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The latest Chinese investment in a US steelmaker has been widely criticised by the domestic industry.
But Anshan Iron & Steel Group’s backing for John Correnti’s new venture could turn out to be a smart move, and one that shows Chinese producers are finally learning how to play the international investment game.
State-owned Chinese companies have aggressively expanded into the world market over the past six years, and particularly since the financial crash of 2008.
This expansion has been focussed on the developing world, notably Africa, where Chinese mining and engineering companies have poured cash into exploration, production and infrastructure projects.
Anshan’s latest deal is not the first Chinese investment in North America —Tianjin Pipe is moving ahead with plans for a $1 billion seamless pipe mill in Texas, Wuhan Steel bought a $240 million stake in Canada’s Consolidated Iron Mines and Jinchuan Group has launched a friendly C$150 million takeover bid for Toronto-based nickel junior Crowflight Minerals.
All of these transactions have been for minority stakes, in return for offtake deals, or Greenfield and early stage projects.
Not that China hasn’t tried to make more significant transactions.
In 2004, China Minmetals failed in its attempt to buy Noranda. A year later China National Offshore Oil tried to take control of oil giant Unocal, a bid that was shot down due to national security issues.
But China has come back smaller and smarter.
Instead of looking to take control of established and entrenched companies and risk a backlash, Chinese investors have worked out that it’s better to build goodwill by brining capital — and jobs — to local communities by financing new projects from scratch.
That’s one reason why big Chinese mills sat out of the steel merger and acquisition boom in the middle of the last decade, and why Correnti’s Steel Development is such an attractive proposition. It’s not like there are many other Greenfield projects out there.
But, while it bears some similarities to other overseas investments made recently by Chinese companies, Anshan’s decision to fund Steel Development has one key difference.
China is short on iron ore, nickel and most other raw materials. It’s not short on steel.
Furthermore, Steel Development is unlikely to export its output to China. Even if Anshan needs the rebar, Correnti’s vision for the company is based on supplying local markets.
Unsurprisingly, then, news of Anhsan’s investment in the company has sparked some controversy and speculation as to its motives.
One theory is that the deal has been timed to divert attention from currency and trade issues at this week’s US-China summit.
That seems unlikely. With Greek’s economic stability still in doubt and the embers in Thailand still smoking the summit is unlikely to make front-page financial news.
A more likely reason is that Anshan, as well as other Chinese steelmakers, is reacting to domestic and international pressure for Chinese mills to curb overcapacity by looking overseas for growth.
A stronger yuan, if that’s the way it goes, would only make these kind of investments more attractive.
There’s no real reason not to take Anshan’s investment at face value, despite the controversy. The company says it wants to develop expertise in EAF technology so that it can reduce its dependence on imported iron ore.
In this, Anshan has Beijing’s backing.
If scrap starts to replace iron ore in Chinese steelmaking on any scale, the consequences for the US steel market as a result of higher ferrous scrap prices could be far more significant than anything happening in Mississippi.
But Anshan’s motivation could be even more basic than that — good old-fashioned capitalism, albeit with Chinese characteristics, could be behind the deal.
Correnti and his team are clearly bullish about the prospects for US construction steel demand. The reason for the investment could be that Angang is too.