SINGAPORE Sinosteel Corp.,
one of China's largest natural resource companies, might be
thinking twice about getting embroiled in one of Australia's
longest-running soap operas.
The Beijing-based company looked like a safe
bet to complete what would have been China's biggest overseas
mining investment to date by snatching up iron ore junior
Midwest Corp. Ltd., West Perth, Western Australia.
For years, Midwest and counterpart Murchison
Metals Ltd., also based in West Perth, have been flirting with
a possible merger/takeover deal. But Murchison dropped its
takeover proposal earlier this year, saying there was no chance
of a good deal for shareholders.
The strategy looked safe rival Australian
suitor Murchison Metals had backed off and Sinosteel managed to
persuade the Midwest board to agree to a bid after some initial
resistance. End of story, right?
Not quite. Having previously concluded that a
good deal was impossible, Murchison returned to the fray and
put together a reverse takeover deal that would cut out the
Chinese. Sinosteel said it wouldn't raise its cash offer, but
Midwest hasn't quite made up its mind.
On the morning when Murchison announced its
new bid, Midwest ended up in the position of recommending both
offers while it waited for the market to react.
Why is all this important?
When Sinosteel made its original bid, it was
hailed as the first in what would be a tidal wave of Chinese
investment in the Australian iron ore sector. China has a huge
appetite for Australian iron ore, and a large portion of the
new iron ore supply to come on-stream in Australia during the
next five to 10 years is already committed in one way or
another to the Chinese.
Take Fortescue Metals Group Ltd. (FMG) in
East Perth, Australia, for example. The launch of its first
shipment was attended by the head of Baosteel Group Corp.,
China's biggest steelmaker, which has agreed to buy up much of
FMG's supplies. There are many such offtake agreements across
the Australian industry.
For a variety of reasons, however, question
marks remain regarding the wisdom of Chinese direct investment
or equity ownership of Australian iron ore companies.
Certainly, there is political nervousness in Canberra,
Australia's capital, about selling off valuable national
resources to the Chinese. Any Chinese company wanting to get
control of an iron ore producer in the remote Pilbara region
can expect some lengthy stays and a robust grilling by the
country's Foreign Investment Review Board. Much is made of the
political character of Chinese resource companies. Sinosteel is
being lined up for a significant share listing, but remains
state-owned for now.
One way for Sinosteel to outmaneuver
Murchison would be to draw on vast reserves of cash that
everyone assumes the Chinese government can put at its
disposal. That could happen, but there are many voices in China
urging caution getting control of overseas iron ore might make
strategic sense, but it shouldn't come at the expense of value,
or at the risk of sparking political squabbles.
Some analysts in China are contend the
country's resource-hungry industry would be wise to exercise
restraint, especially because the iron ore supply-demand future
is uncertain. There are so many projects planned-and not just
in Western Australia-that China could need fewer captive
resources in years ahead as prices fall.
Indeed, the iron ore market is already
throwing up some surprises. Despite all the talk in the past
year of the extremely tight spot market driving up prices, and
a 65-percent increase in annual benchmark prices this year,
headlines are suddenly reporting a massive buildup of iron ore
clogging China's ports. About 80 million tonnes has
accumulated, mostly because speculators saw prices going
sky-high and tried to get their hands on as much material as
possible but then discovered that maybe the market wasn't as
strong as everyone said it might be.
The Chinese steel industry association has
ordered buyers to focus on shifting existing ore rather than
purchasing more material. (This happens to tie in with separate
calls for importers to stop buying spot iron ore from Rio Tinto
to protest the latter's lack of commitment to contract
shipments-yet another sign of the uneasy relationship between
the Chinese steel and Australian iron ore industries.)
Certainly, clampdowns on steel production in
China ahead of the Olympic Games aren't helping demand, but
mills there are also are facing a credit squeeze, which isn't
likely to end while the Beijingtries to rein in liquidity
At the very least, all this demonstrates that
the future is uncertain and Chinese companies are going to be
very careful about storming into the Australian iron ore sector
simply because it seems like a good idea right now.
There is talk of other deals-notably
surrounding Aurox Resources Ltd., Subiaco, Western Australia,
one of the brighter prospects in the Australian iron ore
industry-but it remains to be seen whether the wave of hostile
takeovers that Sinosteel's initial bid was supposed to herald
will actually materialize.
Either way, the importance and symbolism of
the Murchison-Midwest-Sinosteel tussle is inderscored when you
consider what they're actually fighting over is the ownership
of a company that plans to produce 1 million tonnes a year of