Steel major eyes stake in Australian firm

China's largest steelmaker Baosteel Group may buy a stake in Australian iron ore miner Fortescue Metals Group Ltd to ensure stable raw materials supply.

"Baosteel will seek a stake in Fortescue when both sides reach an accord on a number of things, including common goals, development strategy and market positioning," said Xu Lejiang, chairman of Baosteel Group, yesterday at Baosteel's Majishan Port in Zhejiang province, where he received its first shipment of 170,000 tons iron ore from Fortescue.

Baosteel signed a 10-year iron ore supply contract with Fortescue in February last year under which it will get 20 million tons of ore every year.

The third largest iron ore supplier in Australia said it welcomed direct investment by major Chinese companies.

"The Chinese industrial champion takes Fortescue very seriously, and we will encourage its participation in the future of Fortescue," Andrew Forrest, founder of Fortescue, was quoted by Reuters as saying yesterday.

Fortescue has already signed contracts with 33 large and medium-sized Chinese steel manufactures for at least 10 years.

As the ore price increased 65 percent and the coal price tripled this year, Chinese steelmakers have begun buying overseas mining assets to reduce costs.

"In addition to the cost-cutting benefits, such stakes can also ensure a much stable long-term raw material supply, which is very important for Baosteel given the current global market condition," said Du Wei, an analyst at Umental.com, a metal information provider.

Liu Yanqi, an analyst at Haitong Securities, said: "The possible alliance is expected to strengthen Baosteel's power in iron ore price negotiations with Australian miners, such as Rio Tinto and BHP Billiton."

Baosteel has agreed to a 65 percent increase in iron ore price with Brazil's Vale. Australian miners had asked for a 85 percent increase in ore prices to compensate for the rising transport costs, a demand that Chinese steelmakers have refused to meet.

With most of its iron ore to be sold in China, Fortescue said it expects to increase annual production capacity to 100 million tons in 2010.

Shares of Baoshan Iron & Steel Co, the publicly traded unit of Baosteel Group, fell 3.72 percent to close at 12.16 yuan yesterday.

Source: China Daily