited company in the People’s Republic of China on September 10, 2001, by way of promotion by Aluminum Corporation of China (CHINALCO), Guangxi Investment (Group) Co., Ltd. and Guizhou Provincial Materials Development and Investment Corporation.” In its annual report for 2008, ACH showed a large drop in profits. Now, the company’s still in the green but the difference is marked. In 2007, ACH’s gross profits were RMB 20.3 billion. In 2008, gross profits clocked in at only RMB 6.7 billion. A big drop, but not necessarily due to the company’s mismanagement. A key factor in this drop was the major snowstorm in January that forced steel and aluminum production to be scaled back due to a significant shortage of raw materials. About 50,000 tonnes of lead and zinc was forecasted in Hunan. The massive earthquake in Sichuan also affected profits. Let’s not forget that 2008 had soaring prices for raw materials and fuel… The point? None of these factors are in existence anymore. That means ACH can start ramping up profits again. It must be said that the recovery won’t happen overnight… Justice Litle, editorial director for Taipan Publishing Group, said that for investors, the bullish story on China, particularly when it comes to commodities is a long-term story. But with ACH, patience will be rewarded. #2 The Oil Industry: New AcquisitionsOne of the most notable commodities that China has been grabbing at is oil. With a growing middle class and an increasing manufacturing sector, China knows it will need more and more oil, and is making strong moves to meet this need. On Tuesday, Iraq had an auction to award contracts to oil companies interested in its six giant oil fields and two gas fields. The auction, which occurred on the same day as the U.S. troop pullout, was broadcast nationally, The New York Times reported. But, the auction yielded only one oil field contract. The Rumaila field is the largest of Iraq’s oil fields and also one of the world’s largest. Iraq awarded the contract to British Petroleum and its partner China National Petroleum Co., or CNPC (HKG:0135). Walking OutThe Iraqi Oil Ministry is eager to sign the contract as soon as possible. The deal is for 20 years, and Iraq will pay BP and CNPC $2 for every extra barrel produced, instead of the $3.99 the companies had at first requested. The Wall Street Journal questioned why BP agreed to the oil deal, asking, “Why did the oil major agree to very marginal terms to develop an Iraqi oil field that others, like Exxon Mobil, rejected?” Exxon had requested $4.80 and walked away when that was rejected. In fact another Chinese company, China National Offshore Oil Corporation, or CNOOC (HKG:0883), walked away when its request on a different oil field was turned down. CNOOC had asked for $25.40, but Iraq countered with $2.30, reported WAtoday.com. Still, CNPC said it was pleased with the deal that it reached with Iraq’s Oil Ministry. CNPC told Dow Jones Newswires, “We are happy that we have won Rumaila oil field,” and, “We’re looking forward to start working in the field,” reported The Wall Street Journal. China and Russia and KazakhstanChina also recently signed an oil agreement with Russia. The Moscow Times reported, “On June 17, President Dmitry Medvedev and Chinese President Hu Jintao signed an agreement in which Russia will sell 300 million tons of oil to China over 20 years for $100 billion.” In a third recent development, Reuters reported that, on Wednesday, “China secured access to vast oil deposits in western Kazakhstan.” A Kazakh company had completed the Kenkiyak-Kumkol pipeline, which stretches some 3,000 km from western Kazakhstan to China’s Xinjiang region. The Kenkiyak-Kumkol pipeline has a capacity of 10 million tons annually, around 14% of Kazakhstan’s total annual oil production. China and Kazakhstan intend to increase the pipeline’s capacity sometime in the future. In addition, CNPC bought 100% stock ownership of PetroKazakhstan back in 2005. Another “Public Arm”China National Petroleum Co. is a state-owned company that’s traded in Hong Kong, but it owns about 86.29% of PetroChina (PTR:NYSE), which is traded in the U.S. as an American Depository Receipt (ADR). In the first quarter of 2009, PTR showed the same fatigue that many oil companies showed. Depressed oil prices have slammed profits and revenues. Depressed demand doesn’t help either. And it has made production slow 5.7% as compared to the first quarter of 2008. On the other hand, though, natural gas production jumped 7.9%. These factors are forcing the company to become more efficient… particularly in its chemicals and refining divisions. And despite these obstacles, the company continued to expand production and operations overseas. PTR has also been able to continue to raise money, and in the first quarter of 2009 it had RMB 92.2 billion in cash, a 100% increase from Q1 2008. That will allow PTR to ride out fluctuations in demand and oil prices. #3 Currencies: Trading With ChinaWhile China continues to voice concern over the U.S. dollar, other countries are getting a boost from the country’s need to fulfill its internal consumer demand. Last year, China and New Zealand reached a free trade agreement. That helped push New Zealand’s May trade figures to a “very healthy” $858 million surplus, the highest level in 16 years. According to Stuff.com, “figures show the surplus for the month was equal to 21.7% of exports the highest percentage since 1993. Exports hit $4 billion in May, up almost 6% on the same month last year.” Wellington Chamber of Commerce chief executive Charles Finny said the agreement was “almost certainly” a factor in the 92% jump in exports to China in the three months to the end of May, compared with the same period last year… Milk Powder?Exports to China accounted for 80% of the rise in exports during May, mainly from milk powder, butter and cheese, and logs and wood. New Zealand milk powder sales have risen sharply after the melamine contamination scandal in China last year. An article from the DairySite reports that last year, China suffered a decline in exports of its powered milk “after the Sanlu milk powder scandal that broke last September.” In a report from the General Administration of Customs, “Lots of foreign countries stopped importing dairy products from China, and the country’s milk industry suffered severely. “Sanlu baby milk powder was found contaminated with melamine, killing six children nationwide, and sickening 296,000 infants, according to the Ministry of Health.” Economic Recovery Means Investment OpportunitiesIn addition to increased exports, New Zealand is also showing other signs of recovery. Bloomberg reports the country’s “home building approvals rose for the third time in four months.” There are also signs that Australia may be heading into recovery. Earlier this week, “the Australian dollar rose after China repeated its call for a new reserve currency, weakening the greenback against major rivals. Australia’s dollar also strengthened amid signs of a global economic recovery,” according to Bloomberg. As an investor, you can benefit from the uptick in these economies. Earlier this year, the Taipan Publishing Group joined forces with EverBank, one of the banking industry’s fastest-growing and highest-performing diversified financial service providers. Working with EverBank, we helped create a CD that would allow investors to take advantage of emerging economies. With this multi-currency Index CD, we’ve united the currencies of six nations rich in resources, finances, innovation and cash. When global growth resumes, these countries may benefit more than most as they have the resources and commodities China needs to fuel its own recovery. The Ultra Resource currencies (each is equally represented in the CD): *Australian dollar Taipan Publishing Group does have an advertising relationship with Everbank, and our organization may profit from this strategy. But we highly recommend that you investigate this for your portfolio. You can park a small portion of your money in this CD for three months… even six months. You can find all the details here. Originally published July 02, 2009. Other Articles Related To This Topic: |
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