Chinese burn fingers in the Pilbara

Bad moon rising over the Pilbara

The Financial Times takes an in-depth look at the fortunes of China’s state-owned giants as they expand overseas and find in the massive Sino Iron ore project in Australia a pattern of missteps that is being repeated elsewhere.

The Sino Iron project came off the drawing board in 2006. The mine was supposed to enable China, which consumes more than half of the world’s iron ore, to wrest some of the pricing power away from BHP Billiton, Rio Tinto and Vale. Combined the big three control some 60% of the 1 billion tonne seaborne iron ore trade and derive most of their profits from the sector.

Back in 2006 iron was red hot and the Pilbara project – one of eight iron ore projects with Chinese involvement – was forecast by its high-profile backers, which includes the China Development Bank, to cost under $2 billion.

Fast forward six years and although iron ore prices have held up relatively well the steel industry in China continues to slow down just as Sino Iron’s costs are escalating.

The project has now sucked up more than $7 billion and predictions are that the mine, already two years behind schedule, could end up costing more than $10 billion to complete:

“This is no longer about commercial goals,” says a senior executive at one leading Asian trading company with extensive sourcing operations in Australia. “It is about Chinese machismo. They have plonked down too much money to pull out now.”

Apart from cost overruns – hardly a unique problem in the mining industry – FT reports Chinese companies working overseas often miscalculate the impact of environmental legislation, find it difficult to manage workers and see contracts as a “starting point for talks rather than rules set in stone”.

These are not problems back home, but there is one misconception in the West about China’s corporatized state-owned companies:

One of the less well-known drawbacks of Chinese businesses is that they sometimes fight among themselves and are hardly monolithic executors of a central mission statement from Beijing. This is partly because Chinese enterprises are evolving into commercial animals with competing interests. “China and its banks are growing out of the posture of China Inc,” says one banker working in project finance at a leading international bank.

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The Wall Street Journal reported in early June in a video insert about a botched highway construction project in Europe that has led to red faces and recriminations in Poland and China.

Arabian Business reported on another embarrassing project – a high-speed rail link between Mecca and Medina – that received personal backing from China’s premier and the Saudi king, but lead to huge losses for its Hong Kong-listed contractor.

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