China's Steel Industry Looks Abroad
Producers Invest Overseas
To Ensure Flow of Supplies;
Building a Mill in Brazil
By PAUL GLADER
Staff Reporter of THE WALL STREET JOURNAL
March 31, 2004
China is venturing abroad to secure the raw materials needed to produce steel, as its hunger for an essential ingredient to the world's economy drives up prices around the globe.
Chinese steel producers are striking deals with foreign suppliers to ensure steady sources for increasingly scarce materials such as iron ore, needed to make basic carbon steel, and nickel, which is used to make stainless steel. Meanwhile, one Chinese steel producer is planning to build a steel mill in Brazil that would ship its production back to China.
The moves come as China considers other ways to lock in the materials it needs to fuel its booming economy. (See related article.) Its demand has boosted prices for everything from energy to rubber, but some raw materials -- notably petroleum and iron ore -- are in short supply within its borders. China's energy industry has sought to buy stakes in overseas oil reserves, especially in the Middle East, though with limited success so far.
In the short term, the move could lead to still-higher prices of raw materials. But long-term, China's investments could add to global supplies. "If they don't help develop new sources for raw materials, the rest of the world will have a hell of a time," said Charles Blum, president of Washington consulting firm International Advisory Services Group Ltd.
Currently, China is the world's largest steel producer, with a 30% share of global production. It is expected to see its production grow 19% this year, with 16 blast furnaces under construction. But it is also the world's largest steel consumer, because of increased purchases of washing machines, refrigerators and cars, as well as the building of facilities for the 2008 Summer Olympics in Beijing.
One deal made in recent months will supply China's steelmakers with iron ore from North America. A shuttered Minnesota mine was reopened late last year under a new ownership agreement between Chinese steelmaker Laiwu Steel Group Ltd. and Cleveland-Cliffs Co., an Ohio mining company. The two companies agreed to buy EVTAC Mining Co., which had filed for Chapter 11 bankruptcy-court protection and laid off about 400 workers. Laiwu holds a 30% stake, while Cleveland Cliffs owns 70% in the operation, now called United Taconite.
Under the agreement, Laiwu will own 30% of the 3.9 million metric tons produced annually at the mine, but will receive its taconite pellets, which are made from iron ore and used to make steel, for the next 12 years from a Cliffs' mine in eastern Canada because it is easier to ship from there.
China is pressing on to other areas, including Australia and South America. In Australia, four Chinese steel mills reached a tentative agreement with BHP Billiton Ltd., one of the world's largest producers of iron ore, to provide 12 million metric tons of ore annually over the next 25 years for $9 billion. The four Chinese steel mills will each get a guaranteed supply of iron ore from BHP's Jimblebar mine in Western Australia during the contract period. "In the Chinese industry, if you don't have your own iron ore, you are going to pay through the nose," said Peter Marcus, partner of World Steel Dynamics, a steel analysis research group in New Jersey.
State-owned mining company China Metallurgical Construction Corp. has agreed to a $650 million investment in a mining project in Papua New Guinea. It will build and operate a mine and will own 85% of the shares and the entire output of 33,000 metric tons of nickel a year under the agreement. The output would go toward creating stainless-steel products in China. China also hopes it will gain access to Papua New Guinea's timber, minerals and fish.
China's largest steel company, Shanghai Baosteel Group, is going a step further. It plans to build an estimated $1.5 billion blast-furnace operation in Sao Luis, Brazil. The proposed mill would produce about 3.7 million metric tons of steel slabs each year, boosting Baosteel's global steel production by 20%. Baosteel is in discussions with Companhia Vale do Rio Doce SA, the largest iron-ore exporter in the world, and Luxembourg's Arcelor SA, the world's largest steelmaker, regarding the mill.
Most analysts believe Baosteel plans to ship steel slabs back to China for processing, which would be cheaper than shipping back a boatload of iron ore. The operation in Brazil also would give Baosteel flexibility to sell the slabs to other parts of the world.
Chinese investment is paying off in Minnesota's Iron Range region, which has struggled amid the decades-long decline in the U.S. steel industry. A number of iron-ore mines in the region have closed over the past two decades, with the number of workers on the range is down to about 3,700 today from 6,200 a few years ago. But many of the workers have returned with the new activity.
"Two years ago, it was all gloom and doom in the iron range," said John Rebrovich, staff representative for the United Steelworkers Association District 11 labor union. But, with a world-wide shortage of raw materials and a reopened mine, he said small towns are "a little upbeat now."
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