Cnooc, Sinopec Lead China's Expansion in Brazil on Oil, Chemicals Demand

Cnooc Ltd., China’s biggest explorer for offshore oil and gas, may add to the nation’s five- fold increase in direct investment in Brazil this year as demand for raw materials increases.

China Petrochemical Corp., the nation’s second-biggest energy company, and Cnooc may offer at least $7 billion for Brazilian oil assets and a stake in OGX Petroleo & Gas Participacoes SA of Rio de Janeiro, two people with knowledge of the matter said on Sept. 10. Cnooc shares rose to the highest in more than two years this week on speculation it may bid for valuable properties in Latin America’s biggest economy.

Chinese direct investment in Brazil increased to $367 million in the first half of 2010 from $73 million in the same period last year, according to the Brazilian central bank. The Asian nation is the world’s largest consumer of industrial metals, soybeans, pork and cotton and the second-biggest user of oil, corn and sugar, while Brazil is the top producer of coffee and sugar and the second-largest producer of soybeans.

The Chinese economic model is based on “importing commodities, including food, using those commodities very efficiently to produce goods and then re-exporting those goods,” Philip Poole, global head of macro and investment strategy at HSBC, said in an interview at the bank’s office in Singapore. “One of the vulnerabilities associated with that is access to commodities. So part of their strategy is to buy into the supply of commodities.”

Huang Wensheng, a spokesman for Sinopec Group, and Jiang Yongzhi, a spokesman for Cnooc, didn’t answer calls made to their Beijing offices outside of business hours.

Investors Forum

Speculation over Cnooc comes on the eve of the LatinFinance Investors Forum today and tomorrow in Beijing, where government officials, corporate executives and fund managers will gather to discuss opportunities for Chinese investment in Latin America.

Chinese companies from Sinochem Group to State Grid Corp. of China have announced deals or possible acquisitions in Latin American mining, petroleum, and electrical power this year as the nation seeks to secure commodity supplies to feed its expanding economy, which surpassed Japan as the world’s second- largest in the second quarter.

Chinese investment in Latin America nearly doubled in 2009 to $7.33 billion from $3.68 billion in 2008, according to government data. The 2009 number amounts to 13 percent of the nation’s total financial and nonfinancial investment. Cumulative Chinese outlays in Latin America climbed to $32.2 billion at the end of 2008, making up 17.5 percent of total investment, according to the Ministry of Commerce.

Fueling Demand

China’s gross domestic product grew 10.3 percent from a year earlier in second quarter, fueling demand for the raw materials that its manufacturers depend on.

For all of 2009, Chinese investment in Brazil totaled $83 million, according to Brazil’s central bank. Brazil sold $20 billion worth of goods to China last year, with soy and iron ore accounting for 66 percent of the total. Exports to the U.S. totaled $15.6 billion after the global recession reduced that number by 43 percent from the year before, according to Brazil’s Trade Ministry.

Sinochem, China’s biggest chemicals trader, agreed in May to pay $3 billion to Statoil ASA for 40 percent of the Brazilian offshore Peregrino field. Brazilian iron-ore producer Itaminas Comercio de Minerios SA said in March it may sell itself to East China Mineral Exploration & Development Bureau Co. for about $1.2 billion. Aneel, Brazil’s electricity regulator, said in August that State Grid Corp., the nation’s largest grid operator, is likely to win approval for its 3.1 billion reais purchase of seven energy companies in Brazil.

‘Equal Partner’

One reason for China’s advance in the region is that “Latin countries feel China treats them as an equal partner rather than someone who bosses them around,” said Pietra Rivoli, professor of international business at Georgetown University in Washington. “Chinese investors and companies can be more patient. The U.S. has tended be more focused on getting a return on its capital.”

Cnooc, listed in Hong Kong, bought a 50 percent stake in Argentina’s Bridas Corp., the nation’s second-biggest oil producer, for $3.1 billion this year, expanding its interests beyond Australia, Africa and Southeast Asia.

Cnooc shares climbed 4 percent to HK$14.70 in Hong Kong trading on Sept. 13, the highest level since May 2008, before declining 0.7 percent yesterday to HK$14.60.

Aluminum Corp. of China, the largest aluminum producer in the country, bought Peru Copper Inc. of Vancouver for about $792 million in June 2007, taking control of the Peru’s third-largest deposit of the metal used to make wires and pipes. Chinalco, as the Beijing-based company is known, said last year it may seek to build more mines in Latin America.

China’s investments have included low-interest loans to secure favorable supply. China Development Bank Corp., the state-run bank for public works projects, reached an agreement in April to lend Venezuela $20 billion and form a venture to pump crude from the Orinoco Belt.

The bank agreed last year to lend Brazil’s state-controlled oil company, Petroleo Brasileiro SA, or Petrobras, as the company is known, $10 billion, and signed a long-term supply contract with the company.

--Allen Wan in Shanghai. With assistance from Shiyin Chen, Chua Kong Ho and Li Yanping. Editors: Harry Maurer, Laura Zelenko