ArcelorMittal’s purchase of proven and probable iron ore assets, of over a billion tonnes, in Brazil for $810 million is another instance of rising desperation among steel-makers to chase self-reliance in resources.
In another context, referring to the hunt for coal assets by a consortium of five public sector units, Steel Authority of India Chairman Sushil Kumar Roongta said the resources were to be found but the asking price would be too high.
In May last year, the Oslo-listed London Mining bought the said Brazilian iron ore assets at what now looks a throwaway price of $68 million and then invested $32 million for further mine development. And in 16 months, London Mining found a buyer in ArcelorMittal, ready to give it an eight-fold return on the assets. London Mining shareholders must be celebrating as the company will be giving them $430 million of the income from asset sale.
But why did ArcelorMittal, which has built an enviable reputation of picking up assets at the right prices in all kinds of market conditions, think it was worthwhile to buy the Brazilian ore resource at such a high premium? The world’s largest steel-maker says it is targeting 75 per cent self-reliance in iron ore by 2012 from 45 per cent now.
No doubt, ArcelorMittal will pursue the target with great resolution after it had to agree to pay 87 per cent more to CVRD of Brazil for iron ore supplies in the current season. The firm, with presence in almost all the continents, produced 118 million tonnes of steel last year, more than double the Indian output.
ArcelorMittal Director and CFO, Aditya Mittal, says, “The (Brazilian) acquisition ensures that our ore base is further diversified in the face of tighter supply for raw materials.” The company will be investing a further $700 million at the Brazilian site to lift ore production to 10 million tonnes from around 3 million tonnes for use in its European mills.
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Logistical considerations will assume that the company will be eyeing iron ore assets in different locations. So, we hear stories of ArcelorMittal making overtures to Ukranian ore miner Ferrexpo, which wants partners to expand operations.
Incidentally, the Chinese steel-makers suffered more at the hands of BHP Billiton and Rio Tinto, having snatched ore price rises of up to 97 per cent. China has, therefore, declared its ambition of owning one-third of global iron ore resource as it accounts for over 35 per cent of the world steel production.
In pursuit of that goal, Chinese companies are acquiring assets in politically unstable but resource-rich regions of Africa. At the same time, they are making both friendly and hostile acquisitions in Australia. As for India, their two-fold strategy is to build a cosy relationship with ore exporters here and promise creating steel-making capacity in our resource-rich states, provided good mine linkages are given.
China’s leading mineral trader Sinosteel has declared its intention to invest $4 billion, the biggest investment yet promised by a Chinese company, in a steel mill in Orissa. There is no doubt, however, that the investment will materialise provide Sinosteel is given access to iron ore deposits in excess of 300 million tonnes.
The Chinese desperation to seek long-term security in iron ore supply at reasonable cost, which is not the case now, is understandable, both in the context of poor quality of the mineral available locally and the ambitious steel capacity-building programme up to 2015. While China’s crude steel production is to rise to 530 million tonnes this year from 489 million tonnes in 2007, the country’s steel requirements are expected to be around 780 million tonnes by 2015. Being already highly developed and also urbanised, the US will then be using 100 million tonnes, a marginal fall of the consumption now.
China’s iron ore imports this year are set to grow at least 40 million tonnes to 410 million tonnes of 65 per cent iron content grade. The country has ore reserves of around 45 billion tonnes but unlike the case with the high-quality mineral found in Brazil, Australia and India, the average presence of iron in Chinese ore is less than 33 per cent. Therefore, 805 million tonnes ore mined in China last year was equivalent to 383 million tonnes of 65 per cent iron content.
A country whose requirements of iron ore are to climb to over 1.25 billion tonnes by 2015 has all reason to be concerned about now animatedly discussed big ticket consolidation in the mining industry. No doubt, the hostile $127 billion BHP Billiton bid for Rio Tinto is the provocation for the Chinese aluminium major Chinalco to buy a minority stake in the latter Anglo-Australian firm.
Rumours are also doing the rounds that Chinese steel-makers will be backed by a sovereign wealth fund to muster a bid for Rio to stop BHP in the takeover tracks. An interesting saga is unfolding itself.