China acquires control of Australian iron ore producer

The deal signed between Mount Gibson Iron in Australia and ChinaÆs Shougang Group might be small, but it is part of a wider Chinese plan to gain greater control of global iron ore prices.
ChinaÆs third largest steel producer, Shougang Group, has bought a controlling stake in a yet-to-be-approved iron ore project in the middle of Western Australia.

The 73% stake in Asia Iron Holdings was puchased from Mount Gibson Iron Limited for A$52.5 million and could provide one million tonnes of magnetite iron-ore concentrate to ShougangÆs steel mills each year.

The Mount Gibson deal is another move by the Chinese to take control of iron ore supply and be less exposed to global price fluctuations. The worldÆs three biggest miners û BrazilÆs CVRD and AustraliaÆs Rio Tinto and BHP Billiton û currently account for 70% of global exports.

While the deal with Shougang was being inked this week, BHP Billiton and Rio Tinto were waiting on ChinaÆs steel mills to agree on a price hike for the coming yearÆs iron ore contracts. Last year the miners secured a record 71.5% price rise mainly due to supply shortages in China.

For the 2006-2007 contract, other iron ore users in Japan, Korea and Europe have already agreed to a 19.1% increase but the Chinese government is apparently urging its steel producers not to accept such a large increase and has warned mills against striking individual deals.

Rumours that CVRD has already signed a price agreement with China were laid to rest yesterday when the company said it was also still waiting on a decision from the Chinese mills.

ShougangÆs deal in Western Australia goes some way to reducing the power of the big global miners, something the Chinese have been trying to do since Baosteel entered a joint venture with Hamersley in 2002 to construct and operate a new iron ore mine in the Pilbara. The long-term sales arrangements to China from this JV were worth over A$7.2 billion.

In March this year, CITIC Pacific bought two Australian iron ore companies from Mineralogy Limited for $415 million. The company agreed to devote $2.5 billion in capital expenditure on the Sino-Iron and Balmoral Iron mines.

And in the same month, the Queensland government named Aluminium Corp of China as the successful bidder for the development of a A$2.92 billion Aurukun bauxite-alumina project on Cape York.

ShougangÆs deal with Mount Gibson still requires approval from AustraliaÆs foreign investment review board and will only go ahead if the minority shareholders in Asian Iron Holdings donÆt exercise an option to match the Shougang offer.

If these hurdles can be cleared, Shougang then has to wait for environmental approval from the Western Australian government to go ahead with the mining operation. The proceeds of the sale will be held in escrow until this approval is obtained.

Commentators are now speculating which young mining hopeful will be the next to be purchased by Chinese interests in Western Australia, where as much as 97% of the countryÆs iron ore production occurs. Last year the state exported A$5.6 billion worth of iron ore to China.
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