Monday, February 23, 2009

Credit crunch plays into China's shopping plans

By David Barboza - IHT - Friday, February 20, 2009 

SHANGHAI: With the world suffering through a major credit crunch, China has suddenly gone shopping.

Beijing said Friday that one of its big state-owned banks, China Development Bank, agreed to lend Petrobras, the Brazilian oil giant, $10 billion in exchange for a long-term supply of oil.

That investment came after similar deals were signed this week with Russia and Venezuela, bringing China's total oil investments this month to $41 billion.

This month, Aluminum Corp. of China, the largest Chinese aluminum producer, agreed to invest $19.5 billion in Rio Tinto of Australia, one of the world's biggest mining companies. And on Monday, China Minmetals bid $1.7 billion to acquire Oz Minerals, a huge Australian zinc mining company.

Call it the new China play. Flush with cash and eager to take advantage of weak commodity prices, China is once again on the hunt for global energy and resources to power its growing economy. But this time, Chinese companies are being welcomed overseas.

With President Hu Jintao traveling this week on a "Friendship and Cooperation Tour" in Africa, where China has huge interests in resources and mining, the country's vice president, Xi Jinping, was visiting South America, meeting with the leaders of Brazil and Venezuela and signing cooperation agreements on oil and minerals.

Venezuela got a $6 billion loan from China and agreed to increase its oil exports to the country, bringing China's total investment in the country to $12 billion. In Brazil, China signed a $10 billion "loan-for-oil" deal that guaranteed the country up to 160,000 barrels a day at market prices.

And in Beijing this week, Prime Minister Wen Jiabao met his Russian counterpart after China agreed to loan Russia's struggling oil giant, Rosneft, and Russia's oil pipeline company, Transneft, $25 billion in exchange for 15 million tons of crude oil a year for 20 years.

"This is heavy energy diplomacy," said Philip Andrews-Speed, director of the energy policy center at the University of Dundee in Scotland. "If you need money you go to where the money is, and today, China's the place."

The huge investments are China's biggest since 2005, when a Chinese state-owned oil company made an unsuccessful bid for Unocal, the U.S. oil company, amid worries about whether fast-growing China was seeking to tie up global resources.

But the world has changed significantly since then. Commodity prices have fallen sharply in recent months, following a long bull market that was partly fueled by voracious Chinese demand for energy and resources. And China has built up nearly $2 trillion in foreign currency reserves, giving the country easy access to capital.

"What's changed for China is that their key competitive strength has increased, and that's capital," said Andrew Driscoll, a resources analyst at CLSA, an investment bank. "A lot of companies are begging for capital."

China wants reliable supplies of crude oil to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build new homes and consumer goods.

Analysts say there are still worries about whether China will compete with other countries, like the United States and India, for oil and other natural resources.

But some analysts say China's recent investments are welcome because they will help finance much needed development, increasing the global supply of oil and natural resources at a time when many of the world's biggest banks are reluctant to lend.

"It's a good thing because a lot of projects have been postponed," Andrews-Speed said. "Oil companies may now have the money to produce oil. There's going to be more oil produced."

Analysts say that China could continue to make deals this year, for a variety of small oil and natural gas companies, mineral producers and mining companies.

This week, for instance, shares of the Australian miner Fortescue Metals rose after reports that the company was in talks with China over a big investment to help the company expand its operations.

In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where U.S. and European countries are not well positioned, like parts of Africa and the Middle East.

In one of the deals reached this week, China made an alliance with the government of Hugo Chávez, the president of Venezuela, who has denounced U.S. policies.

While the oil deals vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices.

In Brazil, the $10 billion loan will be used to finance a deep water oil reserve that Brazil hopes will help turn the country into a major oil producer.