China flexes cash-rich muscles over oil and minerals

08 March 2009  By Mairtin O’Riada in Beijing

The maxim - ‘loot a burning house’ - has been followed by China’s military strategists for millennia. When your adversaries are in difficulty, press home your advantage to profit from their misfortune.

The country’s political and economic doyens have been putting that age-old philosophy into practice again in recent weeks. They have been taking advantage of China’s enormous cash reserves and the plummeting global demand for natural resources to exploit an international fire sale in oil and minerals to ease concerns about the country’s long-term energy security.

In the biggest of the moves, announced in late February, the state-owned China Development Bank loaned a total of €20 billion to Russian oil titans Rosneft and Transneft. In return, China will receive 15million tons of oil every year for the next 20 years. That translates to a guaranteed supply of 300,000 barrels a day, at $20 per barrel. Oil prices on international markets peaked last year at $140.

Just days after that deal was signed, an €8 billion accord was concluded by Vice President Xi Jinping with the Brazilian oil supplier Petrobras.

Under the agreement, the Brazilian group will ship 160,000 barrels to China daily, in exchange for China bankrolling deep sea oilfield exploration off the coast of South America.

And last week, China National Petroleum Corporation snapped up the Canadian producer Verenex Energy for €315 million, a deal that gives the Chinese company access to a vast swathe of undeveloped but potentially lucrative oil fields in Libya.

But oil is not the only item on China’s resource-heavy shopping list. Two weeks ago, the Chinese metal producer China Minmetals Nonferrous Metals Co. tabled a €1.3 billion bid for the troubled Australian mining company Oz Minerals, the world’s second-largest producer of zinc. Despite the low price and political resistance in Canberra, the debt-laden Australian outfit is expected to have little choice but to accept.

‘‘This was the only offer we’ve received for the whole of the company," Andrew Michelmore, Oz Minerals’ managing director, told journalists in Australia.

In the same week, state-controlled aluminium giant Chinalco offered to rescue the ailing Anglo-Australian company Rio Tinto by pumping close to €16 billion into the mining behemoth to help pay down its crippling €30 billion deficit. Shares in the metals producer have been in freefall as global demand has evaporated, dropping from a high of more than $550 this time last year to just over $110 today. In exchange for its much-needed support, Chinalco would receive an 18 per cent stake in Rio, providing access to extensive copper, iron ore and aluminium deposits and a share of the world’s largest copper mine in Escondida, Chile.

Rio Tinto’s shareholders have baulked at the arrangement, wary of handing over such a significant stake in the company to Chinese control.

But among domestic analysts in China, who have long been pushing for the leadership to do more with its mushrooming cash reserves, the new energy deals are being hailed as a welcome change of strategy.

In 2007,China established a sovereign wealth fund, the China Investment Corporation, and charged it with investing some €160 billion overseas as part of the government’s much vaunted ‘‘going out’’ strategy.

However, the domestic taste for international deals quickly soured, as state-held stakes in US financial giants like Bear Stearns and Blackstone were rapidly eviscerated by the credit crisis.

After those financial fiascos, ‘‘staying home’’ quietly replaced ‘‘going out’’ as the slogan of choice for China’s fund managers.