Commodity Blog

Archive for February 23rd, 2009

China is taking advantage of the economic downturn to go on a major shopping spree, investing in energy and other natural resources that could give it an economic advantage it has never had before.
Some economic analysts say they believe that China’s investments pose a threat to competitors like the United States. In the last move, Beijing said on Friday that one of its big state-owned banks, the China Development Bank, would lend the Brazilian oil giant Petrobras $10 billion in exchange for a long-term commitment to send oil to China.
China signed similar deals this week with Russia and Venezuela, bringing Beijing’s total oil investments this month to $41 billion. They represent an important investment. Supplies of commodities like oil are likely to tighten again once global growth picks up, and China will have a toehold it lacked during the recent boom, when it grew phenomenally even with limited access to resources.
But some analysts say China’s recent investments are welcome because they will help finance much-needed development, increasing the global supply of oil and natural resources at a time when many of the world’s biggest banks are reluctant to lend.
“It’s a good thing because a lot of projects have been postponed,” said Prof. Philip Andrews-Speed, director of the energy policy center at the University of Dundee in Scotland. “Oil companies may now have the money to produce oil.”
It is not just oil. This month, China’s biggest aluminum producer also agreed to invest $19.5 billion in Rio Tinto, an Australian mining company that is one of the world’s biggest. On Monday, China Minmetals bid $1.7 billion to acquire OZ Minerals, also of Australia, a huge zinc mining company.
China is flush with cash — thanks to trillions of dollars from decades of selling goods to the West — at a time when credit markets are tight and collapsing commodity prices have left energy and natural resource companies desperate for cash. For many of these companies, China has gone from pariah to lender of first resort.
“This is heavy energy diplomacy,” Professor Andrews-Speed said. “If you need money, you go to where the money is, and today, China’s the place.”
President Hu Jintao of China traveled this week on his “Friendship and Cooperation Tour” in Africa, where China has huge interests in resources and mining. The vice president, Xi Jinping, visited South America, met with the leaders of Brazil and Venezuela and signed cooperation agreements on oil and minerals.
Venezuela borrowed $6 billion from China and agreed to increase its oil exports to China, bringing China’s total investment in the country to $12 billion. In Brazil, China signed a $10 billion “loan-for-oil” deal that guarantees the country up to 160,000 barrels a day at market prices.
And in Beijing this week, Prime Minister Wen Jiabao met his Russian counterpart after China agreed to lend Russia’s struggling oil giant Rosneft and Russia’s oil pipeline company, Transneft, $25 billion in exchange for 15 million tons of crude oil a year for 20 years.
The investments are China’s biggest moves since 2005, when a Chinese state-owned oil company made an unsuccessful bid for Unocal, the American oil company, prompting worries about whether fast-growing China was seeking to tie up global resources.
But the world has changed drastically since then. Commodity prices have fallen sharply in recent months, after a long bull market that was partly fueled by China’s voracious demand for energy and resources. And China has built up nearly $2 trillion in foreign currency reserves, giving the country easy access to capital.
“What’s changed for China is that their key competitive strength has increased, and that’s capital,” said Andrew Driscoll, a resources analyst at CLSA, an investment bank. “A lot of companies are begging for capital.”
China wants reliable supplies of crude oil to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build homes and consumer goods.
Analysts say there are still worries about whether China will compete with other nations, like the United States and India, for oil and other natural resources.
Analysts say China could continue to make deals this year for small oil and gas companies, mineral producers and mining firms.
This week, for instance, shares of the Fortescue Metals Group, an Australian mining company, rose after reports the company was in talks with China over a big investment to help the company expand operations.
In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where American and European countries are not well positioned, like parts of Africa and the Middle East. In one of the deals struck this week, China made an alliance with the government of Hugo Chavez, the president of Venezuela, who has denounced American leadership. While the oil deals announced this week vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices.

Steel demand in China, the world’s largest user of the metal, may improve later this year as extra state spending kicks in, with more than 60 percent of mills losing money at present, the China Iron & Steel Association said.
“We are pinning our hopes on the government’s stimulus measures to revive domestic demand,” Vice Chairman Luo Bingsheng told reporters today in Beijing. “Hopefully the situation can improve in the second or third quarter.”
China is spending 4 trillion yuan ($585 billion) to stimulate the world’s third-largest economy and stave off the impact of the global recession, which has slashed exports. China’s cabinet on Jan. 14 approved guidelines to bolster the steel industry, including accelerated mergers and acquisitions.
“We haven’t seen obvious signs of demand recovering in the first quarter,” said Luo. The stimulus package will boost government spending on housing and transportation projects, such as upgrading railway links.
Still, Baoshan Iron & Steel Co., China’s second-biggest stainless steel producer, has said that the outlook has improved. Baoshan said on Feb. 16 that it was boosting stainless output as demand from some customers “is picking up.” The Shanghai-based company last month raised steel prices for March delivery.
‘Thin Profit’
“Only some privately owned steel mills may have begun to make thin profit due to lower production costs compared with state-run steelmakers,” said Qi Xiangdong, the association’s deputy secretary-general.
China’s steelmakers had an aggregate loss of 29.1 billion yuan in December after losing 12.8 billion yuan in November and 5.84 billion yuan in October, the China Business News said Feb. 20, citing Shan Shanghua, the association’s secretary-general.
Amid waning demand from builders and automakers, China had 660 million tons of steel-making capacity last year, about 160 million more than production of 500.5 million tons, the association said today. Crude steel output this year may be between 490 million and 500 million tons, Luo said.
The government may further adjust tax rebates on some steel products and remove so-called tolling, the association’s Qi said. Tolling refers to the tax-free import of goods that are processed for export.
China’s steel association represents the nation’s largest mills. The comments from Luo and Qi were made at a regular media briefing in Beijing.