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Baosteel and China Steel in iron ore move

November 17, 2010

“Taiwan’s China Steel and China’s Baosteel are planning to invest jointly in overseas iron ore mines. …

The co-operation also highlights the pressures that volatile iron ore prices impose on mid-sized steel mills. In recent months, this has led to a number of iron ore mine acquisitions by steel companies, as well as a new pricing system for iron ore this year.

Tsou Jo-chi, China Steel chairman, has previously said he hoped to increase his company’s self-sufficiency in iron ore from 2 per cent to 30 per cent within five years. China Steel uses about 20m tonnes of iron ore a year.”

Source: Financial Times, November 17 2010

Observations:

  • China Steel’s 30% self-sufficiency for 20m tonnes iron ore content requires the company to gain control over approx. 6Mt mine production. This is approx. 0.3-0.4% of global production.
  • Recent Chinese steel maker’s investments in mining capacity abroad include Shandong’s investment in Sierra Leone Tonkolili mine and Wuhan’s joint venture with Australian Centrex Metals Ltd corporation.

Implications:

  • Upward vertical integration by steel makers will increase due to the increased risk for the downstream business of the new iron ore pricing system. However, as the Chinese steel makers don’t have the expertise to operate the iron ore mines, they will typically need to look for investments with a western operating partner.
  • Analysts suggests the companies are partnering in order to have a stronger financial position for acquisitions. This implies they will not be looking for many small acquisitions, but rather for 1-3 major operations.

©2010 | Wilfred Visser | thebusinessofmining.com

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