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We’ve been pointing out in various places that some of China’s major state owned enterprises, or SOEs, which are the massive companies once fully owned by the government which still has a large stake in them, have been buying up energy and natural resource assets. China’s oil companies particularly and some of its mining and metals companies are buying up what are vital natural resources, energy commodities, as a way of feeding the mighty energy appetite for the still growing country. Oil, natural gas and coal assets are directly needed to power the manufacturing sector, heat homes and keep everything running in China, yet the story of China’s investment—which is what it is—in its own future by wisely picking up assets on a global basis, is also being lost or at least heavily overshadowed in the story of the current global economic slowdown, which has of course spread to China.

State Grid Corp. of China

That’s why the latest deal, reported in Reuters, Bloomberg and the Wall Street Journal, with government owned State Grid Corp. of China, buying up Brazilian electricity transmission assets from a Spanish company, Actividades de Construccion y Servicios SA (literally, Activities of Construction and Service) for nearly $1 billion in cash and assumption of debt, continues a quiet and growing trend for China. Already China burns roughly 50 percent of the world’s coal to power its electricity generation, so its power needs are immense. With the continuing building up of the country, the demographic increase of urban life in China, and a growing industrial and manufacturing base, this is not only good strategy, it’s necessary.

State Grid’s Growth

Already State Grid has been extending its presence beyond China, into Portugal, the Philippines and adds to its Brazilian assets with this latest deal. State Grid will be acquiring seven high-voltage electricity transmission distributors, and in 2010 State Grid purchased seven other power transmission assets in Brazil, also for nearly $1 billion. The latest deal will be for $531 million along with the assumption of $411 million in debt, for a total of $942 million. The nearly 3,000 kilometers of power lines are in southeastern Brazil, which includes its two major cities, Sao Paulo and Rio de Janeiro, and State Grid will have the concession to operate electricity transmission for 30 years, subject to a review in 20 years by Brazil’s government.

Electric Power Consumption in China (KWH per capita)

Other State Grid Deals

In 2009, State Grid took over power grid operation of the Philippines, after winning an auction for a license to operate for 25 years at a cost of nearly $4 billion. State Grid’s deal in Portugal was for around $500 million for a 25 percent stake in a power grid operator. With these assets, State Grid continues to grow as a global power player. Beijing’s policymakers also, as part of the strategy of having their large companies pursue overseas assets, want their large state owned firms to develop into world class, major players.

Headquarters of PetroChina in Beijing

What’s Next?

We’ve seen companies like PetroChina (NYSE: PTR) and China Chemical & Petroleum Corp. (NYSE: SNP), or Sinopec, buying up assets and entering into joint ventures with partners. There the prize has been overseas oil and natural gas, as well as domestic forays into unconventional shale gas plays. We’ve also seen Yanzhou Coal Mining (NYSE: YZC) acquiring Australian coal mining assets, so the move to larger collections of assets as well as extending operations overseas, as in the case of State Grid, continues. The PRC government’s stated aim to have its large companies become world class so they can compete globally as well as strengthen China’s economic posture domestically to insure long term growth is well underway. While investing in this sector right now might be premature, as commodities are down in price worldwide and the economic slowdown has even blunted power generation and energy usage domestically for now, these developments and China’s long-view, deliberate strategy for these energy and commodity resources is something to keep in mind.

Committed to your Global Profits,

Jim Trippon

Chief Investment Analyst