When it Comes to China, Australia Shows Investors How to Maximize Profits
By Keith Fitz-Gerald
Investment Director
Money Morning
Author, The Fiscal Hangover
A $15 billion deal for liquefied natural gas (LNG) involving Australia, China and global-oil heavyweight Exxon-Mobil Corp. (NYSE: XOM) has prompted many investors to worry that China may be using its global-markets muscle to “paper over” cracks in the global economy.
In reality, however, this mega-deal is a harbinger of what’s to come, and highlights the road that global investors must travel in their journey to maximize their own investment returns.
If you feel like you need a guide on that journey, just look to Australia. That country seems to be setting the pace when it comes to obtaining both a way out of the global financial crisis and an important new trading partner that could benefit their nation for years to come. What’s happening there could be a model we’d best learn from.
As we have noted repeatedly here at Money Morning, when China buys, it buys big. Most recently, China’s global resource acquisition spree has centered on Australia (after tours through Canada, Africa, the Middle East and South America).
By some accounts, the timing couldn’t be better. Following the recent arrest of four Rio Tinto PLC (NYSE ADR: RTP) employees in China last month on corporate espionage charges, the two countries needed to do something mutually beneficial to smooth over relations. For China, the acquisition is viewed as a way to save face and further its strategic interests. For Australia, this deal is a source of cash that will flow right into the government coffers and help the country rebound from the global financial crisis.
The transaction involved a place most people here have never heard of – Barrow Island. Located about 30 miles off the northwest coast of Australia, and about 80 square miles in size, Barrow sits atop a supply of natural gas – a portion of which that will now be liquefied and sent to China.
According to the terms of the deal made public recently, Australia is going to process and ship some 15 million metric tons of the fuel each year – enough for this deal to be worth roughly $15 billion over the life of the contract.
Development of the project is expected to create 6,000 jobs initially, with another 3,000 to follow. It’s also expected to yield some $6 billion for the Australian government, which – like most governments around the world – can really use the money, since it’s still struggling to come to terms with the global financial crisis.
Not surprisingly, like most deals involving China these days, this one has sparked controversy on a number of different levels.
Naturally, there are the obvious environmental issues. According to conservationists, Barrow Island is home to a number of endangered animals, which is why environmentalists are pushing for the liquefied natural gas plant to be built on the mainland.
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But Australian Environmental Minister Peter Garrett dismisses that notion. Speaking to various Australian media outlets, he’s stated that he doesn’t believe there will be “unacceptable impacts.”
As you might expect, that’s ignited a firestorm – akin to the environmental debates we’re used to seeing in this country. Australian Sen. Bob Brown, leader of the “Greens” party, groused that Canberra has put economic interests ahead of those of wildlife and the environment.
What makes this transaction important – and worthy of study – is that the deal is a window into the future. In an increasingly global economy, as mega-dollar international deal proposals become more and more commonplace, the players will have to find a way of addressing the inevitable political battles.
And that’s particularly true when one of the parties is China (as will also be the case on an increasing basis). With the LNG deal, the ink had barely tried before Australian Labor representatives were leveling charges that Canberra’s conservatives had sold out. Many, who seem to feel that a pact reached with China is tantamount to making a deal with the devil, are saying that the diplomatic cost of doing business is steamrolling the concepts of human rights and democracy. But others view such a transaction in much more pragmatic terms.
After all, they say, $6 billion is still $6 billion.
This is not a simple issue and it’s complicated by the fact that China sits on the world’s largest pile of excess reserves – more than $2.3 trillion by some estimates. And the Asian dragon is going to spend or invest that capital as it sees fit, no matter what happens with the U.S. dollar, Western budget deficits, or the global economic recovery.
And it’s not because China wants to spend this money … it’s because China has to spend that money. It’s a matter of the country’s long-term survival.
As we have said a number of times here in Money Morning, China must engage in transactions beyond its borders to ensure that it continues to have borders. Deals like this are not about world dominance. They’re aimed at avoiding “social unrest” – the two-word phrase that scares Beijing more than anything else.
This is why Chinese leaders have been so resolute in their drive to lock up supplies of raw materials and other key commodities.
For the most part, governments are caught between citizens who get uncomfortable at the thought of selling valuable national interests to a trading partner they don’t really know or understand and their own corporations, which desperately need two things to maintain their own global competitiveness: access to China’s low-cost manufacturing capacity, and market share (revenue) from what is the fastest-growing market on earth.
To be better able to deal with – and feel comfortable about – what’s transpiring in an increasingly global marketplace, Westerners need to start understanding what’s really at stake. And they need to also dispense with their own misperceptions.
Take the whole Unocal Corp. transaction of 2005. It failed because U.S. interests were appalled that a Chinese company could acquire “national interests.” Yet few took the time to understand that most of Unocal’s assets are actually located in Asia — which is why the Chinese tried to buy it.
For instance, not only did the United States slam the door in China’s face when China tried to buy Unocal Corp. Chinese National Offshore Oil Corp., or CNOOC (NYSE ADR: CEO) tried to acquire Unocal for $16 billion to $18 billion. Following a vote in the U.S. House of Representatives, the bid was referred to U.S. President George W. Bush. The reason: The deal was said to have “national security” implications. CNOOC withdrew its bid and Unocal subsequently merged with Chevron Corp. (NYSE: CVX).
Then there’s the whole human rights argument, which inevitably comes to the front of the line whenever China is involved in a deal. Detractors logically highlight the fact that China’s record doesn’t fit with our own. Yet, in doing so, they forget the West’s history. The high and mighty, history reveals, weren’t always so high and mighty. In short, we’re not perfect, either.
On one hand we espouse free markets and the premium of economic choice. So why is it that we can’t stand to have the tables turned when it comes to China’s economic freedom? The West has engaged in direct economic investment abroad for years. Shouldn’t China be allowed to do the same thing?
Then there are the concepts we’ve used to justify our own actions particularly when it comes to foreign direct investment. We’ve argued (and continue to argue) that our investments in distant locales will help spread democracy, improve human rights, nurture educational excellence and contribute to the free-market efficiencies that will allow the global economy to function much closer to peak efficiency. And we’ve used the increase in taxable revenue, local employment and even training as reasons to justify our actions and our interests.
If you adopt an objective, global perspective, and see things as China does (understanding its general objectives in the process), there is really only one conclusion a U.S.-based investor can reach: The changes under way are inevitable. Fight them, if you must, but realize it’s at your own cost, and understand the once-in-a-lifetime investment opportunities you’ll be missing.
Or embrace them and ride along – which is not only the path of least resistance: It’s also the most profitable trail to take.
News and Related Story Links:
- About.com:
Australia, China Ink $41 Billion Natural Gas Deal. - Money Morning News Analysis:
China Tightens Grip on Africa’s Energy Resources with Stake in Offshore Field. - Money Morning Analysis:
China Continues its Commodities Binge with Brazilian Oil Deal. - Wikipedia:
Unocal Corp. - Money Morning News Analysis:
What Companies Are Profiting From China’s Commodities Crusade? - Wikipedia:
Peter Garrett. - The New York Times:
China Says Australian Is Detained in Spy Case. - CNNMoney.com:
China arrests 4 Rio Tinto employees. - Wikipedia:
Barrow Island. - WhiteHouse.gov:
George W. Bush. - Wikipedia:
Liquefied Natural Gas. - Money Morning News Analysis:
The Three Reasons China Will Lead the Global Rebound. - Money Morning:
China Landing Natural Gas Deals as Prices Plummet
Comment by Barry Slatter on 3 September 2009:
Keith,
I think you need to get the facts about this project. It is significantly bigger than you have reported.
Australia signs $50bn gas deal with China
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Michael Sainsbury, China correspondent | August 19, 2009
Article from: The Australian
AN Asia-fuelled, decades-long windfall for Australia’s natural gas sector looks assured with up to $100 billion of fresh investment over 12 to 18 months expected across a range of projects after China promised last night to buy $50bn worth of natural gas from the proposed North West Shelf Gorgon development.
The Gorgon venture promises to be Australia’s biggest resources project, pumping $40bn into the federal government’s tax coffers over the next 20 to 30 years.
The deal is the latest sign that while diplomatic relations between Australia and China have ebbed to a decade low, Beijing’s appetite for Australia’s resources remains undiminished, coming only a day after Fortescue Metals Group said China’s state-owned banks would back its rapid expansion with $US6bn ($7.3bn) in loans.
This is the latest and biggest deal in the unprecedented escalation of gas projects which take in the $50bn Gorgon project and several deep-sea gas field developments by Australia’s Woodside Petroleum, as well as surging interest in coal-seam gas deposits, mainly in Queensland.
Already hundreds of billions of dollars in commitments have been signed, with not only China but also Japan, India and South Korea, as the search for cleaner energy options intensifies.
“If everything goes well (with Gorgon), construction will start in about February next year,” federal Resources Minister Martin Ferguson said in Beijing yesterday.
“It’s also a major stimulus package.”
The Gorgon project — which now has commitments of $200bn in sales out of a projected $300bn from the entire project — has promised flow-on effects of $33bn to the construction, manufacturing and services sector, and 6000 jobs over the next four to five years.
“As well as Gorgon and Woodside, there is the Sunrise project in the Timor Sea,” Mr Ferguson said.
“We also have an emerging industry on the east cost — coal-seam methane. So we now have the opportunity, in my opinion, over the next 12 to 18 months, of getting investments of up to $100bn in the LNG sector.”
Mr Ferguson said it was “business as usual” with China, but admitted that “from time to time there will be diplomatic tensions” between Australia and other countries.
Today, Mr Ferguson will meet Zhang Ping, the head of China’s most important ministry, the National Development and Reform Commission, which looks after the country’s macro-economic affairs and has recently been handed command of energy reserves. Mr Ferguson has promised to repeat the government’s call to expedite the handling of the case of arrested Australian Rio Tinto executive Stern Hu.
As reported by The Australian yesterday, the bilateral relationship between Australia and China has reached its lowest point since former prime minister John Howard met the Dalai Lama, and his foreign minister, Alexander Downer, promised that Australia would back Taiwan in any battle with the mainland.
“The relationship between China and Australia has dropped to the lowest point in the past couple of years, with so many events since May, when Australia launched its defence white paper with China as a target,” Shi Yinhong, director of the America Study Centre at Beijing’s prestigious Renmin University told The Australian.
“China’s response then was very restrained — it didn’t react officially to the paper. But then Chinalco’s failed deal with Rio occurred, the case of the Rio personnel’s arrest, and then (the granting of a visa to exiled Uighur leader) Rebiya Kadeer. China totally can’t accept Australia’s handling of Rebiya Kadeer,” Professor Shi said.
“There are so many events this year, more than in the past several years. There are domestic political reasons, but the protectionism and intense media coverage of these events has also contributed to the current situation.”
The new gas deal between Gorgon partner Exxon Mobile and Chinese energy behemoth PetroChina and signed in Beijing last night, dwarfs the liquefied natural gas contract the same company inked with Woodside in 2007.
The long-touted Gorgon project, which is a three-way partnership between global energy giants Chevron, Shell and Exxon, is expected to cost $65bn to develop and reap $300bn in gas sales for its owners — resulting in a $40bn tax windfall for Australian taxpayers. China has no equity in the project as part of its deal.
Gorgon is now within a “hair’s breadth” of getting off the ground, Mr Ferguson said.
The only remaining issue is the ecologically diverse nearby Barrow Island, where Gorgon plans to process its gas and the run-off carbon dioxide and store it underground. Environment Minister Peter Garrett must tick off on the project by September 8. His West Australian counterpart gave his permission two weeks ago.
Last month Exxon inked a $25bn deal with India, taking total commitments for the Gorgon project to about $200bn of an expected $300bn. Mr Ferguson would not comment on the price of the gas which he said was the result of commercial negotiations.
“We treat these negotiations at arm’s length to government but, from an Australian government point of view, working in close co-operation with the private sector, it underpins the investment decisions and export earnings.”
By flying to Beijing to make the announcement yesterday, Mr Ferguson made a show of goodwill towards China, as well as heaping pressure on his cabinet colleague Mr Garrett to follow suit.
Comment by Think People on 3 September 2009:
Selling one’s soul for money, forsaking human rights and our environment to strengthen a Communist country known for its abuse of both. Where are we going — that we accept this…? Terrifying. Have we learned nothing from past mistakes and abuse of power for one’s own greed…? Think, people!!!!!!!
Comment by stockjocky on 3 September 2009:
actually Unocal owned a rare earth mine in the United States that has been closed. Interesting that China now controls 95% of the worlds known rare earths….
Comment by David J Lindh on 4 September 2009:
I am Chairman of ASX listed iron ore development company called Centrex Metals Ltd
We have done three deals with China this year and will commence our first mine soon so plenty of value in the stock
Please visit our website and if you have any questions would be pleased to hear from you
Regards