Chinese investment could be Australia's coal saviour

AUSTRALIA’s coal industry may be enduring low commodity prices and soaring costs because of the high dollar but Chinese investment in the sector has remained solid over the last five years and shows no sign of abating. By Tess Ingram.
Chinese investment could be Australia's coal saviour Chinese investment could be Australia's coal saviour Chinese investment could be Australia's coal saviour Chinese investment could be Australia's coal saviour Chinese investment could be Australia's coal saviour


Staff Reporter

Chinese investment in Australia began to take off around 2005 when our Asian neighbour started a powerful drive for resources security and commercial competitiveness which saw it look increasingly overseas for secure, higher-value assets, particularly in the mining sector.

According to a 2012 report from KPMG, in the period from September 2006 to June 2012, a total of 116 completed deals were recorded between Australian companies and Chinese investors. During this period, an accumulated $US45.1 billion was invested by Chinese enterprises in Australian businesses, with 80% of this going into the mining industry.

Chinese investment in Australia hit a high point in 2008 after the maturation of the country’s ‘Going Global’ policy, and while it has stabilized since then, it looks likely continue for the foreseeable future.

In the last year, the Australian coal industry has seen Chinese giant Yanzhou list subsidiary Yancoal on the ASX and acquire a number of Australian investments, U&D Mining more recently acquired a stake in Bowen Basin focused Endocoal and Chinese coal services group Dadi Engineering increased its stake in Metrocoal to almost 23%.

KPMG partner for energy and natural resources Helen Cook believes that China was a crucial foreign partner for Australia because it is an important player in the global coal market.

“China has a reliance on coal and that makes Australia a critical trading partner for them given that we are the largest exporter of metallurgical coal in the world and a significant player in the thermal coal market as well,” she said.

“So when you marry up China’s needs, the obvious geographic locations and what Australia has to offer, you can form a pretty logical picture of why there has been an increase.”

Queensland Resources Council director Michael Roche agrees.

“We know from talking to some of these companies they are attracted by a number of factors. One is there are good size deposits that they are able to invest into, so scale is an attraction, as is the availability of infrastructure which isn’t always available in some of the other countries they are investing in and they see the Australian track record of being a reliable supplier so that’s giving them a comfort around investment here.”

Roche said that the benefits of Chinese investment in the coal industry were very substantial, especially for junior companies that would otherwise not be able to move their projects into a stage of production.

“What we are seeing is that the Chinese are tending to typically invest in junior resource companies who on their own would probably struggle to raise the capital needed to take the project to the next stage.

“These companies have generally done an excellent job around proving up a resource, starting to identifying the infrastructure requirements, be that rail port, water etcetera but typically the investment sums we are talking about average around $1 billion for even a modest size project, and they need partners to help fund that. What the Chinese are increasingly showing is that they are willing partners.”

Willing investors

Professor of Chinese business and management at the Chinese studies centre and the business school at the University of Sydney Hans Hendrischke believes the Chinese have been willing investors over the past few years and proved themselves capable of adapting to a different commercial environments.

But Australian perceptions and tight regulations pose a threat to the future of their continued investment.

“During the recent visit of the Prime Minister to China a lot of strategic meetings were held that were, to a very large extent I think, answering Chinese concerns,” he said.

“The way it is depicted is that the visit was a victory for the Prime Minister, which is fine, but on the other side I think many of these meetings with the top people came about because there is concern on the Chinese side about the long term stability and the long term prospects within Australia.

“It seems the Chinese are concerned about general strategic issues, where is Australia going, is our investment safe in the long run, concerns with policies domestically, will the general framework be changed or will the goal posts remain the same for a long time… these are all concerns that the Chinese have and I would assume that all of these issues were discussed in these meetings.”

Cook also reiterated Hendrischke’s concerns for the security of future Chinese investment.

“I think the challenge for Australia is even though we are the largest coal exporter and we are currently seeing a large amount of investment coming from China, we are in a global environment and it’s competitive. If we don’t get our regulatory tax and policy settings right there is a risk that Chinese capital will flow to other regions where there are coal resources and a more favourable investing environment.

“I think at a policy level we need to be very careful about what messages our regulatory environment sends to the international investors and we need to be very clean and transparent that foreign investment is a very important part of the economic mix for Australia and respect that really with the appropriate risk management in place.”

Over the last six years, over 95% of Chinese investment has come from state-owned enterprises. Hendrischke believes that this form of investment often carries uneducated, negative perceptions that can be damaging to the investments success, but in reality there are very few dangers associated with Chinese investment.

“There a currently a few court cases surrounding Chinese investment and how it is used but I think they are part of the learning process. There aren’t really any major risks involved to the Australian economy or people.”

Roche agrees.

“We have significant foreign investment in all our coal companies, like Xstrata or AngloAmerican. Half of BMA is Mitsubishi from Japan and there is Mutsui as well.

“The experience of foreign investment in the resources industry in Qld has been a very positive one and at the end of the day the jobs have overwhelmingly flowed to locals, these companies reinvest heavily back into the industry, they’re not stripping out profits without reinvesting and governments are getting a very nice return when it comes to royalties for the states and company taxes for the federal government. It’s a positive scenario for everyone.”