Is China becoming the banker for the international resources sector?

In response to the question “Why do you rob banks?”, the U.S. bank robber, Willie Sutton, is reputed to have answered “Because that’s where the money is”. In the same way cash-poor, resource-rich countries and resource companies are today turning to China, because that’s where the money is.


In my last column, drafted in the second week of February, I examined the logic behind the imminent deal between China and Russia which was concluded just one week later. The Chinese government has agreed to lend US$ 25 billion to two of Russia’s state oil companies, Rosneft and Transneft, in return for a guarantee of supply of 15 million tonnes per year (300,000 barrels per day) for 20 years. I suggested that Brazil would be next, as indeed it was.


That same week, two other deals were concluded. The China Development Bank agreed to lend Brazil’s national oil company (NOC), Petrobras, US$10 billion in return for supplying between 60,000 to 100,000 barrels per day of crude oil to Sinopec, China’s main state-owned refiner, and between 40,000 and 60,000 barrels per day to PetroChina. In Venezuela, China added to the joint fund which is to be used to finance oil industry projects, bringing the total value of the fund to US$ 12 billion, of which China has contributed US $ 8 billion. In return, exports of oil from Venezuela to China are set to rise from 330,000 barrels per day to one million barrels per day by 2015.


Unlike many of China’s large oil deals announced in the last few years, these appear to have been driven by China’s government not by China’s NOCs. The past fifteen years have seen China’s NOCs commit tens of billions of dollars in their global quest of access to oil and gas resources, in more than forty countries across the world. The primer driver for these investments has been the desire of the NOCs to enhance their oil and gas reserves, to secure their long-term survival and to become major international players.


A subordinate driver has been the misplaced belief of China’s government that the holding by the NOCs of rights to overseas reserves will somehow enhance China’s security of oil supply in times of crisis. This motivation has also lain behind China’s growing energy diplomacy in Central Asia, the Middle East, Africa, South-east Asia and Latin America. These recent loans can be seen as tangible expressions of this energy diplomacy.


The timing of the loans has been determined by the short-term need in these three countries for cash to invest in the development of new oil fields at a time when oil prices are relatively low and credit is tight. The low oil prices have caught many oil-producing countries and their NOCs by surprise. Government budgets have been set on the assumption of higher oil prices. NOC budgets are being squeezed by a shortage of revenue from oil sales as well as by pressure from the cash-strapped governments.


In Russia, Rosneft and Transneft require the loans to make much-needed investments in new oil fields and pipelines in order to maintain the level of exports of oil, a key contribution to Russia’s foreign exchange earnings. In Venezuela, oil production is falling due to a lack of investment. In Brazil, the challenge is different. Here, major new discoveries of oil lying below a salt layer in very deep offshore waters require investments amounting to more than US$100 billion over the next five years.


The role of China’s NOCs in these deals has been rather discrete. In the case of the Russian deal, they will receive the crude oil to process in their refineries, though they may be hoping that the loan will create an atmosphere that encourages further investment opportunities for them in Russia. In the case of Venezuela, Chinese companies have been active in exploration and production for more than ten years, and it is not evident what they have to gain from the joint fund, except that some of these funds may assist their own projects. The deal with Brazil quite explicitly mentions that China’s NOCs and their service companies are to be given opportunities to take part in the development of these new oil fields.


Over the same period in late February and early March 2009, China’s state-owned mineral and metal companies were launching a spending spree on a similar scale, but in a different manner. The aluminium company, Chinalco, was seeking to raise its stake in the indebted mining company, Rio Tinto, from 9% to 18% at a cost of US$19 billion. The deal would help Rio Tinto recover from having purchased the Canadian company, Alcan, at the top of the market. As of mid-March this deal has not been concluded on account of objections from other shareholders in Rio Tinto and from the Australian government.


At the same time Sinosteel, a Chinese state steel company, was taking a 5.85% share in the Australian iron ore mining company, Murchison, having last year gained control of Midwest, another iron ore miner in Western Australia. Sinosteel is said to want to gain full control of both companies and merge them into a single structure. Meanwhile, another Chinese company, China Minmetals, is paying US $ 1.7 billion to buy the Australian company, OZ Minerals, the world’s second largest zinc miner.


If successful in these acquisitions, China’s mining companies will have succeeded where China’s NOCs have failed – namely, in gaining significant or controlling shares in western resource companies. Whether or not these acquisitions enhance China’s security of supply of metals, the Chinese companies themselves will certainly have succeeded in taking advantage of market conditions to build their international positions.

The Democratic Republic of Congo saw Chinese companies making contradictory moves. On the one hand, a number of small-scale, private sector copper smelting companies left the country without paying taxes or wages, on account of poor trading conditions resulting from low copper prices. On the other hand, China’s government has committed to make its largest single investment to date in Africa, promising US $9 billion.  US $ 6 billion is to be spent on infrastructure as part of national reconstruction. The balance of US $ 3 billion will be invested in a Congo-China joint venture mining enterprise. In return, China will receive ten million tonnes of copper and 600,000 tonnes of cobalt, together worth about US$ 50 billion at today’s low metal prices.


The deal in Congo resembles the oil deals, in that the Chinese government has been the main driver, securing metal supplies in return for loans, with the mining companies riding on the back of the deal. This contrasts with the mining deals in Australia, which are being driven mainly by the companies, though with support from China’s government.


So, China is indeed becoming a significant source of funding for resource-rich nations and resource companies, at least in the short-term, because that’s where the money is. But, what next? Look for resource companies, whether state-owned or private sector, which are short of cash, and where China has a strong economic or political interest. The list is long, and I for one cannot predict who will be next to benefit from China’s cash and generosity.

 Philip Andrews-Speed is Director of the Centre for Energy and Mineral Law and Policy at the University of Dundee, Scotland.

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