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, 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 rockierThe negotiations will get tougher if succeeds in taking over . 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 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.
- Discuss with Jubak: Do you see natural resources stocks as 'the place to be'?
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'stried 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.
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 slowingThis 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'shas 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 , 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 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.