Andrew "Twiggy" Forrest met Chinese bankers in Hainan at the weekend to seek additional billions of dollars in funding for the expansion of his Fortescue Metals Group's operations, as iron ore demand from China accelerates and low-grade producers fall away.
The talks began as uncertainty continues to dog critical Chinese iron ore price negotiations. Mr Forrest has suggested that a price may not be set this year, with a troubled Chinese steel sector, escalating demand and the global financial crisis all clouding the future of the stalled negotiations.
Mr Forrest is believed to be seeking a minimum of $2 billion to expand FMG's future production capacity to 120 million tonnes.
The group's current plan is to produce 55 million tones. It has struck a deal to sell China's Hunan Valin 16.5 per cent of the company for $645 million and, together with its own cash flows, hopes to finance a capacity increase to 80 million tonnes.
"Any move beyond 80 million tonnes will require extra funding and we met a number of Chinese financiers over the weekend at Boao, including (sovereign wealth fund) China Investment Corp," an FMG spokesman said.
Any push by FMG to lift capacity towards 200 million tonnes would require more than $5 billion in extra funds.
Chinese bankers and investment funds signalled at the conference that they would use their strong balance sheets to begin lending more money to offshore companies.
But the final signing of FMG's landmark deal -- which was approved three weeks ago by Australia's Foreign Investment Review Board -- remains on hold as Hunan awaits a final sign-off from China's National Reform and Development Commission.
Hunan chairman Li Xiaowei told The Australian at the Boao Asia Forum in Hainan that he was confident of securing the approval.
"This process going on is actually going much faster than we anticipated," Mr Li said.
"We've never heard anything negative since we applied. There shouldn't be a problem."
Mr Forrest was bullish on the outlook for iron ore and the equities market, which he believed had bottomed in January. China imported a record 52.08 million tonnes of iron ore in March.
Xu Lejiang, chairman of China's biggest steelmaker, Baosteel, said yesterday at the forum that the group wanted to shrink the gap between the spot price -- which is about $60 per tonne and the 2008 benchmark price, which is about $85 on average.
Big Chinese steelmakers like Baosteel, Hebei and Shogang have been stranded with costly models after investing in high-end product plants in big cities where wages can be up to four times the amount paid in provincial areas.
Demand for hi-tech steel products, such as those used to build aircraft and container ships, has fallen away while China's appetite for more traditional products used in basic construction, now boosted by the Chinese Government's 4 trillion yuan ($810 billion) stimulus packages, has soared.
Mr Forrest said it "was possible" that this year could be the first when no benchmark was set. "But we are supporters of the Chinese system on the basis that the customer is always right," he added.
Mr Forrest was keen to talk up the increasing cost of producing iron ore.
"There has been a permanent structural shift in the cost base of global resources," he said.
"And this is reflected, we think, in a permanent structural shift in the price base for resources and this is evident in iron ore."
Brazilian iron ore giant Vale has effectively left the negotiations to BHP and Rio Tinto, with the latter still mired in its $US19.5 billion ($27 billion) deal with China's Chinalco, the fate of which remains in the hands of the Australian Government.
Source: The Australian
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