Beijing group may offer US$200b to counter BHP
The country's US$200 billion sovereign wealth fund plans to step into an iron ore bidding war with Australian miner BHP Billiton for London-based Rio Tinto, according to a China Business report.
The weekly business magazine yesterday said China Investment Corp, launched on September 29 to boost investment returns on the country's massive pool of foreign reserves, could unite with domestic steelmakers to counter the US$150 billion bid by BHP for Rio Tinto.
If the latter bid were to succeed, the merger of the two companies would create a mining giant that would control more than 33 per cent of global iron ore sales - a prospect that has alarmed policymakers and steel miners in the country.
Citing unnamed sources, the China Business report said the mainland government was considering whether to bid for a stake in Rio Tinto.
'We are studying how the mainland steelmaking industry might respond to the BHP Billiton bid for Rio Tinto earlier this month,' the report said, quoting an unnamed source.
'Our suggestion is that several state-owned steelmakers such as Baoshan Iron and Steel, Shougang Group and Angang Steel should join hands with China Investment Corp to form a consortium to launch a bid.'
The report added that it expected the government to take action on the bid soon.
'It would be a right move for China to offer a counter-bid for Rio Tinto, as raw material costs would further erode the profit of mainland steelmakers once the merger is realised,' said Kenny Tang Sing-hing, associate director of Tung Tai Securities.
'Take Angang Steel; their third-quarter turnover rose 12 per cent but net profit was down 18 per cent. It was mainly due to the surge in iron ore price,' Mr Tang said.
He said the mainland government should support such an investment as iron ore is a strategic resource to the country.
Australia-based BHP Billiton unveiled its US$150 billion takeover bid for rival Rio Tinto Group on November 12. However, the board of Rio Tinto rejected the offer.
'Any participation in a bidding contest by China for Rio Tinto would no doubt increase the consideration that BHP Billiton would have to pay and it creates a situation that would drive the bidding price higher. We [China] are planning a bidding strategy and this will be announced in the near future,' a source involved in the decision on the mainland side told China Business.
The report also said the bid price offered by the mainland consortium would be US$200 billion.
'China Investment Corp doesn't have such funding from the government, so the consortium needs the steelmakers' participation,' the report said.
The mainland is the world's largest importer of iron ore and feared that the merger between BHP Billiton and Rio Tinto would allow the two to control the price of the commodity, drive up prices and hurt the profitability of mainland steelmakers.
Nomura International estimated in a recent research that prices of raw materials for steelmakers such as iron ore and coking coal are likely to rise by a further 40 per cent to 50 per cent by April next year, citing strong demand from the mainland.