China sidesteps suppliers with Aquila move

China's $1.4bn takeover plan is a continuation of push to secure raw materials outside of dominant iron ore suppliers.

China's $1.4 billion move on Aquila Resources is a continuation of the Asian giant’s push to secure raw materials outside of the dominant iron ore suppliers, according to an industry expert.

Phillip Kirchlechner, an iron ore and China expert, said despite China’s long desire to control a portion of Australia’s iron ore, it had not hit that target.

“The Chinese government as well as the Chinese steel industry have been concerned about their import dependency on raw ­materials for a couple of years,” he said.

“The import share of the total iron ore requirement is still going up and that’s a huge concern to them.

“That’s the main reason why the government and steel industry want to get their hands on iron ore.”

Chinese state-owned Baosteel teamed up with Australian rail freight giant Aurizon to launch a $3.40-a-share offer for Aquila Resources, which is developing a major iron ore mine in Western Australia and a Queensland coalmine.

The bidders’ statement is tipped to be released this week and the market is expecting a lift in the bid price, with analysts saying a 10 per cent increase is probably needed to attract board approval.

Euroz Securities analyst Greg Chessell said while the offer was attractive in the context of Aquila’s peers and its own substantial funding requirements, the bid fell short of his assessed fair value of $3.75 a share.

“The takeover offer is validation of our view that the Chinese steel industry is motivated to reduce the influence in seaborne iron ore trade of the producer oligopoly that currently exists among Rio, BHP and Vale,” he said.

Mr Kirchlechner, director of Iron Ore Research, said sentiment towards iron ore stocks was cooling and the Chinese believed it was the right time to buy.

“It’s a very deliberate and long-term strategy to come in now at a time when they think they could get a good valuation,” he said.

Mr Kirchlechner, who was chief representative of Hamersley Iron (Rio Tinto Iron Ore) in Shanghai during the 1990s and Fortescue’s head of marketing until 2006, added that Baosteel’s selection of Aurizon as a joint bidder was a new strategy, probably formulated in light of disasters such as Citic Pacific’s Sino Iron project.

“A few years ago there was a reluctance by the Chinese to work with Australian advisers,” he said.