Chinese steel mills are steadily pulling the pin on billions of dollars worth of investments in Australia, with several major Chinese players quietly retreating from iron ore projects amid weak iron ore prices and rising pressure in their domestic economy.
But the trend, which has already claimed the West Pilbara Iron Ore project and which threatens the $3 billion Karara iron ore mine, is unlikely to extend to Citic’s Sino Iron operation, which is critical to the financial fortunes of federal MP Clive Palmer.
Giant Chinese conglomerate Citic just before Christmas signed off on the $24 million development of a sealed airstrip at the Sino Iron project, signalling its long-term commitment to the mine.
In contrast, Chinese rivals Ansteel and Baosteel have both in recent weeks decided to scale back the funding of their Australian ventures, leaving billions of dollars of investment and more than 1000 local jobs under a cloud.
Ansteel’s local partner in the Karara project, Gindalbie Metals, this week told investors there were doubts about its ability to continue as a going concern should Ansteel withdraw its support for the mine. Karara’s chief executive sent a memo to the mine’s 1000 workers last week warning that Ansteel was unable to continue to provide funding due to the “economic and industry slowdown”.
Just before Christmas Chinese steel mill Baosteel and its local partner Aurizon Holdings decided to stop work on studies over the proposed West Pilbara iron ore mine. The parties had bought the project through their $1.4bn takeover of Aquila Resources in 2014.
And Perth-based junior Sundance Resources yesterday became the latest local company to suffer from the impact of the funding freeze affecting Chinese iron ore investments.
Sundance, which wants to develop the Mbalam-Nabeba iron ore project in the African nations of Cameroon and Congo, yesterday revealed that the Chinese state-owned construction company that had agreed to build the project’s port and rail infrastructure had unexpectedly been unable to secure funding.
Iron ore prices have fallen from more than $US180 a tonne in 2011 to just over $US40 a tonne today, while steel prices in China have also fallen sharply.
Adam Handley, the China foreign direct investment markets leader for law firm Minter Ellison and the president of the Australia China Business Council in WA, said it was a misnomer that China would invest in projects regardless of the iron ore price or outlook. “The experience I’ve had over the last decade working with China is that China is generally a pretty sophisticated investor and makes decisions based on economic grounds like any other investor,” Mr Handley said.
Iron Ore Research director Philip Kirchlechner, who has spent decades working with Chinese steel mills in his role as an analyst, consultant and deal-maker, told The Australian that all Chinese steel mills were struggling amid low steel prices and a weakening domestic economic outlook.
And the problems were particularly acute for older state-owned entities such as Ansteel — the first steel mill established in Communist China — given the huge workforces they employ.
“A lot of these old SOEs are cradle-to-the-grave bureaucracies which employ too many people. Ansteel is a classic example of that, and it’s a huge burden to run all these mines and run this huge bureaucracy,” Mr Kirchlechner said.
“All Chinese steel mills are under pressure at the moment in terms of losing money, but Anshan must be suffering the most because of all the legacy issues they have. They simply don’t have the money to put into this thing.”
While many China-backed projects in Australia are under pressure, Citic’s $12bn Sino Iron mine appears to be safe.
The company recently signed off on a decision to spend up to $24m building a sealed airstrip at Sino Iron that will be capable of servicing two Fokker F100 aircraft. The investment will reduce the travel time to site by about 30 per cent, improving efficiency and saving Citic money over the longer term.
While small in the scheme of the overall project, the airstrip investment reinforces the view that Citic sees Sino Iron as a long-term commitment. Aside from the huge amount spent on the project made to date, Sino Iron provides a premium feedstock for Citic’s steel mills and completes the company’s supply chain.
The fate of Sino Iron is of crucial importance to Clive Palmer, with royalties from the mine currently generating almost all the income of his key mining venture Mineralogy.
Source: The Australian