In China, if you owe your creditors a few hundred million dollars, you had better pay them back or face the wrath of vice-premier Liu He.
But if you owe them $1.9bn and control strategic natural resource assets, well, that is a rather more complicated situation.
When a Chinese coal company and automotive group recently defaulted on four bonds totalling Rmb4bn ($612m), sending tremors through the country’s $15tn bond market, a powerful regulatory body headed by Mr Liu threatened “zero tolerance” for any companies caught trying to evade debt repayments.
By contrast, Tianqi Lithium, one of the world’s biggest producers of the element used in electric batteries, faced an end of November deadline to pay back creditors led by China Citic Bank almost $1.9bn. It borrowed the money two years ago to fund its $4bn purchase of a 23 per cent stake in Chilean rival Sociedad Química y Minera.
China Citic Bank gave Tianqi Lithium, based in southwestern Sichuan province, a month-long reprieve as they try to sort out a new repayment schedule by December 28.
Tianqi Lithium is a private sector company, listed on the Shenzhen stock exchange. The fact that it was able to borrow so much money from state banks for the SQM stake purchase, completed in May 2018, says a lot about the unique role it has carved out for itself as a national champion operating in a strategic industrial sector.
At the time, Mr Liu was overseeing a clampdown on an overseas buying binge by large private groups including Anbang, Fosun, HNA and Wanda. Many of their acquisitions in the entertainment, insurance and tourism sectors, such as Anbang’s purchase of the Waldorf Astoria hotel in New York, were viewed by Chinese regulators as overpriced trophy assets.
Tianqi Lithium’s desire to purchase a stake in SQM, however, dovetailed with a core interest of the Chinese state — the establishment of leading, if not monopoly positions, over the production of commodities such as lithium. What oil and copper were to the transportation and communication revolutions of the mid-20th century, lithium is to their early 21st-century equivalents, as it is used in the batteries that power everything from Apple’s iPhones to Tesla’s electric cars.
In addition to billions of dollars of credit from China Citic and other state-owned banks, Tianqi Lithium could also count on Beijing’s open and vocal support as it pursued the SQM stake. When the deal was criticised by Chilean opponents who felt it would give China too much sway over the global lithium industry, Beijing’s man in Santiago waded into the fray. Any move to block the deal, ambassador Xu Bin told local media at the time, would “negatively” affect Sino-Chilean relations.
The sale went through, although Tianqi Lithium now wishes it hadn’t. It was closed as lithium carbonate prices were peaking at $17,000 per tonne. They have since plunged about 70 per cent thanks to a global supply glut, putting the Chinese company in a precarious financial position.
Tianqi Lithium and its creditors face a difficult challenge as they try to avoid triggering a formal default at the end of the month: how to balance the Chinese state’s interest in getting its money back with its interest in securing lithium supplies around the world.
Tianqi Lithium could, for example, raise money by selling down its 51 per cent stake in its Greenbushes mine — a huge, open-pit lithium mine in southwestern Australia. Greenbushes is 49 per cent held by Albemarle Corp of the US.
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But, given Washington’s determination to challenge Beijing’s grip over strategic commodities such as lithium, President Xi Jinping would probably not be happy about yielding control of Greenbushes to an American rival.
Selling a stake in Greenbushes to an Australian miner would be more palatable, although also a bit humbling for China considering the 14-point memo its Canberra embassy released last month blaming Australia for this year’s rapid deterioration in bilateral relations.
For Beijing, the ideal outcome would be figuring out a way to keep Tianqi Lithium afloat with its assets intact until global lithium prices recover. On Monday, Reuters reported a deal that might accomplish exactly that was nearing completion, with Australian miner IGO poised to take a minority position in a vehicle holding Tianqi Lithium’s Greenbushes stake for $1.5bn.
That should allow Tianqi Lithium to retain control of Greenbushes while helping China Citic Bank get its money back. If so, China might consider thanking Australia for the favour.