Archive

Posts Tagged ‘Sinochem’

Canada rejects BHP bid for Potash

November 4, 2010 Comments off

“Canada has rejected BHP Billiton’s $39bn bid for PotashCorp, dealing a potentially fatal blow to the Australian miner’s 10-week pursuit of the Saskatchewan-based fertiliser producer.”

Source: Financial Times, November 4 2010

Observations:

  • The acquisition has been rejected because of unclear benefit to the country. BHP has 30 days convince the government of the net benefit for Canada of the transaction.
  • The main issue for the Canadian provinces is the prospect of reduced tax revenues. Additionally, the government will require additional certainty about the security of jobs.

Implications:

  • The rejection should not be interpreted as a final decision, but rather as a logical way of pressuring BHP Billiton to be more generous to the Canadian government in conceding securities. The company will most likely come with a counteroffer that is hard to reject with the argument of negative ‘net benefit’.
  • If the company manages to convince the government, it still has to persuade shareholders to sell the shares. Most likely it will have to increase the price by approx. 10 percent to gain enough support. However, the actions of other parties like Sinochem and Phosagro might force the company to back off, as a bid above $150 could not be explained to BHP’s shareholders.

©2010 | Wilfred Visser | thebusinessofmining.com

Advertisements

The Rise of China in Mining

October 4, 2010 4 comments

China is rising as a global superpower in the mining industry. Ore from mining companies all around the world is shipped to Chinese ports to fuel the growth of the economy. Building relationships with Chinese government and customers is a top priority for many business leaders. However, few people in the industry know that China itself is a major producer of many minerals. This article explores the Chinese rise of production, the rise of demand, the rise of Chinese mining firms and the rise of investment and sketches the implications for the mining industry of the changing role of the country.

 

1. The Rise of Production

China’s mining industry is the world’s largest in many aspects: the country has 200,000 collectively owned mines1, employing over 10 million miners; it is the world’s major producer of coal, lead, zinc, tin and rare earth minerals and also ranks high in output of iron ore, gold, bauxite and other minerals.

The country has been a major producer for decades, but the enormous demand, the opening of the market to private investors and the introduction of modern mining techniques has boosted the productivity and production of the industry. Significant reserves of most minerals allowed China to grow the market share of mining output for all major minerals in the past 15 years (Figure 1). The growth of the iron metal content output share is even more remarkable when considering that Chinese iron ore typically has a very low metal content: while share of iron content grew from 14% to 15% since 1995, the share of gross weight grew from 24% to 37%2.

Figure 1 - Chinese share of world mining output

The largest part of worldwide reserves of rare earths, titanium, tungsten & molybdenum are in China. These minerals are crucial in the production of many high tech products, giving China a powerful position in international trade. Recently the country has demonstrated this power by implementing export quota for rare earth minerals, favoring the domestic high tech industry.


2. The Rise of Demand

China hardly exports any minerals; all domestic mine production is absorbed by the domestic. Value of total mineral exports in 2009 was a mere $0.2bln, 60% of which was molybdenum3. Until a few years ago the country was a net coal exporter, but the growing demand from the utility and steel industry has turned it into an importer. Though the country does not export ores, it has been building a large iron and steel industry, exporting at a total value of $53bln in 2008. In the same year the production of 500Mt of crude steel accounted for 38% of the world production2. In 2009 the imports exceeded exports, as steel companies responded to the crisis by cutting production. Stepping up production will turn the country into a net exporter of steel again.

Read more…

Sinochem struggles to mount Potash bid

October 1, 2010 1 comment

“Sinochem of China is struggling to find partners to mount a counterbid for PotashCorp and derail BHP Billiton’s $39bn hostile takeover following the collapse of talks with a potential Russian partner.

The failure of talks with UralKali, the Russian fertiliser group, is the latest setback for the state-owned Chinese chemical group after earlier approaches to a Canadian public pension fund, and Temasek, the Singapore’s investment agency.

Bankers believe Sinochem needs several partners, including non-Chinese companies, to mount a serious rival bid to BHP Billiton and assuage fears in Ottawa about the sale of PotashCorp to a Chinese state enterprise. PotashCorp is the largest global producer of mineral fertiliser, demand for which is soaring in China, India and other emerging economies.”

Source: Financial Times, September 29, 2010

Observations:

  • The deadline of BHP Billiton’s bid for PotashCorp is November 18th. The company hopes to convince shareholders to sell over 2/3 of the shares at a price of $130/share.
  • China imports approx. 4 million tonnes of potash per year, growing at a high rate. The Chinese government is afraid a takeover of PotashCorp by BHP and the resulting potential change in pricing mechanism will reduce stability in the market.

Implications:

  • PotashCorp has built up a shareholder plan that makes it difficult for a foreign company to assume control. The plan is mainly targeted against BHP, but makes it harder for other foreign firms to prevent the merger from taking place as well. Many Canadian officials will not be glad if PotashCorp falls in Chinese hands, therefore the Chinese government, via Sinochem, is looking for other partners.
  • The probability of a competing bid surfacing is rather low, as it would have been in the interest of a competing party to announce the counterbid as early as possible. The most likely remaining alternative is a partnership between a major minor and a trading house, many of which hold strong positions in the agricultural sector.

©2010 | Wilfred Visser | thebusinessofmining.com

Sinochem in push to foil BHP’s Potash plan

September 9, 2010 Comments off

“Sinochem, the Chinese state-owned chemicals group, is trying to recruit at least one sovereign wealth fund and a Canadian pension fund for a consortium to block BHP Billiton’s $39bn hostile takeover of PotashCorp of Canada.

People familiar with the discussions said Temasek, the Singapore state investment agency, had been approached to join the consortium, along with several Canadian pension funds, including Alberta Investment Management, a pension fund with $66bn under management.”

Source: Financial Times, September 8, 2010

Observations:

  • Sinochem is reported to try to form a consortium to buy a strategic stake of PotashCorp to prevent BHP Billiton from acquiring the company. The Chinese company, backed by the Chinese government, is said to be afraid the targeted position of BHP would decrease stability of the fertilizer supply to China, which is crucial for the food security in the country.

Implications:

  • Chinese firms appear to use the strategy of buying 10-20% stakes of companies that are about to be acquired in order to prevent the acquisition in case the deal is thought to be harmful to Chinese interests. Using this “divide and conquer”-strategy, Chinese firms try to limit the negotiation power of their suppliers.
  • The advantage of state-controlled Chinese firms is the availability of large amounts of cash and the support of development banks, which helps companies like Chinalco and Sinochem to buy strategic stakes in suppliers. Clearly, the pockets of Sinochem are not deep enough to prevent the acquisition without help from other parties.

©2010 | Wilfred Visser | thebusinessofmining.com