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Supply still key as China eyes Oz iron ore juniors
Its miners and steelmakers, little bothered by Canberra's proposal for a controversial resources "super tax", are now looking at Australia's iron ore juniors, bankers and analysts say.
Players such as Atlas Iron , Ferraus and the iron ore arm of Aquila Resources may be in their sights.
Two iron ore problems continue to jangle China's nerves.
First, China's domestic iron ore supplies are insufficient and expensive to develop relative to seaborne ore.
Second, the recent collapse of the decades-old benchmark pricing system has left China vulnerable to quarterly contracts and unpredictable swings in the spot market. Now, China's leaders are more determined than ever to break the dominance of the world's three biggest suppliers, BHP Billion, Rio Tinto, and Vale.
To be sure, Chinese steel production is slowing as the government reigns in speculation in the mainland's runaway property market. ID:TOE64P08A
But a near-term slowdown does not change the overall growth trajectory -- growth which could reduce the Oz super tax to the status of a minor inconvenience for China.
"Are they willing to wear the additional tax rate in order to secure supply -- that's something they've got to consider" said James Wilson, analyst at DJ Carmichael. He said it was not merely an issue of profits but also China's longer-term supply needs.
MORE TO COME
Last year's deals, such as Hunan Valin Iron and Steel's purchase of a 17 percent slice of Fortescue Metals -- Australia's third largest iron ore miner -- are a sign of what's to come, bankers and analysts say.
Fortescue executives brag openly that China is interested in another tie-up with the firm.
And rumors simmer that CEO Andrew "Twiggy" Forrest may ultimately cash out and sell the whole company to China, an Asia-based investment banker with direct knowledge of Fortescue told Reuters.
There's also Gindalbie Metals Ltd, which this month secured A$175 million ($144 million) with the help of its major Chinese partner -- China's Angang Steel Co Ltd (AnSteel) -- to help fund the development of its A$2 billion Karara iron ore mine in Western Australia.
AnSteel in March agreed to buy 30 million tonnes of iron ore from Karara each year over a mine life estimated at 30 years.
Outwardly, China is putting on a defiant face to foreign giants such as Vale and Rio Tinto, claiming it will need less foreign ore as it ramps up domestic production.
Data from China's National Bureau of Statistics show China produced 88.07 million tonnes of iron ore in April, up 10.5 percent from March and 45 percent year-on-year.
But total independence is unlikely if not impossible, given the lower quality of Chinese ore and the costs of mining it.
"The Ministry of Land and Resources believes the reliance on imports will fall over the next 3-5 years to trade neutral in 15 years," Bank of America-Merrill Lynch said in a recent report.
"We see this as highly unlikely given the production cost differential between seaborne and domestic production."
FALLING PRICES, CHEAPER DEALS
In the near-term, Beijing's attempt to clamp down on the country's hot property market will work in its favor when it comes to offshore iron ore M&A deals.
Iron ore spot prices have slid 27 percent in the past month -- crimping prospects for Australia's small army of new suppliers already struggling with growth obstacles.
The pullback to $163.30 a tonne .IO62-CNI=SI, from a high of nearly $200 earlier this year, while substantial, is still nearly double last year's prices.
A small window is open for dealmakers before prices shoot back up, analysts say.
"With the industry on its knees because of the tax, this could be the time for the Chinese to pounce," said Eagle Mining Research analyst Keith Goode.
Sourced from www.reuters.com
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