Chinese firms have rarely found it easy to secure their own supplies of natural resources overseas. The most notorious rebuff occurred last year when China National Offshore Oil Corp's attempt to take over United States oil producer Unocal Corp was scuttled by political opposition in Washington. Currently hanging in the balance is an attempt by Citic Resources, a Hong Kong-listed unit of state conglomerate Citic Group, to acquire the oil assets of a Canadian firm, Nations Energy, in Kazakhstan. The Kazakh oil and energy minister last month said he intended to block the transaction on national security grounds. But more subtle strategies may stand a better chance of success. The decision to play peacemaker and dealmaker in a bitter dispute between two Australian mining firms looks likely to pay off in new iron ore resources for Shanghai Merchants Holdings, a Hong Kong-listed metals trader. Shanghai Merchants helped to facilitate Mount Gibson Iron's takeover of Aztec Resources by buying minority stakes in both. And a major Shanghai Merchants shareholder, state-owned Shougang Steel, one of China's five largest steelmakers, also joined in at a decisive phase of the poker game. 'It's a smarter move for Shougang to be a catalyst behind the scenes than to acquire foreign assets directly,' said Ivan Chung, ratings managing director of Xinhua Finance. 'It will cause less political issues. When Chinese firms try to buy foreign assets, politicians may politicise the issue.' He added: 'With a Chinese shareholder who will be a major buyer [of iron ore], the merger becomes more attractive to all sides, as there will be a guaranteed buyer.' Victoria Li, an analyst with UOB Kay Hian, said that after previous missteps Chinese firms are getting smarter at acquiring foreign resources. Mainland companies are increasingly able to exploit foreign companies' weaknesses, said Ms Li. 'More Chinese companies are going out and their bargaining skills will improve. The chances of Chinese firms succeeding in buying foreign assets will increase.' Shougang Steel's strategy as an indirect facilitator has precedents in Chinese history, added Mr Chung. He pointed to the 15th century voyages of the admiral Cheng He to Asia and Africa. 'The diplomatic strategy of Cheng He was not to conquer countries but to befriend local rulers and help them conquer their rivals, instead of resorting to European-style colonisation,' he said. Shanghai Merchants is in negotiations to secure long-term iron ore supplies from Mount Gibson, said Michael Bogue, an Australian investment banker of long experience in the mining industry who joined the Chinese company as a director in September. Mount Gibson began trying to buy out Aztec in July, offering one of its shares for every three Aztec shares. Four months later Aztec's board was still dug in and the bid had degenerated into a vintage Australian slanging match. As of November 1, Aztec chairman Ian Burston was still accusing Mount Gibson of resorting to scaremongering and misinformation tactics. On November 29, however, Mr Burston did a U-turn and urged Aztec shareholders to accept Mount Gibson's offer. One reason for his change of heart was the rise in the value of the offer to 28.6 Australian cents per Aztec share from 26.3 cents at the time the offer was made. Shanghai Merchants began buying Aztec shares in the open market on September 26, spending more than A$17 million (HK$103.62 million) to gather a 7.27 per cent stake. On October 27 it bought an 8.79 per cent stake in Mount Gibson for HK$224.5 million. On November 13 the high-stakes, geopolitical nature of the game became more apparent. Shougang Steel - which had purchased its 23.8 per cent interest in Shanghai Merchants only the month before - bought a 2.9 per cent stake in Mount Gibson for A$16.8 million. The same day Metalloinvest Group, Russia's largest iron ore producer, swooped down to buy a 19.9 per cent stake in Mount Gibson. On November 22, Shanghai Merchants accepted Mount Gibson's offer for its Aztec shares. This raised Mount Gibson's stake in Aztec from 42 per cent to about 50 per cent. This was a crucial threshold. Under Australian law, once Mount Gibson owns more than 50 per cent of Aztec it is entitled to remove and appoint directors to Aztec's board and dictate its strategy. 'Without Shanghai Merchants' acceptance of Mount Gibson's offer, there is no doubt the bid would have closed and the general offer halted,' said Mr Bogue. Shougang now directly holds about 3 per cent of Mount Gibson and Shanghai Merchants about 12 per cent. Assuming full absorption of Aztec by Mount Gibson, Shanghai Merchants and Shougang would together hold a 13 per cent stake in the combined entity, said Mr Bogue. 'It is Shanghai Merchants' intention to seek board representation in the combined company,' he said. Mount Gibson combined with Aztec will increase its annual iron ore output to 10 million tonnes in two years from three million tonnes now, said Aztec managing director Peter Bilbe. The merged company would be the third-largest Australian iron ore producer. Shanghai Merchants is considering more Australian iron ore investments. 'We are looking to be an active facilitator of consolidation of iron ore in Australia. We will look to investments where we can secure long-term supplies. China seems to have a voracious appetite for raw materials around the world,' said Mr Bogue. China is the world's biggest producer and consumer of steel and in 2004 it overtook Japan as the world's largest iron ore importer. The China Metallurgical Mining Association predicted the country will import 340 million tonnes of iron ore this year, compared with 90 million tonnes in 2001. Australia is the world's biggest iron ore exporter, accounting for one-third of global supply. Its exports of all minerals to China have more than doubled in the past two years. The two countries also have common interests in uranium. China plans to build 40 to 50 nuclear power plants over the next 20 years, while Australia has 40 per cent of the world's known uranium reserves; in April it signed a deal to begin uranium exports to China in 2008. Shanghai Merchants' long-term strategy is to be a major trader not only in iron ore but in uranium, gold, copper and nickel, too, said Mr Bogue. 'We want to be a much bigger player than we are now. We hope to expand revenue significantly in the next few years, mostly through commodities trading. 'We have identified a list of companies we will look at for investments or trade, mainly in Australia. We're going to be quite aggressive. We will pursue opportunities. If there are good opportunities for deals, we'll do plenty of them.' To reflect its goals, Shanghai Merchants expects to change its name to APAC Resources. Of the HK$377.7 million the firm plans to raise with a rights issue next month HK$129.5 million will be set aside for investment in commodities. Other Chinese firms are also actively prowling for Australian resources. In October, state-owned China Metallurgical Group signed a memorandum of understanding to take an undisclosed stake in Australasian Resources, which owns the rights to a billion tonnes of iron ore in Australia, the newspaper The Australian reported. The same month Citic bought a 7.5 per cent stake in uranium miner Southern Gold and in August Aztec agreed to sell Citic 1.5 million tonnes of iron ore per year for up to 15 years. Citic's Australian resources portfolio also includes 22.5 per cent of Portland Aluminum Smelter Joint Venture, 11.62 per cent of Macarthur Coal and 7 per cent of the Coppabella/Moorvale Coal Joint Venture.