Beijing / Hong Kong: China’s taste for cheap commodities showed no sign of flagging on Monday, with government bodies preparing to buy up aluminium, corn and sugar while a state-run firm bid for an Australian zinc miner.
Demand from China drove the boom in commodities and now that prices are far from their peak, the government is stocking up on strategically important materials.
Eyeing more: A Chinalco facility in China. The company has entered into a $19.5 bn deal with Rio Tinto. Bloomberg
It is also buying up surplus crops to make sure farmers—key to ensuring rural stability—do not take a hit from tumbling food prices.
The government is also supporting a drive for mergers and acquisitions by state-backed metals companies, many of whose foreign rivals are struggling with debt and collapsed markets.
Last week metals conglomerate Aluminum Corp. of China (Chinalco) unveiled a $19.5 billion (Rs94,965 crore) deal with Rio Tinto and on Monday trading house China Minmetals Corp. said it agreed to pay $1.7 billion for the world’s No. 2 zinc miner, Oz Minerals Ltd.
Oz Minerals was formed last July in a merger its own executives valued at A$11.6 billion. Both deals need approval by Australia’s treasurer, who bankers say has blocked numerous Chinese approaches in the last year.
“It looks like a decent price if all the hurdles are passed,” said Tim Schroeders, Pengana Capital portfolio manager. “It’s far from a done deal.”
With no certainty of snaring assets that can ensure future flows of commodities, China has been hunting on the open market. China’s State Reserves Bureau (SRB) has already bought up metals such as zinc and aluminium in the last few months and it could buy a further 300,000 tonnes in March, smelter officials and traders said on Monday.
“The SRB may buy 300,000-500,000 tonnes in March and another 300,000-400,000 tonnes in May,” one smelter official said.
That would more than double the 290,000 tonnes it bought from eight smelters in December, a move that has helped lift Shanghai aluminium prices above London prices for the first time in at least three years—even though Chinese demand has fallen.
It is also far more than the 122,000 tonnes of primary aluminium that China imported in all of 2008. To stop its buying sucking in cargoes from abroad, where a crash in demand for cars and houses has left a huge glut, China is likely to reinstate a 5% tax on primary aluminium imports from 1 March.That would be a different tactic from the one being employed in copper, according to traders who said last week that China was quietly buying on the international market to prevent prices spiking.
But it would be in keeping with its purchases of crops, where the government deliberately targets local suppliers and controls foreign trade to ensure benefits stay close to home.
China has already bought soya bean, wheat, corn, sugar and rice for its reserves and plans to buy a further 10 million tonnes (mt) of corn in northeastern areas, traders said on Monday, bringing its corn purchases to 40mt or 24% of a projected record harvest.
The country’s main sugar producing region, Guangxi province, will also buy 400,000 tonnes of white sugar to shore up domestic prices and help farmers, according to an industry website, the Guangxi Sugar Wholesale Market.
On top of 800,000 tonnes of sugar purchases planned by Beijing, that brings government buying to 8% of China’s expected production. But it is unlikely to trigger imports since the government is offering less than Zhengzhou white sugar futures prices, which are below the global market.
“Imports are expensive. International prices could go up further in anticipation of deficit and Indian imports,” said Tao Qiujun, an analyst with the Guangxi Sugar Exchange.
Nor will Beijing’s corn purchases prompt a major inflow of corn, even though Beijing’s offered price of 1,500 yuan ($219.3) per tonne is well above the US corn sold to South Korea at $201.95 to $203.95 per tonne last week.
Unlike soya bean or rapeseed, which China needs to import to meet local demand, there is little call for corn from abroad. “It may trigger some corn imports, but not much. Many feed mills cannot afford domestic corn, how can they take risks on imports?” said one industry analyst. “Demand is not very good.”
Grain experts have been calling for the state to buy from drought-hit provinces such as Henan, Shandong and Hebei because some farmers have difficulties selling their extra harvest.
“Sales by feed mills are not promising. Breeders are not actively restocking. Pig and poultry breeders are losing money,” said Ding Ding, an analyst with Beijing CIFCO Co. Ltd.
Jim Regan in Sydney and Alfred Cang in Shanghai contributed to this story.