China’s Global Investment in Iron

China’sGlobal Investment in Iron

China’sGlobal Investment in Iron

Chinahas one of the world fastest growing economies, which has mainly beenattributed to its investment overseas and rapid growth in themanufacturing sector. Currently, China is the leading consumer ofIron in the world, which has forced the Chinese companies to purchaseassets outside the country in an attempt to address the local demand(Thompson, 2014). This paper will analyze the China’s investment inthe iron sector with the main focus on transaction cost, percentageinterest, takeover premium, operational control, production rights,termination of rights of agreements, and drivers behind china’sinvestment in the iron sector.

Brazil

WuhanIron and Steel, a China’s largest iron importers, have targeted theBrazilian market. In 2009, Wuhan Group purchased a 22 % stake in MMXMineracao, which is a Brazilian iron extractor and processor(Chenhhao, 2009). The 22 % stake was purchased at $ 400 million, butinformation about the take-over premium was not disclosed. The factthat Wuhan purchased 22 % of the stake means that the operation ofthe acquisition remained with MMX Mineracao. By purchasing a stake inMMX Mineracao, Wuhan expected to get a preferred right to purchasethe products (iron bars) that are produced by MMX Mineracao and useit in its Chinese manufacturing plants. The assets of MMX Mineracaoare located in different places within Brazil, but most of them arelocated in Rio de Janeiro. However, the remaining useful life of themines was not disclosed at time of purchase. Since Wuhan purchasedthe ordinary shares of the Brazilian company, the deal can only beterminated by dissolution of the Brazilian company or a deliberatedecision by Wuhan to sell its stake to another investor. When makingthe deal, the management of Wuhan issued a statement that itpurchased MMX Mineracao with the objective of increasing its quantityof iron imports to meet the growing demand for Iron products in China(Chenhhao, 2009). This means that Wuhan’s interest was to accessiron and not necessarily the financial gains given that MMXMineracao’s share price has been declining as shown in Figure 1. Inaddition, the management expressed the intention of Wuhan to makemore purchases in other countries.

Figure1: Trends in the price of MMX Mineracao’s share

Source:Thompson (2014).

SouthAfrica

SinosteelCorp is a Chinese company that expressed its intention to purchase a50 % stake in South African iron extracting company named SamancorChrome in the year 2006. The deal was worth $ 230 million, but thevalue of the take-over premium was not disclosed (China MiningAssociation, 2015). Since Sinosteel Corp purchased half of the totalequity in Samancor Chrome, the operation of the new acquisition willbe shared by the two companies. The intension of Sinosteel was toincrease its iron products for its Chinese plant, without acquiringany other products from Samancor Chrome. All assets owned by SamancorChrome are located in South Africa, but the remaining life of theiron ores is unknown. Sinosteel’s acquisition of a 50 % stakeimplies that the deal can only be terminated by its decision todispose of its shareholding by selling its shares to other investors(China Mining Association, 2015). The key driver of Sinosteel’sdecision to buy a stake in Samancor Chrome was the desire to increaseits sources of iron in order to meet the ever-increasing demand foriron products in the local market.

India

AlthoughIndia has a high demand for steel, which is, the Chinese companieshave made attempts to import iron from this market by purchasingstakes in the local companies. In 2008, Minmetals and Xinxing Ironpurchased a 20 % stake in Kelachandra and Manasara at a price of $1,200 million, but there was no take-over premium for the transaction(Indian Express Limited, 2015). The acquisition of the minorityshareholding implies that Minmetals and Xinxing Iron did not have theright to control operations of Kelachandra and Manasara. In addition,Minmetals and Xinxing Iron did not acquire the operating rights, butit would be expected that the company will be preferred and get aneasy way to purchase iron from the new venture in order to supply itsdomestic manufacturing plant. Kelachandra and Manasara’s assets arelocated in India, but the information about the remaining useful lifeof its assets was not made public. The deal could be terminated incase Minmetals and Xinxing Iron decided to sell off its stake.Similar to other Chinese companies operating in metal industry,Minmetals and Xinxing Iron was driven by the growing demand for ironproducts in the domestic market.

Malaysia

TheChinese metal company, Shougang Group entered the Malaysian market bypurchasing a 40 % stake in Hiap Teck Venture Berhad in 2011 (Lumpur,2011). This deal was worth 240 million dollars, but it did not givethe Shougang Group the power to control the operations of Hiap TeckVenture Berhad. Failure to acquire the controlling stake means thatShougang did not have the production rights, but the company expecteda preferential treatment when purchasing the iron products to satisfyits local demand. The remaining life of the mines was not disclosed.The termination of the agreement may result from the collapse oreither company or a decision by Shougang to sell its 40 % stake. Itis evident that Shougang intended to increase its revenue and anopportunity to import more iron products for the domestic market.

SierraLeone

China’sinvestment in the Sierra Leone iron industry began when China RailwayMaterials bought about 13 % of stake in Africa Minerals at a price of$ 260 million, but there was no take-over premium for thistransaction (Bruyn, 2015). The 13 % ownership of Africa Minerals wastoo low to allow China Railway Materials to acquire the operationalcontrol. This implies that China Railway Materials bought the AfricanMinerals to increase its revenue or an easy access to the iron as araw material for its domestic market. All assets owned by AfricaMinerals are located in Sierra Leone. The iron ore located inTonkolili had an estimated remaining life of 20 years (Bruyn, 2015).This suggests that the agreements of purchase could be terminated incase the mines get exhausted or decision by China Railway Material tosell its shares to other investors. Since Africa Mineral focus on theextraction of Iron, it is evident that the decision by China RailwayMaterials to purchase the 13 % stake was driven by its intention toincrease its supply of iron for the local manufacturing plant andincrease its revenue.

Figure2: Map of Tonkolili iron map

Source:Spilpunt (2014).

ShandongIron is also a Chinese company that bought 25 % of the AfricanMinerals’ shares in Sierra Leone. The transaction was worth $ 1,490million, and there was no takeover premium paid for the transaction(Yap, 2013). The 25 % stake did not give Shandong Iron the power tocontrol all operations of Africa Minerals. Since Shandong Ironpurchased less than controlling shareholding in Africa Minerals, itdid not acquire the production right in Sierra Leon. However,Shandong could have an easy access to the iron being mined inTonkolili to supplement the iron that it imports from othercountries. All assets the Africa Minerals are located in SierraLeone. The newly discovered mine located at Tonkolili had a remaininglife of 20 years at the time of purchase (Yap, 2013). The rights ofthe agreement can only be terminated if Shandong sells its 25 % stakeor African Minerals collapses. Factors that drove Shandong to enterinto this agreement include the desire to increase its revenue andacquire easy access for iron for its plants in China.

Conclusion

TheChinese companies have invested heavily in different countries in theiron sector. The major driving factor in this massive globalinvestment is the desire of the Chinese companies to address theever-increasing demand for iron products in the Chinese market. Inaddition, these companies also invest globally with the objective ofincreasing their revenue. However, most of the Chinese companies havenot managed to buy the controlling shares in their foreigninvestments. This means that most of the Chinese companies havelimited control over the acquired firms.

Summary

Brazil:Wuhan Group buys MMX Mineracao

Transactioncost

Wuhanpaid U.S. $ 400 million to acquire a stake in MMX Mineracao.

Percentageinterest

Wuhanbought 22 % of MMX Mineracao shares, which was less than acontrolling shareholding of 50 %.

Operatorship

Wuhanacquired less than the controlling shareholding, which means that itdid not have the power to control MMX Mineracao operations.

Location

MMXMineracao is located in Brazil with its assets being concentrated inRio de Janeiro.

Remainingmine life

Theremaining mining life was not indicated in the availablepublications.

Terminationof rights

Therights of the agreement can be terminated in case Wuhan sells itsshares to another investor.

Interpretationof drivers of China’s investment in the project

Wuhanintended to increase its iron suppliers for its local manufacturingplants.

SouthAfrica: Sinosteel Corp buys Samancor Chrome

Transactioncost

SinosteelCorp paid U.S. $ 230 million to acquire a stake in Samancor Chrome.

Percentageinterest

SinosteelCorp bought 50 % of Samancor Chrome shares, which a controllingshareholding.

Operatorship

Themanagement of Sinosteel Corp acquires the power to control theoperations of the Samancor Chrome.

Location

SamancorChrome’s assets are mainly located in Sandton South Africa.

Remainingmine life

Remaininglife

Theremaining life of the mines was not disclosed.

Terminationof rights

Therights of the agreement can be terminated in case Sinosteel Corpsells its shares to another investor or either of the two companiescollapse.

Interpretationof drivers of China’s investment in the project

SinosteelCorp bought these shares in order to increase the source of iron tomeet the high demand in China.

India:Minmetals and Xinxing Iron buy Kelachandra and Manasara

Transactioncost

Thetransaction was worth U.S. $ 1,200.

Percentageinterest

Minmetalsand Xinxing Iron bought 20 % of shares, which was less than acontrolling shareholding.

Operatorship

Minmetalsand Xinxing had no control over the operations of Kelachandra andManasara since its acquisition was less than the controlling share.

Location

Kelachandraand Manasara’s assets are located in Bangalore India.

Remainingmine life

Theinformation about the remaining life of the mine was not revealed.

Terminationof rights

Therights of the agreement can be terminated in case Minmetals andXinxing sells its shares to another investor.

Interpretationof drivers of China’s investment in the project

Minmetalsand Xinxing intended to increase its iron suppliers its localmanufacturing plants.

Malaysia:Shougang Group buys Hiap Teck Venture Berhad

Transactioncost

ShougangGroup paid U.S. $ 240 million to acquire a stake in Hiap Teck VentureBerhad.

Percentageinterest

ShougangGroup acquired 40 % of the shares, which was a considerableproportion, but still less than the controlling shareholding.

Operatorship

ShougangGroup had a limited control over the operations of Hiap Teck.

Location

Assetsof Hiap Teck are located in Selangor Darul Ehsan in Malaysia.

Remainingmine life

Theremaining life of the mines was not disclosed.

Terminationof rights

Therights of the agreement can be terminated in case Shougang Groupsells its shares to another investor or one of the two companiescollapse.

Interpretationof drivers of China’s investment in the project

Wuhanintended to increase its iron suppliers for its local manufacturingplants in order to meet the local demand.

SierraLeone: China Railway Materials buy Africa Minerals

Transactioncost

ChinaRailway Materials paid U.S. $ 260 million to acquire a stake inAfrica Minerals.

Percentageinterest

ChinaRailway Materials acquired 13 % of shares.

Operatorship

The13 % acquisition could not allow China Railway Materials controloperations of Africa Minerals.

Location

AfricaMinerals is located in Sierra Leone.

Remainingmine life

Theremaining mining life was not indicated in the availablepublications.

Terminationof rights

Therights of the agreement can be terminated in case China RailwayMaterials sells its shares to another investor.

Interpretationof drivers of China’s investment in the project

ChinaRailway Materials intended to increase its iron suppliers for itslocal manufacturing plants following a sharp increase in demand foriron products.

References

Bruyn,C. (2015). African Minerals inks iron-ore deal with China RailwaysMaterials. CreamerMedia.Retrieved January 23, 2015, fromhttp://www.engineeringnews.co.za/article/african-minerals-inks-iron-ore-deal-with-china-railway-materials-2010-04-01

Chenhhao,F. (2009). Wuhan steel eyes stake in Mining Group. ZeroIPO.Retrieved January 23, 2015, fromhttp://character.zero2ipo.com.cn/en/n/2009-5-22/2009522113922.shtml

ChinaMining Association (2015). China’s Sinosteel to buy 50 % stake inSouth Africa chrome mine. CMA.Retrieved January 23, 2015 fromhttp://en.chinamining.com.cn/Companies/2006-12-19/1166497823d2743.html

IndianExpress Limited (2015). China’s Xinxing Group in JV to set up steelpant in K’taka. New Delhi: The Financial Express.

Lumpur,K. (2011). Shougang to build steel mill I Malaysia. SpaceMedia Network.Retrieved January 23, 2015, fromhttp://www.energy-daily.com/reports/Shougang_to_build_steel_mill_in_Malaysia_999.html

Spilpunt(2014). Mineral commodities. Spilpunt. Retrieved January 23, 2015,from http://spilpunt.blogspot.com/2007/04/sierra-leone.html

Thompson,C. (2014). Africa Minerals seals $ 1.5 billion China deal. Mining.Retrieved January 23, 2015, from http://www.ft.com/intl/cms/s/d2863ade-bc49-11e0-80e0-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fd2863ade-bc49-11e0-80e0-00144feabdc0.html%3Fsiteedition%3Duk&ampsiteedition=uk&amp_i_referer=#axzz3PbgBblhF

Yap,C. (2013). China’s Tianjin Minerals buys $ 990 million stake inAfrican Iron Mine. TheWall Street Journal.Retrieved January 23, 2015, fromhttp://www.wsj.com/articles/SB10001424052702304795804579098811377783076

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