27/03/2013 - 10:29

Chinese masters of resource management

27/03/2013 - 10:29

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It’s no surprise Chinese investors in Australia’s resources sector want to maximise their opportunities, but the outcomes won’t always be favourable for the locals.

It’s no surprise Chinese investors in Australia’s resources sector want to maximise their opportunities, but the outcomes won’t always be favourable for the locals. 

WHILE most eyes were on Canberra last week for the latest act in a political drama that will end on September 14, others were watching the first act of a financial drama that revealed the true intentions of China Inc towards its quarry-of-convenience, Australia.

Lithium, a flavour-of-the-month mineral with a small but growing market in high-tech batteries, was the commodity that revealed how China is likely to treat Australia once it gets control of resources in the ground – iron ore could be next for harsh treatment.

The lithium situation started in the south coast town of Ravensthorpe with a poorly planned investment by Galaxy Resources in a deposit of spodumene (an ore of lithium) at Mt Cattlin.

Galaxy’s plan was to mine at Mt Cattlin and send the part-processed ore to China for conversion into lithium products at the company’s factory in Jiangsu.

Despite the spin from Galaxy management and its public relations consultants, the Mt Cattlin-to-Jiangsu concept was doomed from the day it started because the lithium market is small and raw material readily available from cheaper sources, including dry salt lakes in South America where it can be easily scraped off the surface, rather than mined.

Competition from alternative sources was one reason Mt Cattlin operated for less than three years before being placed in care and maintenance in the middle of last year, and officially mothballed last week.

Interesting as Mt Cattlin is as an ill-conceived mining adventure, the far more important development for everyone involved with mining in Australia came last week when Galaxy announced it had signed a contract with Talison Lithium, the company that owns the Greenbushes spodumene mine near the town of the same name in Western Australia’s South West.

The reason Galaxy is buying its raw material from Talison, rather than use raw material available at its own Ravensthorpe mine, has not been satisfactorily explained. Australia’s high exchange rate is cited as one reason that influenced Galaxy, though that is probably just one factor in a complex equation that covers costs and Chinese corporate connections.

A separate deal was finalised a week before Galaxy retrenched most of the workers who had been waiting for Mt Cattlin to re-start (as promised last July) – the acquisition of Talison from its Canadian owners by a Chinese company, Chengdu Tianqi Industry Group.

What then happened was that Galaxy, which has close Chinese ties and a board with strong Chinese connections, struck a deal with Talison, a company that has just passed into Chinese control.

There is absolutely nothing wrong with the Galaxy/Talison deal. It is a strictly commercial arrangement that should be to the advantage of shareholders on both sides, if not to the workers at the mothballed Mt Cattlin mine.

What Australia has also just witnessed, however, is two Chinese-linked companies (Galaxy and Talison) making a decision about mining in Australia that best suits a manufacturing operation (Jiangsu) in China.

The precedent is fascinating. Galaxy is prepared to close its Australian spodumene mine in order to buy cheaper spodumene from another mine in Australia that has just passed into Chinese hands.

If you ignore the negotiations behind the deal (and it is perfectly natural that Galaxy and Talison should discuss which has the cheaper mine in Australia), you also bump into a few potentially interesting parallel situations in the much more important iron ore industry.

Sino Iron, for example, is a pure Chinese project which will (fingers crossed) start exporting iron ore to China in the next few months, though it too will be a massively expensive supplier given its three-year completion delays and 200 per cent cost blow-out, raising this question: would it be cheaper for Sino’s owner, Citic Pacific, to source iron ore from another supplier than produce its own, just as Galaxy has done with spodumene?

A second iron ore example is the Karara project, which is part owned by locally listed Gindalbie Metals but effectively controlled by the Chinese steel producer, AnSteel.

From one aspect it makes sense for AnSteel to buy the iron ore produced at Karara because it has invested heavily in the mine, but somewhere in the backrooms of the Chinese company a number crunching exercise will be under way comparing the cost of Karara material with the cost of iron ore sourced elsewhere, raising a by-now-familiar question: would it be cheaper overall for AnSteel to buy iron ore feedstock for its steel mills in China from a source other than Karara?

Australia, obviously, wants to see both the Sino and Karara projects succeed, but the Chinese interests could well see the situation through different eyes when it comes to the cost of converting ore into metal – which is exactly what Galaxy has just done in comparing Ravensthorpe ore with Talison ore.

Property rebound

SMART money migrating out of the resources sector is starting to home in on one of the more interesting revival situations emerging in Australia – residential property.

Sluggish so far, it seems that low interest rates are enticing homebuyers back into the market, only for them to discover that the residential sector is chronically under-supplied after five flat years.

The shortage of supply could mean that Australian real estate developers, homebuilders, and suppliers of building materials are heading into boom conditions over the next few years, with an early telltale being the remarkable recovery in the share prices of Boral, a materials supplier, and Peet, a residential property developer.

Boral shares have risen by 64 per cent from last year’s low, and Peet is up by an even more impressive 90 per cent.

It could get better, with a forecast from HSBC Bank suggesting dwelling investment in Australia will rise by 6 per cent this year and 8 per cent next year, the two best years since 2003, and a country mile above last year’s 4 per cent fall and anaemic growth (plus several years of falling investment) over the past decade.

Small change

RESOURCES, too, might stage a comeback when/if the world economy settles, with the biggest pension fund in the US (Calpers) re-entering commodity investment “as a safeguard against inflation”. 

With more than $US200 billion to invest, the former California Public Employees Retirement System has allocated a “tiny” $US1.3 billion towards commodities – but wants more.

***

“When I was a boy I was told anyone could become president. I’m beginning to believe it.” 
Clarence Darrow

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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