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Chinalco move smart

(China Daily)
Updated: 2009-02-23 07:59

Aluminum Corp of China (Chinalco)'s investment in Rio Tinto Group is of great significance to the long-term development of the country's mining industry, says an article in China Business Times. The following is an excerpt:

Related readings:  Chinalco to hike Rio Tinto stake  Chinalco says to invest US$19.5b in Rio Tinto  Xiong to take the Chinalco helm

Chinalco, the world's biggest aluminum producer, announced on Feb 12 it would invest $19.5 billion in mining giant Rio Tinto Group, the largest-ever overseas investment by a Chinese company.

The State-controlled Chinese company already has a big stake in the Australian firm. Rio's stock prices have dropped more than 75 percent since early last year and Chinalco's investment has sustained an enormous loss.

Some analysts call Chinalco's move a failed overseas acquisition. But some insiders say the past losses will be outweighed by future gains. Any holding of resources shares will generate good returns in the long run.

The latest huge deal between Chinalco and Rio Tinto may increase the former's loss in the short term. But such losses may be the kind of price Chinese companies will have to pay to kick start their overseas development. Chinalco needs to look beyond immediate losses and gains if it wants to strengthen its presence in the global iron ore market.

In July 2007 Rio Tinto sustained a $39 billion debt after its successful purchase of Canada's Alcan. Now Rio Tinto is eager to sell part of its subordinate assets to reduce its debt by $10 billion this year. Now is a good time for Chinalco to increase shares in the indebted Australian company.

Chinalco's increased investment in the global mining giant could break Rio and BHP Billiton's duopoly on the global mining market.

China is the world's largest steel and iron producer and imports 50 percent of its iron ore. Excessive dependence on the world market poses a big threat to the country's economic security. Chinalco sets an example for other domestic companies with overseas acquisitions ambitions.