Chinese mergers and acquisitions activity is likely to fall during the latter half of this year, market watchers say, although they remain divided as to why.
So far this year only four of the top metals deals in the world were conducted by Chinese firms, according to a ranking compiled by PwC and released in July, with the largest deal being in India with Bamnipal Steel Ltd.'s US$5.22 billion acquisition of Bhushan Steel Ltd. In comparison, Chinese firms were involved in the top six largest metals and mining transactions just two years prior in 2016. In 2017, Chinese companies were involved in four of the top 10 metals deals.
The deals this year involving Chinese metals and mining companies include investment company Xiamen Unigroup Xue Co. Ltd.'s full ownership in Tianshan Aluminum Plant Co. Ltd., a producer and trader in aluminum, announced in March, which was valued at US$3.7 billion. Aluminum Corp. of China Ltd. in January announced a 12.71 billion Chinese yuan deal to consolidate its ownership in four units, including Baotou Aluminum Co. Ltd., and another US$1.59 billion private placement deal was signed in April between Baotou Iron & Steel (Group) Co. Ltd. and Inner Mongolia Baotou Steel Union Co. Ltd. In June, a C$723 million investment by Citic Ltd. into Ivanhoe Mines Ltd. was announced.
They were joined recently by a C$6.00-per-share all-cash takeover bid by Zijin Mining Group Co. Ltd. for Canada's Nevsun Resources Ltd. in a transaction valued at C$1.86 billion.
Ivan Wong, financial advisory partner at Deloitte China, told S&P Global Market Intelligence that Chinese companies are unlikely to be as aggressive in M&A since they are more likely to be devoting capital on projects they previously purchased. "The number of the projects acquired in the past which are lacking further capital to develop is much bigger than the number of potential projects companies are targeting."
Some projects, such as Citic Ltd.'s Sino Iron project in Western Australia, are still sucking in cash because they are over-budget, he added.
"Transactions by Chinese companies were most vibrant about six years ago, driven by China's huge infrastructure demand back then. This cycle is slowing down now and it shows that companies are digesting their previous purchases," said Wong.
"For some, they are struggling to invest more in order to profit from previous projects, which means they will not regard new acquisitions as a top priority at this stage," Wong said.
Tim Sun, chairman of Hong Kong International Mining Association, said precious metals is expected to witness a growth in transaction volumes due to relatively smaller deal sizes, as tightened regulation over capital outflow has made it difficult for Chinese companies to complete larger M&A deals.
He also said deals will be more difficult to come by in the second half due to China's pledge to deleverage.
"There are many Chinese companies hoping to execute overseas M&A deals to widen their portfolio, but they always face difficulties in the country's capital regulation," he said, adding that the number of deals that get to the announcement stage is typically less than half.
In the July report, PwC attributed a drop in global metals M&A deals in the second quarter to amplified trade tensions created by trade protectionism and expects transactions in this sector to continue at below recent historical average levels. Brian Kelly, U.S. metals deals leader, said in the report that deal activity, particularly cross-border deals, may remain stagnant until the angst caused by the global trade climate has subsided.
But Deloitte's Wong said the fall in transactions started before the beginning of the Trump administration and that it is still too early to conclude that the trade war is resulting in slower M&A activity.