Chinalco Operations Map. Source : ChinalcoChinalco, the Chinese state-owned metals and mining conglomerate, has made a decisive leap forward today by agreeing to invest $ 19.5 bn in troubled mining giant Rio Tinto. This move comes one year after Chinalco successfully acquired - jointly with the Alcoa group - a 12% stake in the UK listed arm of the Rio Tinto group, equivalent to a 9% stake in the group itself.
According to the Financial Times, "the deal, which will involve the sale of minority stakes in some of Rio’s best mining assets and the issue of convertible bonds, marks the biggest ever investment by China in a foreign company. Chinalco will buy $7.2bn in convertible bonds which will convert into Rio shares at a later date. That would increase its stake in Rio from 9 per cent to 18 per cent. The rest of the capital injection comes from the sale of the minority stakes."
As a matter of fact, Chinalco is pursuing an agressive growth strategy abroad, by taking advantage of the current slump in commodities prices, to buy strategic assets at a distressed price. This is consistent with a rising trend among state-backed Chinese companies, not only in the resource sector but in other sectors as well, to consolidate their dominant position at home and to expand abroad, as I wrote in a previous post three months ago.
Indeed, as Yan Janging, from Caijing Magazine reported, according to some experts the current uncertain environment could be a good opportunity for Chinese companies to continue their expansion overseas. He quotes Ian Sperling-Tyler, oil & gas director in Deloitte saying that China's state-owned oil companies may have an especially good chance to buy close to 19 independent oil firms, the market values of which are all lower than their net assets.
Although, the Chinalco Rio deal can still be hindered by regulatory authorities in Chile and Australia, or by angry shareholders in the UK, it is an important symbol of the structural shift in global capitalism. A shift that signals distinct features from the pre-crisis world.
All in all, if there is one more thing this deal tells us, it is that China's thirst for all kinds of commodities remains unquenchable, and that this thirst will be sustained through 2009-2010 by the huge amount of stimulus money flowing into the infrastructure and construction sector. Given the ongoing "supply destruction" and the CAPEX freeze at the global level that we are witnessing now, this will sooner or later push the price of commodities up and reignite the same kind of commodity-driven inflationnary cycle that the world has known over the 2003-2007 period.
