Thursday, July 22, 2010

CHINA'S GROWING IMPORTANCE IN THE COMMODITIES MARKET

On our Facebook Page we presented research on catalysts of global growth. We saw that exports to China and imports from China are definitely already a factor to reckon with. Imports from China are already the most important import flow variable at the global level. Germany and the USA lost their dominant position. With Chinese middle classes still earning much less than their German and American counterparts Exports to China are a bit less important, but they do already represent a number 3 spot in a global ranking of countries based on their importance for exporters.

Within the package of products and services that are exported to China commodities play a very important role. China is commodity hungry and with the Chinese manufacturing industry producing at full speed with growth rates around 10 percent or even slightly higher this will definitely continue in the near future.

But the Chinese do not want to be dependent on imports of commodities. Chinese firms - both large state-owned enterprises and wealth funds and privately-owned vehicles - are very active in the M&A market for commodity producers. Last year these Chinese firms invested some $ 13 billion in mining corporations abroad and that is 100 times (!) more than the investment level five years earlier.

And it is clear that this year's investment level will be higher again. Shangdong Iron indicated last week that it would invest $ 1.5 billion in African Minerals from Sierra Leone (iron ore). The total number of Chinese mining deals so far this year is 76 with a total value of $ 8.3 billion. Investigator Derek Scissors of the Heritage Foundation believes that deal flow trends will not be broken during the next few years. This will translate into a total level of mining-related Chinese M&A activity (with the Chinese on the buy side) of more than $ 100 billion in 2014.

Shangdong Iron investing $ 1.5 billion in African Minerals from Sierra Leone
Chinese firms becoming a dominant force in cross-border M&A's in the Commodities sector 


The Chinese investment activity is this time well-planned when looking at valuation levels and that is something new. In the past, large government related Chinese investment funds were notorious for their bad investment timing. This time round China expands at a time when the world - including mining firms - is suffering from a post-Crisis blues. Valuation levels are more than interesting for the Chinese.

In 2004 Chinese foreign mining investments represented about 1 percent of total international mining transactions. In 2007 this number grew to 7.4% and in 2009 the number exceeded 33%.

It will be interesting to see to what extent we can see something of this trend back in our next contribution to the Catalysts of Global Growth series later today when we focus on Foreign Direct Investments Abroad, adding up all industries.

(NOTE: Story partly based on information from an article in The Wall Street Journal; LMG info and analysis added)

1 comment:

  1. As a country, China is moving to value added manufacturing in the future. They are going to move away from the cheap labor image. Only time will tell.

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