China steps up iron ore hunt with Centrex deal

SYDNEY, Dec 18- China's steel industry extended its reach into Australia's rich iron ore mines on Thursday as No. 3 mill Wuhan Iron & Steel (Group) Co agreed to buy half of five projects owned by Centrex Metals Ltd for $126 million.

Wuhan, an integrated steelmaker that already operates iron ore mines in China, will also pay an additional A$9.7 million for a 15 percent stake in Centrex. Its rival Baotou Iron & Steel Group already 10.12 percent of Centrex, which owns a number of prospective mines but does not produce any ore now.

The deal shows that steel mills in the world's biggest producer are renewing their drive to secure access to their raw materials, despite a massive downturn in the global steel sector and collapsing prices brought on by the financial crisis.

The sudden tumble in commodity prices is also expected to bring mills a bit of relief on iron ore contract prices, negotiations over which are now underway.

"We expect there to be a price reduction for next year of something of the order of 15-20 percent," Centrex Managing Director Gerard Anderson told Reuters.

In addition to investing up to A$180 million ($126 million) for a half interest in iron ore mining projects owned by Centrex, Wuhan will buy a 15 percent stake worth about A$7.75 million based on Centrex's current market value of around A$55 million.

Centrex shares rose 2.2 percent to A$0.23 on Thursday. Since Dec. 1, the stock has steadily risen from A$0.13.

In 2008, miners secured increases of between 65 percent and 80 percent in term prices, helped by now-outdated forecasts of strong demand well into 2009.

Most forecasters are now calling for prices to go down next year for the first time in more than half a decade. [ID:nL0451137]

In Australian dollar terms, Anderson said he did not expect to see a year-on-year decline in prices at all, given the sharp fall in the U.S. dollar-Australian dollar exchange rate.

"The production cuts from Vale and Rio Tinto in particular, and certainly the postponement or delay of most other would-be aspirants for several years as a consequence of the economic climate will eventually make its way through the system," he said.

"Effectively, up to 300 million tones of iron ore has been taken out of the seaborne trade," Anderson said.

The pact with Wuhan comes as Chinese companies renew their interest in Australia's mining sector following a hiatus that coincided with a recent tumble in commodities markets.

"There is a recognition that while commodities such as iron ore are down right now, the long-term prospects for the sector are positive," Patterson Securities analyst Andrew Harrington said.

This month, Shenzhen Zhongjin Lingnan Nonfemet 000060.SZ, China's third-largest zinc producer, offered A$45.5 million for 50.1 percent of Australia zinc miner Perilya L.td.

There is also speculation that Baosteel is interested in iron ore miner Fortescue Metals Group Ltd. Baosteel is Fortescue's biggest customer.

Centrex holds 15 hematite and magnetite iron prospects across South Australia state's Eyre Peninsula slated for development starting in 2010.

Hematite type ore is fed directly to steelmaking blast furnaces, while magnetite must first go through a smelting stage.

Both sides expect to seal the agreement by March 17, 2009 pending foreign investment clearance from regulators.

Centrex's plan is to link development of its iron ore mines with construction of a nearby export port, capable of handling Capesize bulk carriers similar to Australia's main western iron ore export terminals.


No comments: