Small iron ore and coal companies good investment bets due to Chinese interest
A senior mining analyst reckons that small mining companies, particularly those with iron ore and coal, will be attractive investments due to Chinese desire to secure future supplies.
Posted: Wednesday , 30 Apr 2008
LONDON (Reuters) -
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.
"Strategically Chinese 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 conference call.
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," he said.
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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