China out to bust grip of big three

MELBOURNE - China, planning to bankroll a US$6 billion ($8.96 billion) iron ore expansion of Fortescue Metals in Australia, is poised to make further investments to help break the "stranglehold" of the world's three largest exporters.

"The Chinese steel mills are trying to dilute the concentration of iron ore supply," said Mark Pervan, senior commodity strategist at ANZ. "They will be looking for more deals like this."

China, the world's biggest buyer of the ore, has invested in US$56 billion of projects globally to try to reduce dependence on Vale, Rio Tinto and BHP Billiton, which control two-thirds of seaborne supply.

The nation yesterday scaled back contract price demands together with the Fortescue deal after seven months of stalled talks.

The Chinese "are keen to see supply away from BHP, Rio and Vale grow", said Tim Schroeders, at Pengana Capital in Melbourne. They would want to "lessen the stranglehold, or perceived stranglehold, that the big three have", he said.

Fortescue's stock has more than doubled this year as a rebound in demand in China boosted ore cash prices by about 46 per cent.

Chinese lenders would arrange US$5.5 billion to US$6 billion of financing for Fortescue, in which China's Hunan Valin Iron & Steel Group has a stake, as part of a sales price accord, the Perth company said yesterday.

Most of the money would be used to expand production, Fortescue chief executive Andrew Forrest said.

"Fortescue and China are hoping the miner has the potential to break the duopoly of BHP and Rio" for Australian iron ore, said Zhou Xizeng, a Beijing- analyst with Citic Securities. BHP and Rio are the two biggest producers in Australia, itself the biggest exporter of the ore.

Fortescue, which had delayed expanding its iron mine amid a cash squeeze and a slump in demand, planned to increase capacity to 95 million tonnes by 2012, chief financial officer Michael Minosora said last week, from current capacity of about 45 million tonnes.

"The Chinese aren't there for next year, they're not there for the year after, they're there for the next 10 to 20 years," said James Wilson, a resources analyst at D.J. Carmichael in Perth.

China bought record volumes of ore in July as the Government's 4 trillion yuan ($874 billion) stimulus package spurs demand for steel in construction, cars and washing machines.

China's drive to secure ore production was set back in June when Rio rejected a US$19.5 billion investment by Aluminum Corp of China, or Chinalco, that would have included stakes in Rio's Australian iron ore operations.

- BLOOMBERG