Friday, February 20, 2009

China to Squeeze Lower Iron-Ore Prices out of ... Itself?

A couple of recent posts (here and here) touched on Chinalco's impending increase of its stake in Rio Tinto, the Australian iron-ore producer. The second "here" discusses Chinalco's rivalry with fellow SOE and steel producer, Baosteel. Apparently both Chinalco and Baosteel both wanted to make a play for Rio Tinto, but Chinalco was able to make the better case to the Central Government.

This has led to fears in Australia that the ultimate aim of "China, Inc." is to basically guarantee itself access to cheap sources of iron-ore for its steel industry -- essentially to force Rio to sell it iron-ore at rock-bottom prices. The problem with this logic, of course, is that there are numerous market and regulatory mechanisms that can prevent that from happening, a few of which I noted here.

In an interesting development, Bloomberg revealed today that Baosteel has plans to take over two of its domestic competitors in order to speed along consolidation of the steel industry.

China, which produces one-third of the world’s steel, is pushing for consolidation in the industry to boost its competitiveness and raw material purchasing power. ...

“The global recession will help speed up industry consolidations,” said Luo Wei, a Shanghai-based analyst with China International Capital Corp. “Boosting the concentration will increase steelmakers’ profit and their pricing power.” ...

The government will also push Anben Steel Group, China’s fourth-biggest, to merge with Panzhihua Iron & Steel Group, while Taiyuan Iron & Steel Group, the biggest stainless steelmaker, will combine with rivals in Shanxi...

The basic raw material for steel is iron-ore, and there is currently what amounts to a "triopoly" in this industry among CVRD of Brazil, BHP Billiton of Australia and Rio Tinto of Australia -- whose largest shareholder is none other than Chinalco.

While Chinalco, even as Rio's largest shareholder, would not be in much of a position to expropriate iron-ore supplies from Australia at cut prices, Baosteel, along with the increasingly large and powerful steel groups in China may very well be in such a position -- much to the chagrin of Chinalco's shareholders.