Rio Tinto Group

Mainland bid for Rio lacks credibility

PUBLISHED : Wednesday, 05 December, 2007, 12:00am
UPDATED : Wednesday, 05 December, 2007, 12:00am

Mainland steelmakers have been talking about taking over mining giant Rio Tinto. It is highly unlikely they will manage to put together a credible bid. And even if they do, the bid will fail.

Reports were swirling yesterday that a consortium of mainland steel companies led by Baosteel are planning a takeover bid for British-Australian mining behemoth Rio Tinto to counter an earlier bid from Rio's arch-rival BHP Billiton.

At first glance the mainland bid appears to make good sense. Mainland steel mills rely heavily on iron ore imports from mines in Australia owned by Rio and BHP. But as mainland demand for the metal has risen over recent years, so have the ore prices charged by the mining companies (see charts).

In 2005, for example, the miners jacked up contract prices by a hefty 71.5 per cent.

Next year, prices are widely expected to jump by between 25 and 50 per cent, 'with the increase closer to 50 per cent than 25 per cent', said industry expert Michael Komesaroff.

That will hurt the mainland's steelmakers who already are suffering from excess capacity.

Clearly they are worried that a merged BHP-Rio will force them to swallow even higher ore prices. On the other hand, if they can acquire Rio for themselves, not only will they guarantee a secure ore supply but they will be able to exert a far bigger influence on future price negotiations.

But Rio, with a market capitalisation of US$165 billion, is truly a giant. None of the mainland steelmakers has a balance sheet nearly strong enough to take it on alone.

Acting in concert can be difficult, however. The mainland steel companies are an infamously fractious bunch. In recent years they have managed to negotiate collectively on ore prices only under threat of government sanctions. But as their refusal to consolidate shows, intense rivalries persist. Agreeing on how to divide the spoils of a Rio acquisition could well prove impossible.

The only way the steel companies will be able to put together a credible bid is if they are driven by the central government at the highest level, possibly with financial backing from the new China Investment Company.

Yet it is highly unlikely that Beijing has the appetite to get involved in a hostile takeover bid, especially for such a prominent company.

CNOOC's unsuccessful 2005 bid for US oil company Unocal taught the central government just how tricky state-backed cross-border deals can be. A bid for Rio would dwarf that failed oil company bid and would risk painting the CIC as nothing but an aggressive resource-grabber.

And even if a serious bid does emerge, it almost certainly will fail. Canberra reserves the right to reject foreign takeovers 'that are determined to be contrary to the national interest'.

In 2001, John Howard's administration blocked Shell's proposed takeover of Woodside Petroleum and the new government of Prime Minister Kevin Rudd is reckoned to be even more fiercely protective of Australian industry.

'If they knocked back Shell, they'll certainly knock back the Chinese,' observed one Australian analyst.

So it is likely that talk of a mainland takeover of Rio will remain just talk. And when it comes to next year's iron ore price rise, mainland steel companies just will have to put up and shut up.