Jim Jubak

Jubak's Journal11/20/2007 12:01 AM ET

Make money off China's nightmare

Fueling the nation's industrial machinery takes a lot of imported raw materials. Now you can profit from buying into the suppliers that China needs to avoid getting squeezed.

By Jim Jubak

Australian mining company BHP Billiton's $140 billion bid to take over rival Rio Tinto is China's worst nightmare come true.

The fright is revving up China's already aggressive drive to buy access to the raw materials it needs. And you can profit from China's panic by buying shares of smaller material suppliers before the Chinese make more moves.

But wait -- it gets better. Because of China's panic, I think the stocks I'm profiling today fit two of my "5 ways to ride out the market's storm." In that Nov. 13 column, I urged you to:

  • Think like an overseas investor and put your money into hard assets or strong currency assets.

  • Think long term. I know it's hard right now to focus on anything but the stock market's wild swings, but these stocks will reward the effort.

In its nightmare, China is at the mercy of the big multinational companies that supply the raw materials, such as iron ore, that keep its industries humming. The country imports about 50% of the iron ore it uses. China's industries have to pay up or shut down.

There's just enough reality to that nightmare to make it really, really scary. In aggregate, the Chinese steel industry is the biggest in the world. But the Chinese industry is splintered, with production divided among 1,500 companies. The country's largest steel producer, Baosteel, is only one-fourth the size of ArcelorMittal (MT, news, msgs), the Indian company that's the No. 1 producer in the world.

China's fragmented steel industry already faces tough negotiations to set the price of iron ore in 2008 because just three big companies control roughly 75% of the world's iron ore. The big three are reportedly asking for a 50% price increase in 2008, the sixth consecutive annual jump.

For China, things could get rockier

The negotiations will get tougher if BHP Billiton (BHP, news, msgs) succeeds in taking over Rio Tinto (RTP, news, msgs). Then China's steel companies would face just two companies with that same 75% stranglehold on iron ore. And BHP, which would jump over Brazil's Companhia Vale do Rio Doce (RIO, news, msgs) to become No. 1 in the iron ore market, has been the most aggressive of the big three about raising prices. China will import 410 metric tons of iron ore in 2008, an 11% increase from 2007, according to the China Iron and Steel Association. No wonder that the bid has set China scrambling for alternatives.

China briefly considered launching a counteroffer for Rio Tinto. But then Beijing recalled what happened the last time it tried a high-profile bid of this sort. In 2005, China's CNOOC (CEO, news, msgs) tried to buy U.S. oil company Unocal. China certainly remembers how that went: Republican and Democratic politicians feverishly competed to see who could bash China the hardest, and the deal went down in flames.

Video on MSN Money

China Wall © Photodisc/SuperStoc
Jubak's Journal: Will stocks soar or tank in 2008?
It depends on China, says MSN Money's Jim Jubak. Optimists say China’s economy will grow 11%, about the same as in 2007. Pessimists warn, however, that a slowing U.S. economy could whittle China's growth down to 9% or even 7%. Pay attention to the pessimists. They all work in Beijing.

China has developed a new strategy since then. In order to secure critical supplies of raw materials, Beijing is taking smaller stakes in big producers, buying specific assets rather than whole companies and buying smaller companies, acquisitions that aren't likely to set off alarms among home-country politicians.

A spending spree that isn't slowing

This under-the-radar approach has been remarkably successful. China has been on an acquisition spree without most investors noticing.

In the past two years, for example, China's Zijin Mining Group (ZIJMF, news, msgs) has acquired control of the Rio Blanco copper and molybdenum mine in Peru and the ZGC Gold Project in Tajikistan, and begun or completed work on mines in Vietnam and Russia. In other deals over that period:

  • Aluminum of China has acquired Peru Copper (CA:PCR, news, msgs), a Vancouver, British Columbia, company that owns Peru's third-largest deposit of copper.

  • China's Citic Group has bought oil fields in Kazakhstan.

  • Anshan Iron & Steel, China's third-largest steel maker, has signed a $1.6 billion deal with Australia's Gindalbie Metals (GDBGF, news, msgs) to develop two iron ore projects.
  • Sinosteel has made a deal with another Australian iron ore producer to develop the Weld Range and Koolanooka projects in Western Australia's Mid West region.

Continued: Trend not likely to slow

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