Chinese steel mills to get the go-ahead to build in Australia

THE Australian government is poised to signal its support for Chinese efforts to build steel mills in Australia.

In the first major speech about China by a senior Australian official or politician since the federal election, Australia's ambassador to China Geoff Raby will this morning tell a major annual iron and steel conference that Australia is also eager for more investment from China.

"It is conceivable for Chinese companies to consider establishing mini mill and finishing facilities in Australia, using alternative smelting or direct reduction based processing," Dr Raby will tell the conference, sponsored by the powerful China Iron and Steel Association and held in the northern Chinese city of Dalian.

"This would fit well with the overall restructuring of China's steel sector, and offer the potential for China to gain access to new steel export markets in Asia," he will say.

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The Australian understands that China has been quietly exploring the possibility of setting up steel mills in Australia through various avenues to Canberra. It has also sought clearer rules for its rising investment in Australia, which last year passed $9 billion.

"Australia welcomes and encourages foreign direct investment, including from China, because of the benefits that it provides our economy," Dr Raby will say. "Australia has historically relied on significant international finance to open new investment opportunities and to develop our natural endowments."

Australian resources companies are also believed to have explored a number of options around a mill project.

Wuhan Steel, which has ventures with junior Australian miners Western Plains Resources and Australian Centrex Metals, recently announced it would build a $US5 billion （$5.2bn） steel mill in Brazil, a sign of China's intended strategy.

"I myself have been giving some thought to the potential for China to develop steel production in Australia," Dr Raby says in the speech, a copy of which has been obtained by The Australian.

"Alternative steel-making technologies and shipping steel, rather than iron ore, would also lead to lower carbon emissions, an important consideration given the likelihood of an increasingly carbon constrained world in the future."

But there are a number of sticking points in talks over the setting up of Chinese steel mills in Australia, foremost among them the cost of labour.

China has advocated that it be allowed to bring in short-term workers to build mills and other infrastructure in Australia, such as rail lines, pipeline and ports.

This poses a problem for the Gillard government, which went to the polls with a lower immigration policy.

China has offered to help Australia fix its infrastructure bottlenecks but wants to bring in cheap labour on a project-by-project basis.

"This issue （of a Chinese mill） has been looked at previously, but has not gained traction for a number of reasons," Dr Raby says. "However, conditions may now be changing in ways which make it a more favourable proposition."

He cites the emergence of lower grade magnetite iron ore producers （high quality iron ore sold by BHP and Rio is known as haematite）, backed by large Chinese steel makers, as a possible game-changer.

PricewaterhouseCoopers global mining leader Tim Goldsmith says these projects are more about diversifying and increasing supply of iron ore for China than about making money.

The lack of coking coal in Western Australia has long been another problem that may be overcome with next-generation gas-powered plants.

"I have been fortunate to have visited most of China's major steel mills during my tenure as ambassador, " Dr Raby says.

"I have invariably been impressed by the scale and technological sophistication of these mills, and have no doubt that this expertise could be brought to bear by Chinese firms establishing steel production facilities in Australia.

"Of course, this proposal raises a number of challenges, and there are many other issues which would need to be taken into account. But I have raised it today in order to provide food for thought about possible next steps in the development and integration of the Australian and Chinese iron ore and steel industries."

In 1990 Australia exported less than 10 million tonnes of iron ore to China annually. Last year, it exported more than 260 million tonnes of iron ore to China.

The trade was worth about $22bn and accounted for more than 50 per cent of Australia's total exports to China and almost 25 per cent of two-way trade.

While short-term pricing and demand is going through a soft spot, the medium and longer-term trend for iron ore and steel is strong, according to Economist Intelligence Unit China chief Stephen Joske.