I have been doing some DD into Baosteel. I find it interesting that they went out of there way into McFaulds Lake, Ontario to secure 10% of a non-producing Canadian Venture mining company. This company is one of the largest in China and is a world player when it comes to making steel and providing finished materials to other industries throughout Asia. Why such an interest in Noront? As we recently elected one of their employees to the Noront BOD, I thought it might be worth taking a look at some of their recent news.

One of the themes that I have seen coming across lately when looking at Baosteel is that they are at the mercy of the big three (Vale SA, Rio Tinto and BHP Billiton) when it comes to their pricing. In the past these mining companies would court Chinese interests in a hope of developing new sales in a formerly closed market. The cost of courting was the setting of "chinese rates" for iron ore, ... With the incentive to provide these discounts virtually gone due it now being a sellers market, companies like Baosteel are at the mercy of the larger mining companies who have in recent years started to increase the prices.

Here are two articles below that show what may have been part of the motivation for the Noront purchase. That of a desire to start to control their own destiny in the form of controlling a part of the supply chain they depend upon.

There is another article I read today concerning a first for a Chinese company. The issuing of bonds in the Hong Kong market. As per this October 20, 2011 new release, Baosteel issued the equivalent of 1 billion US in bonds in Hong Kong. The transaction is being overseen by Deutsche Bank and DBS Bank - none of whom are talking. I wonder what they might need that money for?

Have a great weekend all! See you Monday!! M1.

http://www.chinamining.org/Companies/2011-10-20/1319080760d50584.html

From November 3, 2011:

http://english.caixin.cn/2011-11-03/100321999.html

Baosteel: Iron Ore a Buyer's Market

(Beijing) – The global iron ore supply is expected to increase over the next two years and the balance will shift in favor of buyers, said Ma Guoqiang, the general manager of Baoshan Iron & Steel (SHE: 600019).

Baoshan Iron & Steel, a listed unit of China's leading steel maker Baosteel Group, is currently in negotiations with Vale SA over fourth quarter iron ore prices, which are expected to fall, said Ma at an online conference on October 31.

The top three global mining giants -- Vale SA, Rio Tinto, and BHP Billiton -- had a combined profit last year far exceeding the profits of the entire Chinese steel industry, Ma said at the conference accompanying the release of the company's third quarter results.

The country's 77 large- and middle-sized steel plants booked a combined net profit of 89.7 billion yuan last year, according to China Iron & Steel Association, less than 30 percent of the total net profit for the top three miners.

China is the world's largest manufacturer of steel and consumes about 50 percent of global iron ore. But CISA projected that the growth of China's demand for steel will slow to 2.6 percent a year by 2015 from the current 4.6 percent a year.

Policy tightening measures on the real estate market, combined with slower growth in the auto and home appliance sector have dampened domestic steel demand. Weak economic growth in Europe has also aggravated pressure on iron ore suppliers, analysts were cited as saying in a report by Beijing News.

From 08/08/2011:

http://english.caixin.cn/2011-08-05/100288091.html

Closer Look: A Steel of a Deal

China is the world's largest steel producer. Chinese steel makers are also subject to the world's largest price gouges by the three major global miners -- Vale SA, Rio Tinto, and BHP Billiton.

Given China's need for iron ore, the three big mining giants have spared no opportunity to drive up prices, continually testing the limits of Chinese steel makers. The Chinese steel sector expected a 20 percent growth in iron ore prices at the start of 2010, but ended up with a 40 percent hike by the trio. At the end of last year, Chinese steel makers were faced with a 100 percent price hike.

Meanwhile, the three major global miners have seen booming earnings growth. Vale SA booked a 94.2 percent growth in revenue at US$ 46.5 billion in 2010, 37 percent of which went to net profit. The same is true for the other two. Rio Tinto raked in US$ 14.3 billion in net profit last year while BHP Billiton earned US$ 17 billion. The combined net profit of the trio ran was around US$ 48.6 billion.

In contrast, Chinese steel sector as a whole took in an aggregate profit of 89.7 billion yuan (US$ 13.4 billion).

Economist Larry Lang parallels BHP Billiton as the British East India Company that sold opium to China in 19th century. BHP controls enormous resources around the planet, backed not only by industrial capital but also by invisible financial capital, Lang noted.

As Lang says, iron ore is like opium to Chinese steel makers -- steel plants cannot survive without iron ore. So they have to import, at prices that increasingly erode their profitability.

Moreover, Chinese steel companies have seen no end in sight to their business woes. According to customs data, China's import prices of iron ore hit a record high of US$ 160.9 per ton in the first half, up 42.2 percent from a year earlier. Meanwhile, import volume continued rising, up 8 percent to 334.3 million tons in the first six months.

As the world's largest iron ore consumer, China has failed to secure a "China" price, partly because of its missteps in the past. In the 1980s, when the global iron ore market was still in the buyer's favor, Rio Tinto and BHP Billiton came to China and invited Chinese companies to jointly develop mines in Australia, a request rejected by the Chinese authorities.

But when China saw explosive growth in steel production and an attendant demand for iron ore, it was the turn of the global mining giants to call the shots.

Despite its annual imports of 400 million tons in iron ore, China has little leverage in talks with the big three on prices. The fact is that China can never win in a game where the rules are set by the rivals.

Of course, Chinese steel makers will not be subject to reign of the global mining giants forever.

China should build a long-term iron ore supply chain by stepping up acquisitions of overseas mining resources. Meanwhile, Chinese steel companies should avoid infighting and strengthen their collective bargaining power. In doing so, China will gain the upper hand in future negotiations and put an end to profit runoff.

The author is a media commentator. The article is translated and adapted by Caixin from its Chinese version.