Originally Published 2010-12-10 00:00:00 Published on Dec 10, 2010
The economic cooperation between Baosteel of China and China Steel of Taiwan for joint investment in overseas mining, and these kinds of economic engagements, need to be viewed more from the lenses of the liberal paradigm of international relations rather than focusing on the conflict or the political aspects of the engagement.
Implications of the joint overseas explorations for iron ore between Baosteel and China Steel
The financial crisis which began in 2008 continues to affect the global economic order even in 2010. For example, in the European Union (EU) the contraction in GDP was the severest since the 1930s. Even in 2010, the recovery seems fragile and uncertain. According to World Bank projections, the global GDP will expand between 2.9 per cent and 3.3 per cent in 2010 and 2011, strengthening between 3.2 per cent and 3.5 per cent in 2012, which will reverse the 2.1 per cent decline in 2009. It is expected that developing economies will grow between 5.7 and 6.1 per cent each year from 2010- 2012.

In the first six months of 2010, the Chinese economy grew 11.1 per cent to reach 17.28 trillion Yuan (USD 2.55 trillion), according to the National Bureau of Statistics (NBS) in China. When the crisis began, it was expected that China will not be affected by the crisis at all because of the perceptions that the Chinese economy was largely decoupled from the Western economies, and on accounts of its closed capital account and its insulated banking sectors.

But the export oriented development model that China has been pursuing since Deng Xiaoping’s Reforms and the opening-up of its economy in 1978 dragged the Chinese economy also to the crisis. The impact of the crisis became severer as demands from China’s principal export destinations such as the US and EU countries shrank and China was left with a vast number of goods that were over produced but could not be supplied because of demand constraints.

In the financial sector, the stock market crash wiped out more than two thirds of market value. The Chinese banks also witnessed the sudden pullout of many of their Western partners, like the Bank of America, UBS and RBS, which had to sell their minority stakes to retrieve capital. Despite the fact that China possessed USD 2.1 trillion in 2008, China’s foreign exchange reserves showed signs of decline in the fourth quarter of the year. This can be attributed to the decline in foreign investment and the outflow of capital. China also faced a severe decline in exports, rising inflation and sharply increasing levels of unemployment. China’s key export industries such as steel, ship building and machine tools also were impacted severely. These sectors together accounted for more than 50 per cent of Chinese exports.

Against this back drop, the Chinese government announced a USD 586 billion stimulus package. According to the Chinese plans, the stimulus package is to be spread proportionately from late 2008 through 2010, financed in part by a surge in credit expansion, with total new lending equal to 30 per cent of the GDP in 2009. While delivering his work report to the National People’s Congress (NPC) in June 2009, Wen Jiabao pledged a series of measures to boost domestic demand, including a USD 140.283 billion government deficit to fund investment in major infrastructure projects and the nation’s social safety net. He also noted the need to support the export sector while saving local enterprises.

China’s stimulus package is one of the world’s largest, and attempts to take China to a new level of global competition. According to the stimulus package, USD 88 billion would be spent on constructing inter-city rail lines, which is the highest priority in the plan. Thus iron and steel become important for ensuring the sustainability of China’s stimulus package over the long run. In the last quarter of 2009, 43 per cent of the growth in China was from investment in fixed assets such as roads, factories and machinery -- all of which rely on steel. Despite being a pillar industry in China, the steel industry is highly fragmented and prone to over production. It also faces problems of backward production capacities and that of carbon emissions. China’s steel makers use on an average 20 per cent more energy per tonne of output than producers elsewhere. Also, because of the increasing demand in China, iron ore prices have risen from an average of USD 37 per tonne on the Brazilian spot market in 2004 to an average of USD 101 per tonne for 2009.

Most of China’s iron ore demands are met through imports. China is one of the largest producers of iron ore, yet it is a net importer of iron, which in itself displays the strong demand for iron in the country. Increasing steel production in China has driven up the demand for iron ore.

The Chinese strategy to reduce dependence on iron ore imports is to increase overseas iron ore mining. According to the China Metallurgical Industry, there is a need for enhancing domestic iron ore explorations and increasing investments in overseas mining operations. With rapid development of the Chinese steel industry, and considering the continuously rising international iron ore prices, investments in overseas iron mines are the effective solution to the shortage of iron ore in China.

Recent Chinese steel investments in mining capacities abroad include Shangdong’s investment in Sierra Leone Tonkolili mine and Wuhan’s joint venture with Australian Centrex Metals Ltd Corporation. China has equity interests in about 190 million tones of iron ore abroad, which equals roughly about 30 per cent of total imported iron ores. Also Baosteel in China and Taiwan’s China Steel have planned joint investments in overseas iron ore mines.

This is the first cross Strait steel industry cooperation and a reflection of new business opportunities that derive from the political détente and the economic liberalisation between the People’s Republic of China (PRC) and the Republic of China (ROC). In June 2010, the PRC and the ROC reached an agreement on a wide ranging trade deal called the Economic Cooperation Agreement or the Ecfa.

The partnership between Baosteel and China Steel is, however, sensitive in nature. In fact, the Ecfa faced strong political opposition within Taiwan amid fears that economic integration could lead to political reunification, and that the economic benefits of the partnership will not be as expected. But what needs to be pointed out in this context is that Baosteel is a natural partner for China Steel because the two companies have cooperated in the past on technical issues. Also, the two have cooperated earlier on offshore oil drilling. Baosteel does not have iron ore mines of its own till now. In the last few years, Baosteel has developed iron ore mines with local partners in the international market.

To secure sources of iron ore, the partnership between the two should be seen in a more positive light. China Steel faces the need to move upstream and to be vertically integrated, as it is about 20th in the world in terms of size. For this purpose, financing and scale become important which would not be possible for China Steel to accomplish on its own. Diversification in forms of joint ventures for offshore iron ore mining, as has been agreed upon by Baosteel and China Steel, is important as it will help break the monopoly of the largest iron ore producers in the international market and influence the pricing. In any case, Baosteel is a private sector, publically listed company, and cooperation between these companies should not involve politics.

Just the way the steel industry is one of the pillar industries in China, the steel industry in Taiwan is also one of the pillar industries. Steel becomes important in Taiwan also because of the export driven economic development model. According to statistics released by the Taiwanese Ministry of Finance in July, Taiwan increased its exports of iron and steel by 64.9 per cent, to USD 1.06 billion.

Given this backdrop, economic cooperation between Baosteel and China Steel for joint investment in overseas mining is a welcome development and will bring benefits to both the countries and generate growth. This kind of economic engagements need to be viewed more from the lenses of the liberal paradigm of international relations rather than focusing on the conflict or the political aspects of the engagement.

(The author is a Junior Fellow at Observer Research Foundation)
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