Premier opportunity for investment

China’s unquestioned importance to Western Australia is reflected in the state government’s hard lobbying to get Chinese Premier Wen Jiabao to visit next month.

The head of the world’s fourth largest economy is due in Australia in April and the state government is anxious to discuss potential new raw materials deals at a time when China’s hunger for resources shows no sign of slowing down.

Another annual $6 billion-plus into WA’s economy from Chinese buyers won’t go amiss, either.

Many of these buyers are already here. Over the past few years, a cadre of China’s top multi billion dollar resources, raw materials and trading houses has been established in Perth to monitor and secure China’s future economic life blood.

Fears of another WA resources bubble burst scenario were alleviated recently when Premier Wen predicted China’s gross domestic product would grow by an annual average 7.5 per cent between now and 2010.

China is the world’s largest steel producer and its biggest iron ore importer, about 40 per cent of which comes from WA. China’s next biggest suppliers are India (27 per cent) and Brazil (20 per cent).

Last financial year, WA merchandise exports totalled $38.6 billion – $8.5 billion to Japan, $6.6 billion to China and $3.2 billion to South Korea. More than 76 per cent of that was from the mining and petroleum sectors.

Iron ore exports from WA were worth $8.3 billion, with China taking half that, followed by the state’s traditional partners Japan (32 per cent) and South Korea (10 per cent).

Australia-China Trade managing director Juyan Feng has predicted Chinese steel production of 385 million tonnes in 2006, peaking at 450mt over the next five years.

Xiaofei Cui, managing director of the Perth-based Australian unit of China’s second largest iron ore trader, Sinosteel Corp, opted for 400mt/year within five years.

Federal government economic forecaster, the Australian Bureau of Agricultural and Resource Economics (ABARE), has predicted iron ore exports from Australia could rise by as much as 22 per cent to 292mt, worth about $18 billion, in 2006-07.

For this, ABARE has factored in a 12 per cent rise in iron ore prices this year.

This is all good news for WA when taken along with its traditional strong markets, such as Japan and South Korea, and with India looming on the horizon.

The only impediment, it seems, may be WA’s ability to meet the supply challenge.

It is these fears – skilled labour supply and equipment and services shortages that are pushing up costs – the state government and resources companies will be keen to allay when meeting the Chinese.

One obvious Chinese market is for the increased supply of petroleum products, such as liquefied natural gas (LNG).

Last year, WA petroleum exports were worth $10.4 billion – 41 per cent went to Japan, 11 per cent to the US and South Korea, with just 4 per cent to China.

The flow of royalties to the state was $1.26 billion last year – 44 per cent from petroleum and 30 per cent from iron ore.

China’s GDP has grown 9.6 per cent over the past 20 years, according to Henry Wang, senior investment commissioner for Greater China with the federal government’s Invest Australia program.

Mr Wang said the economic miracle that was happening in China was predicated on the twin thrusts of industrialisation and urbanisation, producing a new, much wealthier middle class and better rural wages.

“They require a lot of steel,” he said. “China invests in Australia because of its strong economic credentials, political stability, high skills base, multilingual workforce, growing financial services sector, cost compe-titiveness, strategic location, sophisti-cated infrastructure, open regulatory environment, quality of life and welcoming attitude to investment.”

Direct Chinese investment in Australia last year totalled about $2 billion, the country’s 17th largest source of investment, with more than half invested in WA.

The intention of the Chinese corporate gathering in Perth was made clear by Sinosteel’s Xiaofei Cui when he told a recent international iron ore conference his company wanted to explore more opportunities in WA: “So if you have any ideas or opportunities, I’d be happy to discuss them”.

Sinosteel is currently renegotiating extended supplies from the 40 per cent Channar iron ore mine joint venture in the Pilbara it struck with Rio Tinto subsidiary Hamersley Iron in 1990.

The company most recently applied this forward supply planning to its joint venture with Midwest Corp for the $1.5 billion development of the Weld Range and Koolanooka projects in WA’s burgeoning Mid-West region.

China’s largest iron and steel maker, Shanghai Baosteel Group Corp, has a 46 per cent stake in Hamersley’s Eastern Range deposit near Paraburdoo to supply Baosteel with an estimated 200mt over 20 years.

China’s second largest steel maker, Angang Group, is also in Perth, as is the multi industry, shipping, trade, mining and steel processor China Shougang International Trade and Engineering Corp.

Shougang also has an office in Kwinana within the HIsmelt direct smelting iron joint venture, in which it has a 5 per cent stake.

The new commercial-scale HIsmelt plant is currently ramping up to full production of 800,000 tonnes a year over the next three years.

Shougang general manager and chief representative Tiesheng Gao said the group was also looking for more investment in WA.

China’s largest nickel and cobalt producer, Jinchuan Group Ltd, represented in Perth by Sino Nickel Pty Ltd, has off-take agreements with Sally Malay Mining’s nickel project and Fox Resources’ Radio Hill mine, both in WA.

The Radio Hill deal is initially for copper concentrate, but seen as a precursor to developing the nickel resources there. Sino Nickel also has contracts with BHP Billiton’s Nickel West projects in WA.

In the petroleum sector, Chinese National Offshore Oil Corp (CNOOC), China’s biggest crude oil/natural gas producer, has a 25 per cent stake in the China LNG joint venture within the North West Shelf gas project to supply CNOOC and the Guangdong LNG project in China. This entitles CNOOC to a 5.3 per cent interest in North West Shelf gas.

Other major Chinese players in WA include leading steel mills Wuhan Iron and Steel Corp, Maanshan Iron and Steel Co, Jiangsu Shagang Group and Tangshan Iron and Steel Co, which are involved with BHP Billiton in the Wheelarra joint venture in the Pilbara.

The joint venture is worth more than $16 billion in iron ore over the next 25 years, BHP Billiton’s largest ever commercial agreement with Chinese steel mills.