DAKAR (Reuters) - A bold push by China into iron ore projects in Africa and elsewhere will increase its access to supply and may help moderate prices but will only slowly reduce its dependence on the three companies that dominate the market.
China, the world’s largest iron ore consumer, imported 618 million tons of iron ore last year, and most of that was supplied by global miners BHP Billiton (BHP.AX) (BLT.L), Rio Tinto (RIO.L) and Vale VALE5.SA.
About 85 percent of the imports of the raw material to make steel came from only four countries — Australia, Brazil, India and South Africa.
Beijing has stepped up its campaign to break that dependence by investing in mining projects in places such as west Africa, where it has agreed on a spate of joint ventures and is seeking other deals, including a proposal to swallow a whole company.
These projects could produce up to nearly 250 million tons of ore annually in the medium to long term.
But even if China secures and fully develops all these proposed projects, it will struggle to cut it reliance on the Big Three, analysts said.
The new projects will take many years to achieve full production, while the majors each have their own ambitious expansion projects, which will help reinforce market dominance.
“These projects have little chance of displacing production from the major producers such as Rio, Vale and BHP, who are so far ahead in terms of infrastructure, capital expenditure and quality of resources,” said John Meyer, a mining analyst at investment bank Fairfax.
The Chinese government has encouraged steelmakers such as Baoshan Iron and Steel (600019.SS) and Wuhan Iron and Steel 600005.SS to gain more control over foreign iron ore. Wuhan, its third-largest, has vowed to become self-sufficient by 2015.
“China currently owns less than 10 percent of imported iron ore. We should seek 50 percent of ore from Chinese-invested overseas resources in the next five to 10 years,” Li Xinchuang, deputy secretary-general of China Iron Steel Association, told China Daily in July.
Li said China would be able to break the hold of Rio, Vale and BHP on supply and pricing only if it can source half its overseas ore from Chinese-invested mines.
“The Chinese are looking to become involved but they simply don’t own the licences to the world’s largest iron ore projects, Meyer said.
China has had a fraught but symbiotic relationship with the majors, vowing to cut its dependence on them after failing to persuade them to offer big price discounts during the global financial crisis.
The icy relationship appeared to thaw in 2009 when China’s state-owned Chinalco and Rio Tinto agreed on a $19.5 billion tie-up, but later that year Rio spurned the deal.
China was bitter about the break-up, but later the two agreed a major joint venture to develop Rio’s massive Simandou iron ore project in Guinea.
Chinese industry officials also have accused the companies of monopolistic practices after Rio, Vale and BHP decided to abandon an annual pricing system in favor of a more flexible, index-based quarterly system last year.
A recent deal that marked a change from China’s usual mode of taking stakes in projects and forming joint ventures.
In July, Hanlong Mining Investment bid for all of Australia’s Sundance Resources (SDL.AX), which is developing the Mbalam iron ore project that straddles Cameroon and the Republic of Congo, in a deal worth $1.5 billion.
That and other recent deals have shown China’s determination to gain more direct control over supply and that it is eager to come in at an early stage and make the infrastructure investments needed to bring projects on stream.
“In the current state of markets, only Chinese firms can back up such huge infrastructure investments,” said Luca Del Conte, director of capital markets at GMP Europe.
Infrastructure is also a vital part of a deal between Chinese firms and African Minerals AMIq.L to develop its estimated 13 billion ton Tonkolili project in Sierra Leone.
China Railways Materials Commercial Corporation invested $230 million, and in August, Shandong Iron & Steel, the world’s ninth-largest steelmaker, finalized a deal to pay $1.5 billion for a 25 percent stake.
The deal will give Shandong the right to purchase iron ore at a discounted price under an off-take arrangement, and it retains the option to buy up to 25 percent of annual production from each of Tonkolili’s three phases based on benchmark prices.
More deals are expected as Chinese firms look to invest in development-stage iron ore projects globally in which their expertise in infrastructure development can be used, Edison Investment research said in a note.
“This makes West Africa an ideal target; and the region is opening up as the business climate improves. There are a number of projects that have passed the high-risk greenfields exploration stage and are now ready for large capex injections to get the project producing,” it said.
China’s own ambitious domestic infrastructure and construction projects will keep increasing its appetite for iron ore. It is forecast to import an average of 670 million tons of iron ore in 2011, up 8 percent from last year.
That growing demand has fueled a price rally, but supply from China’s own projects, when they launch production in the medium to long term, could help moderate prices along with the additional output from the majors’ own expansion plans, analysts say.
Iron ore with 62 percent iron content has shot up by a third in about a year and has nearly doubled over the past two years. It was last quoted .IO62-CNI=SI at $176.80 per ton, according to the Steel Index.
Del Conte says the additional supply alone will probably not have a huge impact but could help stabilize the market.
“They (China) will have access to concentrate at favorable prices for their own direct supply, and in my personal opinion it will probably make sure prices will not rise too far above $150 a ton in the medium-term,” Del Conte said.
Editing by Eric Onstad and Jane Baird