Small mining companies with iron
ore and coal operations are among the most promising investment bets as
mineral-poor China will target them for possible mergers and acquisitions, a senior
analyst has said.
A lack of raw materials,
particularly iron ore and coal, makes China dependent on other countries to speed its steel
and industrial development.
“The best to have is to own
companies with commodities that China doesn’t have,” said senior analyst Andrew
Keen at Bernstein Research told a conference call late on Tuesday.
Bernstein Research is a wholly
owned subsidiary of the global asset management firm AllianceBernstein, which
had around $800 billion in assets under management at end-2007.
“There is going to be
significant movement of Chinese capital out towards developing marginal
supplies outside of China,” Bernstein said.
He believes Chinese capital will
gain only modest access to major miners like BHP Billiton or Rio Tinto.
capital will be limited from progressing too far into names like BHP. I think
that is going to be limited by government intervention,” he said.
“But that does not apply to
junior miners,” he said.
Iron ore prices are due to rise
at least 65 percent under annual contracts, while coking coal prices have
almost tripled — making life even more difficult for the world’s top iron ore
importer to feed the world’s top steelmaking industry.
“You’re going to see a
significant trend of Chinese interest coming out; either in terms of project
financing or in terms of outright acquisitions,” Bernstein told the
To secure much needed iron ore
supplies, several Chinese steelmakers started to invest in Australian iron ore
projects, with the latest being Sinosteel’s revised $1.27 billion hostile bid
to increase its stake in Midwest Corp.
“Among the junior iron ore
names that we covered, up to 6 of the 10 have agreed strateagic relationships
with Chinese interests,” he said.
China’s demand for raw materials is so strong, Bernstein said, adding that it
is likely to offset the impact of a slowdown in the world’s biggest economy,
the United States.
“Chinese domestic metal
demand growth is decoupled from the U.S….For now, coupling remains a
theory,” he said.
“Approximately 15-22 million
people urbanised each year since mid 1990s. This is roughly an additional New York or London being built every six months…This process is not
finished,” he said.
Thanks to this trend, the country
is now key to global demand for industrial metals.
“The slowdown in the U.S. economy will not have the same effect on global
metals markets as in the past because demand has shifted substantially,”
In the short-term the copper
market is set to range between $6,500-8,500 per tonne due to supply disruptions
and low stocks versus reluctance of Chinese buyers to accept high prices.
“It is common that Chinese
buyers re-emerge…But the main thing driving the market is continued
disruption on the supply side,” he said.
(Reporting by Humeyra Pamuk;
editing by Peter Blackburn)
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