China's hunger for resource M&A remains strong

BEIJING (Reuters) - Chinese companies' hunger to acquire natural resource firms is as voracious as ever despite turmoil in commodities market, but executives will likely wait for prices to fall even more before striking deals.

The mergers and acquisition market has dropped globally, hit by financing constraints and falling share prices from the credit crisis.

That has forced Chinese companies, which earlier this year moved aggressively abroad, to pull back on overseas acquisitions, causing some to wonder whether the country's outbound M&A deals had run out of steam.

But two Beijing-based investment bankers interviewed at the Reuters Summit this week said China's overseas ambitions remain as strong as ever, particularly when it comes to scooping up resource-related assets.

"China recognizes that it's structurally short of a number of key commodities that it needs to continue fuelling its economic growth," said Philip Partnow, a UBS AG (UBSN.VX) managing director and deputy head of investment banking at its Chinese joint venture.

Buying up steel, oil, natural gas or coal assets to help fuel the growth is even more tempting than it was earlier this year, because falling stock and currency prices make acquisitions cheaper.

But with commodity prices fluctuating, Chinese buyers are expected to wait a bit before pouncing.

"Chinese companies still have an appetite, a growing appetite for acquisitions, and it's not limited to the resources industry," said Neil Ge, Credit Suisse's (CSGN.VX) chief executive of its new joint venture in China. He cited manufacturing as a sector that potential Chinese buyers are eyeing.

"For resources companies, however, one of the issues is the volatility of commodity prices. You hardly can price anything, right now, including pricing M&A," Ge said.

That view was shared by Partnow, who said that with swings in commodities, currency and stock prices, its tough to agree on what to pay.

"Some people will go out and venture forth and do deals even in this environment, but I think it will take things settling down into a new equilibrium before a lot of people get comfortable transacting," Partnow said.

CHEAP PRICES

So far this year, the number of announced acquisitions by Chinese companies for firms beyond their borders has risen 19 percent to 206 deals -- a solid gain in a tough M&A market.

What is more striking is the size of the deals Chinese companies have pursued, compared with previous years. The size of outbound China deals year to date has nearly tripled, to $46.1 billion, according to Thomson Reuters data.

The materials industry is the most active China M&A sector this year, with 567 total inbound and outbound deals worth $38.6 billion, according to Thomson Reuters. That industry includes steel and mining, paper, and chemicals. Financials is second with 181 deals worth $18.2 billion, and energy and power third with 204 deals worth $16.5 billion.

Of the top five Chinese M&A deals in terms of size, three are resources related.

That streak is unlikely to stop anytime soon, say the investment bankers, especially when volatility settles, and buyers realize how cheap some assets have become.

"Things have gotten a whole lot cheaper -- commodities prices are down, the commodity stocks are down, and to the extent that commodity stocks are in countries that are heavily resource-dependent, whether its Canada or Australia or Brazil, those currencies are down," Partnow said. "So all the commodities look a whole lot cheaper today than they did six months ago."

(Editing by Ken Wills)