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China's gobbling up South American commodities: How investors can profit

Tony D'Altorio, Investment U
0 Comments| December 21, 2010

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China’s large appetite for commodities has it heading into South America. And Brazil and Argentina are getting the lion’s share of its interest.

Chinese companies have spent over $15 billion just on energy deals alone, including:

  • CNOOC ADR (NYSE: CEO, Stock Forum), which paid $3.1 billion for a 50% stake in Argentina’s Bridas Energy in March.
  • Sinochem Group, whichpaid $3 billion to Statoil ADR (NYSE: STO, Stock Forum) for 40% of its Brazilian offshore field, Peregrino, in May.
  • Sinopec ADR (NYSE: SNP), which made a $7.1 billion investment into the Brazilian subsidiary of Repsol YPF ADR (NYSE: REP, Stock Forum) in October.
  • CNOOC – again – which agreed to pay $7.06 billion for a 60% stake in Argentina’s Pan American Energy in November.

Now, in December, Sinopec is paying $2.45 billion for the Argentine operations of Occidental Petroleum (NYSE: OXY, Stock Forum).

Wall Street turned its nose up at all of those deals as being too expensive for too little. But as usual, it’s missing a potentially profitable trend.

China is willing and able to pay a premium to lock up crucial commodities. And it doesn’t mind going all the way to Argentina to get them…

China’s Argentine investments

China knows very well how much it needs to secure commodities for itself. And it has no problem forging economic ties and trade deals with certain countries to do that.

The Asian nation seems to have a particular affinity for investing in Argentina, where it had $136.7 million in investments as of 2009. Back in 2004, however, it only claimed $13 million.

Chinese companies invested over $10 billion into Argentine energy deals alone in 2010. And earlier this year, China promised to supply a huge $10 billion to upgrade its fellow emerging market’s national rail network.

So far, it seems mainly focused on Argentina’s energy, but it also really likes its metals, minerals and fertilizers, among other resources.

The Latin American country has huge metals and minerals potential in its significant amount of unexplored land. So Chinese firms have begun to move in on this sector too.

Shandong Gold, for one, signed on with an Argentine state-owned company in July to jointly explore the La Rioja province for gold.

And in the agricultural sector:

  • A Chinese-backed company invested $600 million in Tierra del Fuego’s urea production in southern Argentina.
  • China is spending an additional $100 million on a soybean project in the Rio Negro province.
  • It has also invested in the Belgrano Cargas railway, which is vital to Argentine soybean transportation.
  • The Chinese are also bidding for port and dredging operations in building a new port in La Plata near Buenos Aires. When finished, no doubt the port will be busy shipping all sorts of commodities to China.

China and Argentina

Unlike the U.S., China isn’t put off by Argentina’s difficult tax and regulatory system.

But Chinese companies can afford it better with strong state support and access to cheap credit. As Laban Yu, a Macquarie oil and gas analyst, said, “China is probably the only country that would actually buy in [to Argentina], because of the political pricing system there.”

Still, that system could change for the better soon with the recent passing of Argentine President Nestor Kirchner. And if so, China is excellently placed.

Knowing that possibility, China will likely continue courting the country. Consultancy Deloitte & Touche recently reported, “Argentina is definitely positioning itself as a strategic partner for China with mining, energy and petrol, agriculture and food, and the car sector [being] the main areas of interest.”

No ETFs or mutual funds currently focus solely on Argentina. But there are viable stocks that trade on U.S. exchanges.

That includes:

All four offer an excellent way for investors to play Chinese investment into Argentina’s commodity-rich economy.

Disclosure: The author does not hold positions in any of the stocks mentioned

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