Shougang goes against the grain with $1b investment
February 10th, 2009Shougang Hierro Peru, a Chinese mining company operating in Peru, announced it will invest US$1 billion to expand an iron-ore processing plant in southern Peru. The company is owned by China’s Shougang Group, one of the top five exporters to China.
The news is surprising. Most mining companies worldwide have postponed or curtailed their expansion plans in the face of the global recession. In fact, I can’t recall a single billion-dollar investment not made by a government in the last six months.
China’s demand for iron ore has plummeted in the last year as China’s steel producers have slashed production. As recently as yesterday, Bloomberg relayed this dour forecast from Morgan Stanley:
Feb. 9 (Bloomberg) — Latin America’s economic slump will deepen as the “aftershocks” from Asia’s slowdown hit the region, Morgan Stanley said.
Asia’s shrinking demand for raw materials amid a “collapse” in its own exports will show up in Latin America in February and March, Morgan Stanley economists Daniel Volberg and Gray Newman wrote in a report today.
Shougang says it will start the plant expansion later this year, to be completed by 2010. The project will increase the company’s capacity to 10 million tons per year. Taking a longview on the global recession is one thing, but 10 million tons is a lot of ore to have on hand without knowing where prices will be in a year’s time.
February 10th, 2009 at 7:19 pm
Hey, yeah, it is a bit surprising, but not so much really. The key is “not made by government”. In fact Shougang investments are made by the Chinese government, since Shougang Group is a SOE.
On the other hand, it is true that it sounds optimistic to expand capacity now that the global demand for steel is steeply falling. But 2 reasons might explain this move:
1-For a long time China has suffered the shortage, delays and high price of Iron, and now they want to prepare to be in a more advantageous position for the post-crisis period,
2-China is investing like crazy now as part of their stimulus plan. Although arguably the stimulus plan is most effective when invested in homeland, still, a company like Shougang needs to put the money on the knife blade, as the saying goes.
All this connects with the generally optimistic stance of the Chinese government. From their statements on the press they seem to believe that Crisis will be light and short in China, and China must get ready for when the time comes to take over the world (i.e. when China has recovered and the rest of the World is still down). This idea of opportunity during the Crisis is still present in their speeches.
I hope they are right, but I tend to think they are overly optimistic.
March 20th, 2009 at 10:37 am
[...] back their investment projects and cutting costs, Chinese mining company Shougang Hierro Peru announced a US$1 billion expansion plan for their iron-ore procession plant in southern [...]