Lucy Hornby | Financial Times
Minmetals Corp, the Chinese state-owned miner, will swallow Metallurgical Corp of China, the struggling infrastructure and mining construction group in a deal orchestrated by the state, the agency that oversees big state companies said on Tuesday.
Beijing has been attempting to increase its companies’ international competitiveness by forcing mergers, including the high-profile $26bn union of its two railway construction groups a year ago. No value was given for the Minmetals-MCC tie-up in the terse statement from the Assets Supervision and Administration Commission.
Minmetals, originally a metals trading company that helped newly communist China survive a US trade embargo in the 1950s, has become one of the country’s strongest mining groups with extensive holdings overseas, including the Las Bambas copper mine in Peru.
MCC by contrast has encountered a series of misadventures in its overseas projects, ranging from the Ramu nickel mine in Papua New Guinea to its role in the A$8bn cost overrun at Citic’s Sino-Iron mine in Australia’s Pilbara region. It traces its origins to the rebuilding of the Anshan steel mill in communist-occupied Manchuria in the late 1940s.
The merger takes place against a backdrop of falling commodity prices that have hit many Chinese metals groups hard. Sinosteel, Minmetals’ main steel trading rival, technically defaulted on a bond in October. Chinalco, another top Chinese metals producer struggling with poor margins, may have to absorb lossmaking aluminium smelters shed by China Power International in another Sasac-orchestrated merger.
The question of what to do with state behemoths is complicated by the billions in state-backed loans and subsidies they have absorbed over the past 15 years. In that time, Beijing sought to build national champions out of state-owned enterprises left semi-bankrupt by the economic reforms of the 1990s. Minmetals alone has 177,000 employees and revenues last year of more than $50bn.
Industry insiders say Minmetals probably lost money this year, due to the fall in commodity prices, while MCC may have been profitable thanks to government-backed construction contracts.
“There is genuine drive in the country to take over a little bit more of the trading activity themselves and be a bit more of a competitor to the traditional commodity traders,” Michael Widmer, an analyst at Bank of America Merrill Lynch, said. “They realise they own 50 per cent of the market so if you’re that important why wouldn’t you want a bigger say in what is happening in that market.”