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Australia's west coast is aiming to build ports to feed China's hunger for iron |
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Monday, 28 September 2009 |
 If you can't buy it, build your own. That's China's latest tactic in a sometimes acrimonious relationship with Australian iron ore mining companies. Two deals over the past month, with a third in the wind,
point to this switch, which comes after the Aluminum Company of China
(Chinalco) failed to snare a bigger slice of the Anglo-Australian miner
Rio Tinto, followed by mutual finger-pointing over iron ore prices and
the laying of bribery charges in Shanghai against four Rio Tinto iron
ore salesmen.
Chinese anger over iron ore prices and the Rio Tinto loss had triggered
a diplomatic spat between the two countries. But in mid-August some of
the heat dissipated when China's biggest steel producer, Baosteel, won
a modest price concession from Australia's third-biggest iron ore
exporter, Fortescue Metals Group, the company which has made its chief
executive, Andrew Forrest, one of Australia's richest people.
That was followed later in the month when Baosteel invested directly in
a second Australian iron ore company, Aquila Resources, which has yet
to start mining.
More important than the Fortescue price settlement, which saved more
face than money, was a side deal covering the proposed development of
new railways and ports in Australia's northwest, which could lead to a
multibillion-dollar construction surge.
Access to infrastructure, rather than simply opening new mines, is the
key to boosting shipments of iron ore. Baosteel underlined that point
by offering to assist in securing up to $6 billion in low-cost loans
from Chinese banks for Fortescue to build railways and ports. A similar
but looser "strategic cooperation" agreement has been signed with
Aquila.
In fact, all three companies--Baosteel, Fortescue and Aquila--could
soon meet at the same point on the map, a bump on the coast of
Australia's Pilbara region called Anketell Point. This is Aquila's
preferred site for a new port to handle its proposed exports, with
Fortescue participating in Aquila's planning process but not yet
investing.
While Anketell Point is a likely site for a port, it is not alone.
Fortescue is looking at a number of sites, as are the two leading
exporters, BHP Billiton and Rio Tinto, and a new player that emerged in
early September, a joint venture of four small iron ore companies,
called the North West Iron Ore Alliance (NWIOA), which wants to build
two additional berths at Port Hedland to handle their planned future
exports.
Tony Poli, chief executive of Aquila, says Baosteel executives had
shown great interest in the plans to build a port at Anketell Point,
initially to handle 40 million tonnes of iron ore a year and rising to
a theoretical peak of 350 million tonnes a year, rivaling the biggest
existing Australian iron ore ports. "When I showed the plan to the
Chinese, you could see them becoming quite excited about what we're
designing," Poli says.
Anketell Point sits across a narrow bay from an existing Rio Tinto port
at Cape Lambert and a short distance up the coast from Rio Tinto's main
iron ore port of Dampier. "There's no doubt that China wants to see
additional players in the Australian iron ore game, and they're
prepared to help fund any required expansion," Poli says.
Graeme Rowley, executive director of Fortescue, says by e-mail that
Anketell Point provided an attractive option as an export port. "The
lack of available port space is one of the major infrastructure
constraints, which, if not corrected, will continue to prevent
Australian companies from capitalizing on the rich resources of the
Pilbara," Rowley says. "Chinese steel mills are aware of the
limitations and would like to see the development of additional port
capacity."
Justin Walawski, NWIOA's chief executive, echoes Poli and Rowley. He
says the lack of port space is a major hurdle for smaller companies.
"By joining forces we now have a feasible solution," Walawski says.
"We've started our planning process by awarding an engineering contract
to Sinclair Knight Merz [a worldwide consulting firm] and appointed the
anz Banking Group as financial advisors."
Satisfying future Chinese demand for iron ore is one reason for the
port-and-rail rush. Another may be an attempt to try to break the tight
grip on Australian iron ore held by BHP Billiton and Rio Tinto. For
decades these two companies have acted as a duopoly, controlling the
lion's share of iron ore exports, with Fortescue a small but successful
newcomer.
Earlier this year BHP Billiton and Rio Tinto moved even closer, thanks
to a merger deal, which killed the Chinalco move on Rio Tinto.
BHP Billiton and Rio Tinto plan--subject to a complex government
approval process in Australia and antimonopoly regulators in Europe--to
form a single management structure to control their iron ore business
units. They claim it will cut costs. Customers fear it is a mechanism
to maintain high iron ore prices.
For Aquila the Baosteel deal could make the company. Poli says he has
been told that this is the first major international investment made by
$30 billion (2007 revenues) Baosteel in a foreign public company. "The
plan is for Baosteel to invest up to $240 million, which will give them
a 15% stake in Aquila," Poli says. "The involvement of Baosteel paves
the way for Aquila to pursue its strategic vision in drawing together
its West Pilbara iron ore project and shipping through the planned port
at Anketell Point."
Poli said current activity involved testing the quality of the ore
Aquila proposed to export. "There's no specific request about which
port is used for exports, but they're assuming [Baosteel], I think,
that we will construct the infrastructure, including the port," he says.
Aquila has grown from a business valued at less than $100 million to
more than $1.4 billion over the past five years, in the process lifting
the value of Poli's personal 30% stake in the company to $420 million,
making him, too, one of Australia's richest.
The Baosteel deal includes a requirement that the Chinese company
market Aquila's ore to other steel mills. "That means we will have
access to other steel mills, and there is also an obligation that they
will consider assisting us with bank funding from China," Poli says.
"When you look at the combination of offtake [sales] agreements, supply
agreements and funding, together with the potential to invest in the
project, it means not only will it be attractive to the Chinese banks
but also to Australian financial institutions."
Details have yet to be worked out, such as which ports will be built or
expanded, and when, and how much Chinese capital will go into the
developments. Anketell is a possibility in the widest sense of what
everyone is looking at. It is Poli's preferred site and the only one
Aquila is studying, but like everything else it will require
environmental and other government approvals. Better understood is that
China is keen to break the BHP Billiton-Rio Tinto nexus--with Brazil's
Vale, they account for approximately 70% of the world's traded (or
seaborne) iron ore output--and see new infrastructure developed that
will significantly boost the supply of iron ore and, theoretically,
drive the price down.
It's not so much a war on the waterfront as a waterfront war.
The Iron Coast
Western Australia, is the bull's-eye for Australia's planned expansion
of port facilities, which would ship ore to China. The development of
railways to get to these ports would set off a construction boom in the
region.
Source: Forbes
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