Source From Financial Times

http://www.ft.com/cms/s/0/2ff1365a-f1f3-11df-84ef-00144feab49a.html#ixzz169qeExps

By Robin Kwong in Taipei

Published: November 17 2010 10:04 | Last updated: November 17 2010 18:57

Taiwan’s China Steel and China’s Baosteel are planning to invest jointly in overseas iron ore mines.

The move is a rare example of companies from Taiwan and mainland China co-operating overseas, which in the past has been largely restricted to offshore oil drilling.

The alliance, which the Taiwanese company confirmed on Wednesday, will be a first for cross-Strait steel industry co-operation. This in part reflects new business opportunities deriving from the political detente and economic liberalisation between mainland China and Taiwan over the past two years. The move also comes as pressure increases for steel companies to secure their own supply of raw materials.

But the partnership may also prove sensitive because the Taiwan government still owns about 20 per cent of China Steel. Despite the warming of relations, Chinese investment into Taiwan is still heavily regulated and there is wariness on the democratic island over becoming too economically reliant on communist China.

China Steel said it and Baosteel “have a need to search for raw ingredients so this move is a positive [for both companies]. Baosteel is a private sector, publicly-listed company, so working [is] not something that should involve politics”.

China Steel would happily work with other steel companies, such as South Korea’s Posco, on joint overseas investment “but they already have their own iron ore [supply]”, the company said. Baosteel was a natural partner because the two companies have already co-operated on technical issues in the past and Baosteel does not yet have its own iron ore mines.

The co-operation also highlights the pressures that volatile iron ore prices impose on mid-sized steel mills. In recent months, this has led to a number of iron ore mine acquisitions by steel companies, as well as a new pricing system for iron ore this year.

Tsou Jo-chi, China Steel chairman, has previously said he hoped to increase his company’s self-sufficiency in iron ore from 2 per cent to 30 per cent within five years. China Steel uses about 20m tonnes of iron ore a year.

Peter Tzeng, analyst at Polaris Securities, said China Steel had little choice but to find a partner if it was to secure sources of iron ore. “They have recognised the need to move upstream and be vertically integrated but they are about 20th in the world [in size] and are just not strong enough in terms of financing and scale to do this alone.”