China’s state-owned private companies and enterprises will take advantage of weak equity and asset values in the resources industry by accelerating acquisitions and investments.
This comes as fund managers, bankers and transactional lawyers are saying commodities demand is expected to strengthen.
Private equity fund manager and China observer Jason Chang said the world’s largest mineral commodities user is obligated to obtain long-term mineral supplies regardless of the short-term pessimism as a result of the influence of China’s credit pressure on demand and prices.
Chang is the head of Melbourne-based private equity resources fund EMR Capital, with $100 million under management
“Our prediction is that some time in the next six to 12 months, China’s new leadership will ramp up the economy again,” Chang told The Australian from Singapore on the way to Beijing.
“As with all changes of leadership in China, it takes six to 12 months to settle in. And we expect – and our partners in China are of the same view – that now is the time to position ourselves for the growth that is going to come in about 12 months,” Chang said.
Macquarie Group’s West Australian chairman Mark Barnaba said there was a ‘disconnect’ and it was ‘certainly presenting a wonderful set of opportunities’.
“The Chinese understand the demand side of the commodity equation better than most. I think the market has been oversold, if you look at the steep sell-off in companies’ shares versus the commodity markets,” Barnaba, who is also director at Fortescue Metals and heads Macquarie’s Global Resources Group, said.
Chang concurred with Barnaba that an ‘amazing disconnect’ had occurred between fundamental values and equity values made the gold sector a hub of Chinese interest.
The Chinese economic downturn meant copper appeal had slowed ‘temporarily’ but medium to long-term activity in it along with coking coal and crop nutrient potash, looked good.
He said the huge sell-off in mining shares would spur more activity as the dollar bought much more shares today than a year ago.
“So there is still interest there, but I think people should be prepared for the Chinese being a little more fussy about what they invest in,” Chang said.
He added China was becoming ‘a lot more savvy, knowing that their past investments have not always been successful’.
“So on the one hand they are more cautious. But on the other hand the market sentiment and environment is such that you will see more merger and acquisition activity by the Chinese in the junior to mid-cap space,” Chang said.
“We know that there are a lot of parties in China with a lot of interest, both from the state-owned sector as well the private sector.”
He said EMR was getting interest from American institutional investors and fund managers for investment in the mining industry.
Clayton Utz partner Jonathan Li said Beijing is encouraging private enterprises to forge ahead and buy weak assets. Private Chinese interests recently took over Australian lithium producer Talisman and attempted to bid for ASX-listed African copper producer Discovery Metals, but failed.
He said the trend of Chinese state-owned enterprises being silent on investment in Australian mining is dissimilar to the time of the global financial crisis when equity and investment values slumped.
During that time, SOEs moved into Rio Tinto’s share register, and obtained mining assets portfolio from OZ Minerals.
US investment bank JPMorgan has released a research note this week which supports China’s tactics and says investors should overweight positions in commodities.
"Against one-sided sentiment and following 15 months of destocking, Chinese buyers are going to realise very soon this is the opportune moment to back up the truck and to restock supply channels where China is import-dependent," the report said.
"A surge in Chinese buying of a metal at a lower price has already been observed in gold.
"We expect renewed vigour in imports of copper and oil. It is quite obvious what the Chinese should do here in physical markets, in pursuit of China's long-run economic and social self-interest."
Drilling company Boart Longyear cut its full-year earnings forecast between $1.36 billion and $1.56 billion for full-year revenue, and from $176 million to $211 million for earnings before interest, tax, depreciation and amortisation.
It slashed 1000 jobs from its operations globally this year.