Wednesday, January 7, 2009

China goes shopping for commodities

If you have kept up to date as I try to do with China's oversea investments in the commodity and energy sectors you're probably aware of the fact China has been shopping for commodities in emerging markets.

Africa and to a lesser extent South America where the main benefactors of China's spending spree from 2000-2008. The two continents are home to abundant supplies of natural resources China needs to sustain economic growth. The two continents are also home to various countries that are hungry for foreign direct investment in their commodity sectors which until recent had been the main fuel behind their respective economics booms.

China also had a edge up on their western counterparts in many of these countries. Some countries in Africa and South America intimidate traditional western investors due to political instability. Others have such a horrendous human rights record that many western firms are morally inclined not work in them.

With the global slow down in full swing, cash rich Chinese companies and investment groups now find themselves in a different position. Frozen credit markets, plummeting commodity prices, depressed stock market prices and a cloudy horizon in the future have led many mining companies from developed countries to search for long-term investors with the capital to keep their operations running until the global economy improves.

China has shifted its attention away from Africa, instead focusing on possible investment opportunities in Canada, Australia and South America. Keith Spence, president of Global Mining Corp, a China-focused resource investment company was quoted in a great piece published in the Financial Times yesterday.

"The Chinese realize there are massive opportunities in the market. A year ago, they were going to Africa to acquire early-stage development assets. But now they are looking for larger tonnage, longer life, later-stage assets. There is less of an emphasis on emerging markets, because now there is choice."

Last month China's largest zinc producer, Zhongjin purchased 50.1% of Australian zinc miner Perilya for $32 million usd. Chinalco, a Chinese aluminum company has suggested it may increase its stake in Rio Tinto to nearly 15%.

(click here to access the full article on this topic from the Financial Times)

I must say it is interesting to see that although China finds itself in a more lucrative buying position that it has not shunned South America. Evidence to suggest the Chinese may perceive South America as more than simply another commodity rich area in which to extract untapped resources.

Rather it may be that South America has come to represent a region that has well developed assets, worthy of purchasing for the long-term. China is forging much closer ties with fellow APEC members Chile and Peru. China is quickly working with Peru to finalize a Free Trade Agreement and already has one with Chile. China is increasing its investment in agricultural commodities in Brazil and Argentina and hopes to continue easing visa restrictions for many of its citizens on travel to the region.

Below I've included a chart of Chinese investments / cooperation with Latin American countries. I assembled this chart about 6 months ago for my independent study / thesis. If you know of any other instances of Sino-Latin America interaction please by all means let me know and I'll update this chart.