China Steel to Buy Iron, Coal Mines to Cut Dependency

China Steel Plans to Buy Iron, Coal Mines to Cut Dependency
A crane moves a steel roll at China Steel Corp.'s factory in Kaohsiung, Taiwan. Photographer: Maurice Tsai/Bloomberg

China Steel Corp., Taiwan’s biggest maker of the metal, is in talks with five groups to buy stakes in iron ore and coal mines to reduce its reliance on raw material suppliers as it increases production.

Australia is the main target for the investments, while Brazil and Africa are among prospective locations, Chairman Tsou Jo-chi, 58, said in an interview in his Kaohsiung office yesterday, without elaborating.

“This is a way to maximize profits as it’s under pressure from mining companies,” said Peter Tzeng, a Taipei-based analyst at Polaris Securities Co., who has an “equalweight” rating on the stock. “The company is looking in the right direction, though it has to choose good investment targets.”

China Steel joins ArcleorMittal, the world’s largest producer, in seeking to boost self-sufficiency in raw materials after prices of iron ore and coking coal surged this year on demand from China, the world’s largest producer of the metal. The Taiwanese company is planning to increase steel production 35 percent by 2014.

“We hope to control sources of raw materials to some extent,” Tsou said. “Dividends from the investment can also increase our earnings.”

China Steel, which supplies more than half Taiwan’s steel, was unchanged at NT$31.55 as of the 1:30 p.m. Taipei trading close. The stock has declined 1.2 percent this year, compared with a 2.1 percent gain in the benchmark Taiex index.

Volatile Prices

The company aims to get 30 percent of its iron ore and coal needs from mines it has investments in within five years, up from about 2 percent currently, Tsou said. Raw materials account for 70 percent of the mill’s costs, he said.

China Steel uses about 10 million metric tons of coal and 20 million tons of iron ore a year. Steelmakers faced volatile prices this year as they bought iron ore and coal for immediate delivery or in quarterly supply accords after Vale SA, Rio Tinto Group and BHP Billiton Ltd., the world’s largest suppliers of iron ore, ended 40-year-old annual pricing system. BHP and Mitsubishi Corp.’s joint venture is the biggest exporter of steelmaking coal.

Prices for iron ore almost doubled in the April quarter and gained more than 20 percent from June to September.

China Steel owns a 5 percent stake in the Sonoma coal mine in Australia, according to its website. Consumption of the raw materials is set to rise as the company is relining a blast furnace and its Dragon Steel Corp. unit is building a new plant to boost capacity.

Full Production

The mill and units expect to produce 14.8 million tons of crude steel this year, aiming to boost annual capacity to 20 million by 2014, Tsou said. The company will return to full production this quarter. Taiwan’s steel consumption is about 23 million tons a year, China Steel said, with the domestic market taking 75 percent of the company’s production. China is the company’s biggest overseas market.

Taiwan’s demand for steel is “OK,” as the economy recovers, he said. The mill plans to set prices for January and February this month, he said, declining to give details.

China Steel said Oct. 12 prices will rise for three types of products for December, the mill’s first increase in five months.

The announcement follows a trend of steelmakers planning to buy control of raw materials. ArcelorMittal, based in Luxembourg, in September said it plans to spend $4 billion to increase iron-ore production to 100 million metric tons by 2015 and plans to develop coal assets in joint ventures.

Economic Growth

JFE Holdings Inc., Japan’s second-largest steelmaker, plans to spend as much as 200 billion yen ($2.5 billion) investing in iron ore and coal mines in Australia and Brazil to double its raw material self-sufficiency, Eiji Hayashida, the president of the company’s steel unit, said in a May 7 interview.

Taiwan’s gross domestic product will probably grow 8.24 percent this year, compared with a contraction of 1.91 percent in 2009, the statistics bureau said in August.

Still, Tsou said he doesn’t have “strong confidence about the future,” as the gains of the Taiwan dollar can hurt exports.

The Taiwan dollar’s strength reduces earnings from overseas after converting into the local currency, which has appreciated 5.8 percent against its U.S. counterpart this year.

China Steel’s third-quarter net income fell to NT$9.24 billion ($305 million) from NT$10.4 billion a year earlier, according to Bloomberg calculations based on nine-month results released by the company Oct. 29.

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