On 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.
Today, the company 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.
- Another state-owned company, China Minmetals Group, got approved to buy $1.39 billion of mining assets from Australia’s OZ Minerals Ltd. (OZL:ASX) on June 11.
- Ansteel also got approval to increase its 12.6% stake in Australia’s Gindalbie Metals(GBG:ASX) to 36.28% on June 29.
These deals have induced other mining companies to actually seek out China as a potential partner.
One mining company that has approached China is Anglo American (AAUK:NASDAQ).
Anglo American has recently rejected a bid from Swiss-based Xstrata (XTA:London) 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.”
The major Chinese company Anglo wants? Chinalco, or its public arm, Aluminum Corporation of China (ACH:NYSE).
China’s not the only potential candidate for joint ventures, but it’s certainly the most interesting, given the other news in the mining industry about China, not least of which is the stockpiling the country’s been doing.
The country has been storing hundreds of thousands of tons of metal like copper, zinc and aluminum.
MarketWatch reports, “China has so far amassed 590,000 metric tons of aluminum, 159,000 tons of zinc, and 235,000 tons of copper. Analysts said the news could push down metals prices in the near term, though a stimulus-driven revival in demand may limit the fall.”
MarketWatch also reports that China says its stockpiling is over and metals prices have stabilized.
But what was this stockpiling all about in the first place? Was it really to stabilize prices?
Justice Litle, editorial director for Taipan Publishing Group, says, “It turns out, much of China’s stockpiling drive looks to have been pure speculation. And not even official speculation sanctioned and planned out by the mandarins in Beijing... but instead a fast and loose misallocation of funds.”
“As part of China’s economic stimulus plan,” he explains, “Chinese banks were ordered to lend massive sums to steelmakers, iron ore importers and other industrial players. A large portion of these funds was plowed directly into big commodity price bets.”
We’ve seen this type of speculation before, and it has nothing to do with price stabilization.
Justice says, “Stockpiling decisions were made by cash-flush managers at the ground level, as a wave of stimulus funds encouraged them to gamble. Beijing lost control of how those funds (handed out as cheap loans) were being used.”
So what happens next? Justice says that some metals distributors who have stockpiled previous have gone out of business because of depressed prices.
Think about it. Those stockpiles represent supply that’s not being used. In order for those inventories not to affect metals prices, demand will have to rise significantly… And there’s no guarantee when that will happen.
For investors, the bullish story on China, particularly when it comes to commodities is a long-term story, says Justice, “hinging on the day when these countries truly make strides towards weaning themselves from the economic crutch of exports to the West. We are closing in on that point, but are not quite there yet.”
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