Tianjin-based General Nice Resources, one of the largest iron ore traders in China, is in talks with state-owned enterprises on its home turf about merging or forming joint ventures to reduce funding costs, the company’s CEO Jaffe Lau told FinanceAsia in an interview.
The company is looking at potential acquisitions amid a slump in commodity prices. Merging with a state-owned enterprise would put it in a better position to raise funds.
Privately-held General Nice Resources owns mines in Africa and Australia and generated sales of $3.7 billion in 2013. The group has total assets in excess of $10 billion. Despite being one of the larger industry players, it finds its growth constrained by a lack of funding.
“We feel at this level it’s difficult to move forward," said Lau. "We are seeking some opportunity to cooperate or merge with SOEs to reach a higher platform. [The] Chinese government is willing to support SOEs. Chinese local banks are willing to support SOEs but not private enterprises,” he added.
Speaking at the National People’s Congress in early March, Chinese Premier Li Keqiang said the government would “unswervingly” support the private sector. However, China's state-owned enterprises often have preferential access to lending from Chinese banks and enjoy cheaper funding in the debt markets.
According to Lau, the cost of funding for a state-owned enterprise tapping the bond markets is about 3%-4% compared to 10%-12% for a private company.
The climate for fund-raising for steel companies has deteriorated thanks to a collapse in commodity prices and over-supply. In addition, fraudulent loans collateralised by metal stockpiles at Qingdao port have fanned fears among banks and curbed their appetite to lend. “There has been quite a lot impact [from Qingdao Port] yes. People lost the confidence and the trust,” said Lau.
General Nice counts HSBC and Standard Chartered among its main lenders and both had exposure to Qingdao Port. "[Banks] no longer trust this kind of structured finance," added Lau.
Crisis begets opportunity
Despite difficult market conditions, the cyclical downturn has created acquisition opportunities for mining and commodities firms.
“Yes we do [have acquisition plans]. If there are any reasonably priced and good projects, we will acquire,” said Lau, declining to specify targets.
General Nice early this year took over an iron ore mine in Greenland from troubled London Mining which is under administration. The mine is expected to have a total cost of investment of $2 billion and General Nice is lining up financing from Chinese policy banks.
To spread the risk, General Nice has in the past partnered with other Chinese companies. This was the case in 2012, when it formed a consortium with Hebei Iron & Steel, Tewoo group and Industrial Development Corporation of South Africa to buy a 74.5% stake in Palabora Mining company from Rio Tinto and Anglo American for about $476 million.
The fortunes of the steel industry are closely linked to China's construction and property market, which has been floundering. Lau however, believes that the light could finally be at the end of the tunnel, thanks to the government's move to shore up the real estate and stock markets. The Chinese government cut the benchmark lending rate in March this year, the second time in the past three months.
"Once the property market goes up, they can bring up everything from the steel products, construction, cargo, everything," said Lau. "We feel that maybe [in] three to six more months, the commodity cycle will start to bottom out," he added.