[Vnbiz] Steel firm eyes iron ore in Vietnam

[Phan, Tai]

Steel firm eyes iron ore in Vietnam

Having failed to hold out against this year's increase in iron ore prices, China's steel mills are looking to depend less on the world's big iron ore producers. 

Wednesday, July 26, 2006

Having failed to hold out against this year's increase in iron ore prices, China's steel mills are looking to depend less on the world's big iron ore producers. 
For Kunming Iron & Steel (Group), a medium-sized firm in Yunnan province, that means developing ore deposits in Southeast Asia. 

Li Youling, general manager of Kunming Iron & Steel, the steel- producing unit of Kunming Iron & Steel (Group), said the company is in negotiations with the Vietnamese government to open up an iron ore mine 60 kilometers from the Yunnan border. 

"If we manage to import 1.5 million tonnes [a year] from this new mine, then Vietnamese imports will account for about 15 percent of our iron ore demand," he said. 

Li said that if approval comes through this year, KISCO could hit that target by 2008. 

With KISCO currently importing 30 percent of its iron ore, mostly from Australia, Brazil and South Africa, the mine in Vietnam will help insulate the firm from the fallout of annual price negotiations with Rio Tinto, Companhia Vale do Rio Doce, and BHP Billiton.

China's steel producers accepted a 19 percent hike in the price of iron ore fines and lump in June after protracted negotiations failed to result in preferential pricing. The increase came after a 71.5 percent price hike in 2005. 

The Vietnam mine, a joint venture with two Vietnamese firms, in which Kunming Iron & Steel (Group) would take a 45 percent stake, is likely to be the firm's first step in expanding into the region. 

"Once [the mine] project is completed, we'll move on to the second stage to build a 500,000-tonne-a-year steel mill in Vietnam," Li said. 

Li also said Kunming Iron & Steel (Group) is in long-term discussions with the Myanmar and Lao governments about developing iron ore resources in those two countries, but talks are still in their early stages. 

The iron ore will be used to fuel an aggressive expansion that will see annual steel production increase to 4.4 million tonnes this year from 3.82 million tonnes last year, and hopefully jump to 5.4 million tonnes in 2007.

Most of that will be construction grade steel consumed in Yunnan. 

The company originally intended to fund its expansion by listing in Hong Kong in March last year. 

"At the time steel stock prices were really on the low side," said Li, when asked why the listing did not go ahead. 

"But that hasn't stopped our progress," he added. "We wanted to list to speed up the pace of development, but we've managed to expand production and merge with smaller firms anyway." 

Li said the firm's expansion had been funded by bank lending, and that it is still considering its listing options. 

As Yunnan province's major steel mill, Li said Kunming Iron & Steel was singled out by local authorities three years ago to play a key role in consolidating the local steel industry. 

Li said KISCO had recently completed the takeover of Honghe Steel and Xinxing Steel, two local steel producers, but is not considering buying any other local mills. 

"It's often difficult to absorb smaller firms as they're usually not that efficient and have low environmental standards," he said. 

"We might buy a mill, and because of the government's policy of weeding out low quality production, we might be asked to shut it down next year." 

Meanwhile, with Beijing pushing to consolidate the sector and raise its efficiency, KISCO might be a ripe investment choice for larger steel producers. 

According to Li, KISCO posted a net profit of 600 million yuan (HK$584.46 million) in 2005. Although he expects profit to be flat this year as rising input prices squeeze margins, he said KISCO has been among the strongest performers in western China. 

Li said that both Mittal Steel and Arcelor approached Kunming Iron & Steel about cooperating more than a year ago, but the firm turned down Arcelor's advances, having already entered into discussions with Mittal. 

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