A fear of failure hangs over cautious Chinese investors

Chinese investors are shunning speculative WA mining projects in favour of taking small equity stakes in LNG assets and high-quality iron ore mines.

Graph for A fear of failure hangs over cautious Chinese investors

Chinese worker processes steel products at a factory in Qingdao city, east Chinas Shandong province. (Imaginechina)

Australia’s mining sector has lost its darling status in the eyes of Chinese investors, who have lost billions of dollars in projects dotted around the country. It was only few years ago that the Chinese would want to snap up anything from exploration projects to a chunk of mining giant Rio Tinto.

In 2013, deals in the energy and power sector accounted for three quarters of China’s total investment in Australia. Investment into this sector increased more than 43 per cent from the previous year, including China National Offshore Oil Corporation’s $1.9 billion investment into the Queensland Curtis  LNG project, according to PwC’s new report on Chinese outbound deals.

The mining and minerals sector, which once accounted for the lion’s share of Chinese money flowing into Australia, shrank to only 20 per cent of total M&A activity in 2012. The declining Chinese appetite for Australian mining assets was evident during a recent visit by a senior delegation from the APEC China Business Council to Australia.

One of China’s biggest traders of iron ore from Hebei Iron and Steel Group, China’s largest producer of steel, expressed interest in buying Australian iron ore assets. However, he made it categorically clear he didn’t want a greenfield project nor a magnetite asset.

The colossal failure of CITIC Pacific’s Sino Iron project, which is $6 billion over budget and four years behind schedule, has left a deep impression on many Chinese investors, including the senior executive from Hebei Iron and Steel.

The executive made it clear he was only interested in hematite (high-grade iron ore) projects that have well-supported infrastructure, such as railways and port facilities. It is a far cry from the days when Chinese investors bought multi-billion dollar magnetite (low-grade iron ore) projects in the middle of nowhere.

Many Chinese projects in the mid-west region of Western Australia have either stalled or mothballed. The region was once hailed as a potential new iron ore province for Australia, but has lost much of its lustre lately.

David La Ferla from Negotiation, a specialist energy and resource advisory firm, said failed Chinese projects would have a deterrent effect on other investors and was bad for Australia. It is also clear that the new crop of Chinese investors have much less tolerance for risk than their colleagues a few years ago.

The steel industry executive said he didn’t want to buy any mine outright and was happy to take a small equity stake in producing iron ore mines. During the height of the Chinese mining investment boom, many companies preferred to own mines outright. The Chinese have learnt that they are not always equipped to be successful buyers, owners and operators of overseas projects.

It is not only state-owned giants that are interested in Australian LNG assets, but hundreds of smaller Chinese private players. Some of the delegates from the APEC China Business Council also expressed interest in investing in the Australian LNG sector.

However, like their colleagues from steel industry, they prefer to take equity stakes in mature and producing assets and even depleted oil fields. But they don’t want to be involved in more risky and speculative exploration projects.

Follow Peter Cai on Twitter: @peteryuancai
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