Money Morning first reported in January, that China was building stakes in some of the world’s largest natural-resource companies, which have been made vulnerable by depressed commodities prices, tumbling profits and falling stock prices. In the scant few weeks since that Money Morning report was published, Aluminum Corp. of China Ltd. (ADR: ACH), or Chinalco, has invested $19.5 billion in Australian/British mining giant Rio Tinto PLC (ADR: RTP), and China Minmetals Corp. acquired Australian zinc miner Oz Minerals Ltd.

China Development Bank has been particularly active. Earlier this week, the bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

China Development Bank struck a similar deal with Petrobras Friday, agreeing to loan the Latin American energy giant $10 billion to help finance deepwater oil exploration off the coast of Brazil.

Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company, the Macauhub reported.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Brazil is necessarily the country that comes to mind when taking inventory of the world’s top oil producers. It currently has about 12 billion barrels of proven reserves, but that figure could grow substantially now that a number of very rich deposits have been found off Brazil’s shores.

Petrobras happened across the second-largest oil find in two decades last year when it found between 5 billion and 8 billion barrels of untapped light oil in the Tupi basin. Even more impressive are the unofficial figures from a new reservoir, known as Carioca. That field could hold 33 billion barrels of oil and gas, which would make it the world’s largest discovery in at least 32 years.

With discoveries like these Brazil, currently ranked 13th on the list of the world’s top oil producers could, could easily move into the top ten.

The only problem with the Tupi and Caricoa oil fields is production costs. The Carioca discovery, for instance, is located 170 miles offshore, more than 6,000 feet under the surface of the water, and is trapped beneath a shelf of salt 500 miles long and 125 miles wide.

Developing oil fields such as these will be very costly and with crude oil trading below $40 a barrel financing is imperative. In that sense China couldn’t have timed its investment in Petrobras any better.

Petrobras said it plans to invest $174.4 billion from 2009 through 2013, compared with the $112.4 billion planned for investment for 2008-12. The company will invest $28.6 billion in 2009 alone.

In 2008, trade between China and Brazil totaled $36 billion making China Brazil’s second largest trading partner.

Source: China Continues its Commodities Binge with Brazilian Oil Deal

According to World Steel Dynamics, a U.S. steel consulting firm, steel production could fall next year by 13.9% compared with this year. This downturn comes after a long period of growth in the steel industry. In fact, output has grown every year since 1998 – soaring from 777 million metric tons a decade ago to 1.34 billion metric tons in 2007.

The catalyst behind the expansion has been a robust world economy and a steep rise in demand in China – by far the world’s biggest steel producing and consuming nation, accounting for more than a third of global steel output.
But the sector has been among those worst hit by this year’s financial storms, with share prices in many steel companies having fallen by more than two-thirds since the middle of 2008.

“The reduction in demand we’ve seen in steel goes beyond typical cyclical downturns given the level of distress in global financial markets and tight credit conditions,” Carol Cowan, a U.S.-based analyst at Moody’s Corp.(MCO)credit rating agency, told the Financial Times.

Steel companies’ share prices have been hit hard. Severstal OAO, Russia’s biggest steelmaker, has seen its shares fall almost 90% since July, ArcelorMittal (MT) has dropped more than 70 per cent; and United States Steel Corp. (X), the United States’ biggest steel company is down 79% over the same period.
Meanwhile, China’s steel industry, the world’s largest, is sitting on a stockpile of 63 million metric tons, or about 13% of annual production.  Baosteel Group Corp. General Manager He Wenbo said in November that his company was facing the “most difficult” period since it was founded 30 years ago.

But China is making noise about a shift in trade policy meant to rekindle its steel mills and keep its economy humming.  The government is considering measures, including buying unsold inventory and raising export rebates, to help steelmakers weather the slowdown, Minister of Industry and Information Li Yizhong told Bloomberg News on Dec. 12.

That represents a dangerous shift in policy that could hinder international trade, according to Myron Brilliant, vice president for Asia at the U.S. Chamber of Commerce in Washington.  The economic crisis has prompted China to turn back to “export-oriented policies that could lead to an increase in the trade imbalance” and new tension with the United States.

Treasury Secretary Henry Paulson has spent more than two years smoothing over U.S.-China trade relations.  Part of those efforts focused on the value of China’s currency, the yuan, to redress what U.S. officials saw as an unfair price advantage for Chinese products.  The yuan rose 21% versus the dollar from 2005, but its steady rise stalled in July, and has barely budged since.

Before leaving for trade talks in Beijing this month, Paulson told business representatives his biggest concern was that China would revise policy and reverse moves it had made during the past year to cut aid to exporters and stimulate domestic consumption.

China’s five-year plan through 2010 aims to rebalance growth away from exports and increase domestic consumption, but so far it has met with dismal results. Household consumption declined to slightly more than 35% of China’s gross domestic product (GDP) last year from 45% in 1993.  By comparison, consumer spending represents almost 70% of the U.S. economy.

“What separates China from the rest of the world is its incredibly low level of consumption relative to GDP,” Brad Setser, a fellow at the Council on Foreign Relations in Washington, told Bloomberg News. “What can China do that would most directly help the world economy during a period of very severe weakness? Get its consumption back up to 40% of GDP.”

A shift in Chinese policy is bound to meet with resistance in U.S. business circles, especially among steelmakers.  Lawyers representing Nucor Corp, the second-largest U.S. steelmaker, and smaller steel pipe makers say they are considering new trade complaints against China.

Shift in China Trade Policy Could Accelerate Western Steelmakers’ Slump