When the large state-owned enterprises were busy doing resource acquisitions in the foreign countries, what were those private enterprises doing? Didn’t they admire those state-owned enterprises? Didn’t they want to follow them? Of course they did! But the deficiency in money is the biggest hurdle for them.

Recently, Chinalco, China Minemetals Corporation and some other large-sized state-owned enterprises were busy purchasing the overseas resources. The investment amount reached millions or even billions of yuan. The private enterprises in China mostly could not follow them but to watch and admire them. The latest resource acquisition made by the private enterprises happened in November 2008, in which the largest private steel enterprises in China – Jiangsu Shagang Group – acquired an iron ore mine with 800 million tons of reserves in Australia.

Those private enterprises, which are more deficient in capital and strength compared with Shagang Group, were always said to have the plan to do overseas resource acquisitions. But most of those sayings proved to be “just sayings”. Shen Wenrong, Board Chairman of Shagang Group, said that Shagang Group would perform better than now if it could receive the “treatment” as good as what the state-owned enterprises receive from the relevant state departments.

“For the private enterprises in China, the biggest hurdle against going out is not the acquisition of resources but the lack of the support from the government,” said Geng Bingxi, Deputy Secretary-general of China Chamber of Metallurgy Industry.

According to the experts who attended the drafting of the industry promotion programs at the end of February, both the Regulations and Promotion Program of Steel Industry and the Regulations and Promotion Program of Non-ferrous Metal Industry encourage the enterprises with certain strength to purchase the overseas strategic resources. It also suggests that the enterprises should not conduct the overseas resource acquisitions in swarm, which may result in the upsurge of prices.  

Although it is not definitely said that all the private enterprises can not gain support in the industry promotion programs, the enterprises with enough strength to gain support are mostly the large-sized stat-owned enterprises. Quite a few private enterprises meet the standards.

The private enterprises can only go overseas in the ways of self-financing and so on. In November 2008, Shen Wenrong came to Australia personally to sign off a purchasing agreement with a local listing company, obtaining the mineral rights of an iron ore mine with 800-million-ton reserve at quite a small cost.

The acquisitions of overseas resources by the private enterprises still need to be examined and approved by the state relevant department. If a “pass” is not available, there will be more hurdles in the explotation process for those private enterprises.

Due to some policies, Shen Wenrong still has a wish which has not been fulfilled. Last year, Shagang Group united with Tangshan-based Guofeng Iron & Steel, Delong Iron & Steel and the other ten more enterprises with certain strength to establish a union of private steel enterprises to purchase or invest in the overseas iron ore mines, However, such a union with the annual steel output of 50 to 60 million tons has not been approved by the government.

The main problem haunting the private enterprises’ overseas expansion is the source of the capital. From the second half of 2008, the prices of many resources fell drastically by 50 percent due to the financial crisis. Some foreign resource-dependent enterprises, pressed for the tense capital chain, were forced to sell their stock rights at low prices.

The financial crisis hit China’s domestic-funded enterprises as well. Those small and less competitive private enterprises suffered more than the large-sized state-owned enterprises in this situation.

At that time, deficiency in capital became the biggest hurdle for the Chinese private enterprises to do overseas businesses. The third largest iron ore manufacturer in Australia FMG just reached a deal with the Hunan-based China Valin Group. Last year, this company had the willing to sell parts of its stock rights to Shagang Group. However, Shagang Group gave up this opportunity due to the capital stress.

Frankly speaking, a large amount of money is needed in the overseas resource acquisitions. Even the large-sized state-owned enterprises usually need the support from the banks. “Purchasing the iron ores is not so needful for money. But the investment into an iron ore mine usually costs dozens of billion yuan. The private enterprises can not afford this without the support from the banks,” said Geng Bingxi.

In China, if the enterprises want to invest into the overseas resources, they mostly get the loans from the state policy banks. The commercial banks rarely have the opportunity to grant the loans. However, the application for the loans from the policy banks must be examined and approved by the relevant departments. This means that the way for the private enterprises to get the loans for overseas resource acquisitions is not smooth.

“If the private steel enterprises want to have the qualification and capital to buy the iron ores at the long-term agreement price, they need the support from the relevant government departments. If not, the foundation of the union will be meaningless,” said Geng Bingxi.

Even though the private enterprises succeeded in investing in the overseas resources after breaking many barriers, there is no bright future for those investments. A series of problems will come one by one. Due to the unfamiliarity with the political and humanity environment of the investment countries, varieties of risks will be new hurdles for the private enterprises.

The first is the capital risk. The private enterprises have weak strength. Once financial crisis or some other hazards happened, the investment assets would see a sharp depreciation or exchange rate would fluctuate greatly. In that situation, the private enterprises, which lack the additional funding, will be paralyzed immediately.

But the large-sized state-owned enterprises like Chinalco and China Minemetals Corporation are rarely haunted by those problems. For them, capital is not a problem. Even though large deficit occurs to their investments, they can also survive with the aid of the loans from the banks and the support from the government.

Take Chinalco for example. When it firstly invested into Rio Tinto, the shrink of the stock market made it lose two thirds of its investment. The stress of the capital chain increased drastically. However, the company still had the “strength” to further invest into Rio Tinto.

“Once having problem in the investment, the private enterprises usually have to fight alone without any support,” said Geng Bingxi.