Money’s too tight to mention

If skeptics are correct, and demand for minerals will not return to the levels seen in recent years, why are Chinese companies so keen to have a piece of Australia's miners? Daniel Hall writes.

While I was discussing the recent boom of Chinese interest in Australian mining companies with Australian Mining features editor Jessica Darnbrough, she mentioned the 1980s classic song Money’s Too Tight To Mention, by English pop legends Simply Red.

Both the title of the song and the band’s name are relevant to today’s minerals industry.

I been laid off from work my rent is due, My kids all need brand new shoes, So I went to the bank to see what they could do, They said son looks like bad luck has got a hold on you – Money’s Too Tight To Mention, Simply Red

Firstly, money hasn’t been so tight since our last recession, Keating’s ‘must have’ recession, and Australian unions are seeing ‘simply red’ over China’s latest spate of investment in the Australian industry.

Indeed, money is too tight to mention for some Australian miners, as they look to overseas investors, particularly the Chinese, to fund rising debt levels caused by the financial crisis.

While domestic sceptics are saying that Australia may never see demand reach levels that the industry has seen in the last few years, Chinese metal giants have slowly been capitalising on a fire-sale of Australian minerals operations.

Unions are urging the Federal Government to be cautious about the spate of sell-offs and put in place measures to protect Australian capital.

They have urged the Federal Government to re-introduce export licenses in a bid to control foreign owned capital.

The Australian Worker’s Union and the CFMEU expressed concern over Chinese state-controlled corporations Chinalco and Minmetals attempts to buy into Australian resource companies.

“Our unions are concerned that these companies holding strategic minority investments will seek to influence the supply/demand balance in their favour,” AWU national secretary Paul Howes said.

“Companies with strong relationships with foreign governments may seek to unfairly influence iron ore and coal pricing as well as aluminium pricing – using the current global financial crisis to warp markets to ensure their interests are primary.”

Howes said while the unions were open to discussing how an export system might operate with the Federal Government, an easy mechanism would see all export contracts for nominated minerals submitted to a federal government authority.

“If they are not rejected within a specific time frame then they should be approved for export,” he said.

Recent developments

Minmetals’ and OZ Minerals recently announced a $2.6 billion takeover offer for OZ Minerals, with Minmetals confirming that it intends to continue to operate current OZ Minerals operations, according to OZ Minerals CEO Andrew Michelmore.

The company, which had been struggling to re-finance US$560 million of debt by the end of the month, will now have its outstanding balances paid by Minmetals.

According to Michelmore, the move will provide certainty to businesses beyond those operated by OZ Minerals.

South Australian Premier Mike Rann says the move could help to save Australian jobs, with the takeover guaranteeing the State’s Prominent Hill project will go ahead.

“Minmetals may use its $2.6 billion takeover of OZ Minerals as a springboard to buy further Australian assets,” OZ CEO Andrew Michelmore said.

“I think they are going to see this as a platform to really grow their business.

“They want this as their offshore vehicle to grow their base metals business.”

If this is the case, and the Chinese are looking to grow their businesses by increasing their share in Australian mining companies, I wonder why Australian companies are selling and not capitalising on these business opportunities themselves. Are we being too short sighted?

China’s Hunan Valin Iron and Steel Group is set to buy more than 16% of Fortescue Metals Group for $1.2 billion, adding to the rush of Chinese investment.

The Valin deal, signed in Hong Kong recently, will give the Chinese steel mill additional off take and a seat on the Fortescue board for its chairman, but no rights to marketing or representation on management committees.

Fortescue’s chief executive officer Andrew Forrest said the deal highlighted Fortescue’s importance in the global iron ore industry.

“This placement provides Fortescue with a cornerstone Chinese equity partner which will only enhance our ability to grow and prosper,” he said.

Australian miners, technology suppliers and distributors must have a good look at their preparations for the next peak in demand, and how the Australian mining landscape will look when the job cuts, doom and gloom headlines and sell-offs are behind us.

Will we be a strong, consolidated industry with an improved supply chain profile, or will the industry be unprepared, and under capitalised, for the inevitable recovery?

While we are crying that money’s too tight to mention, we may be letting some key opportunities slip through our hands.

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