Mining a rich seam of M&A Chinese companies see depressed iron ore prices, fueled by low steel demand, as a great time to acquire assets. (Photo/China Daily)
Chinese companies look to expand their global presence as metal ore prices continue to drop
Chinese companies should be looking to increase their overseas investments in the global mining industry.
Sluggish demand in the sector has left foreign firms struggling to cope with falling commodity prices after a brief boom last year and in 2011.
A sharp decline in steel production worldwide has hit the iron ore market. In June, the World Steel Association reported that production had dropped for a fifth consecutive month.
Iron ore is the key ingredient in making steel－the backbone for industries ranging from construction to car manufacturing. But this slowdown has produced unexpected opportunities.
"The market value of these mining companies with good quality assets is declining as prices in commodities, such as iron ore, copper and even gold, fall," Wang Jiahua, vice-chairman of the China Mining Association, said.
"This is a good time for Chinese companies to look overseas for acquisitions or mergers."
The global mining industry has suffered a turbulent time since the 2008 financial crisis, which triggered a sharp drop in raw material prices. This allowed Chinese companies to expand internationally and increase the country's supply of key resources.
By 2011, they had invested, or bought, 284 foreign firms based in countries ranging from Australia to Guinea, according to figures released by the China Mining Association.
"During this period, an increasing number of Chinese companies moved in to buy overseas assets at relatively low costs," Wang said.
But in 2013, the number of overseas investments started to dry up as foreign mining firms cut operational costs to cope with the sector's changing financial landscape.
Then last year, iron ore prices plunged by 33 percent to $89 a ton after briefly rallying to $134 a ton at the beginning of 2014.
The downward spiral has continued. In April, iron ore prices dipped to about $46 a metric ton, a drop of 75 percent compared to the dizzy heights of $190 in 2011. Last month, the price recovered slightly to $60 a metric ton.
"It will take three to five years for the global mining industry to pick up," Wang said. "During that period, some foreign firms in the sector will face major challenges."
"In fact, the market value of some exploration companies has been cut by 80 to 90 percent," he added. "This will present new opportunities for Chinese companies to expand their presence in overseas markets."
His views are echoed by colleague Chang Xingguo, project director of international minerals at the finance department with the China Mining Association. Small and medium-sized Australian iron ore mines, he pointed out, are struggling against fierce competition from the industry's major players.
"Industrial giants, such as Rio Tinto Plc, BHP Billiton Ltd and Vale SA, have increased their capacities and supply this year, so many medium-and small-sized Australian mines are facing tough financial times," Chang said.
As the major customer of iron ore, China's heavyweight steel companies have been quick to see opportunities in the market.
Baosteel Group Corp, the country's largest listed steel company, linked up in May with Australian freight operator Aurizon Holdings Ltd to pay about A$1.4 billion ($1.3 billion) for Aquila Resources Ltd. The company had already taken a 20 percent stake in Aquila in 2009 and has increased its investment to 85 percent, with Aurizon owning 15 percent of the Australian miner.
The deal is waiting for regulatory approval.
