Thursday 27 November 2008
As BHP-Rio Deal Dies, Chinese Steelmakers Breathe Easier
Dramatic changes in the iron ore market and opposition from the European Union’s competition authorities have forced BHP Billiton to abort its plan to form the world’s largest iron ore mining giant with a hostile takeover of it fellow Australian and rival Rio Tinto.
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As BHP-Rio Deal Dies, Chinese Steelmakers Breathe Easier
CSC staff, Shanghai
27 November 2008
Dramatic changes in the iron ore market and opposition from the European Union’s competition authorities have forced BHP Billiton to abort its plan to form the world’s largest iron ore mining giant with a hostile takeover of it fellow Australian and rival Rio Tinto.
Shan Shanghua, secretary-general of China Iron and Steel Association, noted that the failure of the merger prevents the further concentration in the iron ore market and is helpful to the diversified resources of Chinese steel mills. He added that it offers opportunities for Chinese steelmakers to go out to acquire mining enterprises. He also predicted that next year the iron ore price will drop.
“Under the current economic situation, some difficulties in the acquisition of western enterprises are easing, which brings more opportunities for Chinese enterprises,” said Lu Youqing. Lu is the deputy general manager of Aluminum Group of China (CHALCO). He noted it would depend on the situation whether CHALCO will expand its overseas acquisitions.
Late last year, BHP Billiton announced its plan to acquire Rio Tinto via an exchange of shares, but Rio’s board refused the bid as a gross underestimation of the firm’s worth. In February this year, BHP offered to swap 3.4 of its shares for one share of Rio’s. This bid valued Rio at about $147 billion, a price BHP has insisted is not only fair but generous.
But the iron ore market situation has undergone a radical change that has forced BHP to finally give up on the acquisition. Chairman Don Argus, said, “BHP is still worried about the risk brought about to shareholders due to the deterioration of the current global economic situation as well as the uncertainty on the time it needs to improve the overall situation.” The “overall situation” might refer to the fact that during the last few weeks before BHP dropped out of the chase, the EU announced its opposition to the merger.
Marius Kloppers, BHP Billiton CEO, points out that the current global situation and plummeting iron ore prices have changed the risk of acquisition. In the light of debt resulting from the merger, together with difficulties brought about by the divestiture of assets in the present market to gain EU approval, the risk to shareholders had reached an unacceptable level. BHP was rewarded for its decision to throw in the towel by a 14% jump in its share price on yesterday’s opening of the London market. Rio Tinto shares, on the other hand, fell 16% in value.
Steel enterprises should take advantage of the chance to “go out”
Had the merger been completed, the newly-merged entity would have controlled 27%-36% of the globe’s iron ore, 23% of fuel coal (coke), 13% of copper and 17% of aluminium. But high-ranking officials from Hebei Iron & Steel Group and Capital Iron & Steel Group noted in an interview yesterday that the merger’s failure doesn’t have a substantive impact on China’s steel enterprises. “The present annual talks on iron ore are mainly based on current needs and the negotiation mechanism and only with changes there will a fundamental change in the price occur for the coming year.”
Zeng Jiesheng, an analyst for “My Iron and Steel” (a research centre), told reporters yesterday that the failed deal also has no direct impact on the trend in the spot market. At present there are difficulties in the iron ore market, which is one of the reasons that BHP gave up.
With the deal’s failure, Shan Shanghua noted that now there are opportunities for major steel enterprises in China to obtain overseas mineral resources. “It is now the golden time for investment, whether from the perspective of the exchange rate or share prices of foreign mining companies.”
Zhang Jiazhu, chairman of Taiwan’s China Steel Corp., pointed out the failure of the merger is to the advantage of the iron and steel industry and will provide more room for bargaining in long-term iron ore negotiations.
Shan said yesterday that long-term iron ore price negotiations, which should be already underway, have not yet started. The two sides are still conducting discussions, since both are uncertain about the future trend. “It is certain that the long-term iron ore contract prices next year will be reduced and the only uncertainty is the size of the reduction.”
At present, Brazil’s Vale and some Australia miners are visiting Chinese steel enterprises and doing research on production cutbacks. FMG, an “upstart” Australian company, is negotiating with some Chinese steel enterprises on a supply agreement, with the price to be settled in fiscal year 2009.
Of note is that BHP yesterday announced the approval of a capital investment plan for a Western Australia iron ore project totaling A$4.8 billion (BHP’s share). The project looks to increase the annual output of Australia iron ore by 50 million tons, and annual production to 205 million tons, and demonstrates BHP’s confidence in iron ore.
On November 17, CHALCO’s Lu Youqing agreed that the failure of the merger itself is a good thing, and means that management can concentrate on strategies to deal with the current financial crisis, rather than spending a great deal of energy coping with matters related to the acquisition.
Lu said at an internal financial budget meeting of that there would be a positive financial budget in 2009. Due to the financial crisis and other factors, CHALCO plans to raise 60 billion yuan in cash for a “rainy day.”
At the beginning of this year, CHALCO and Alcoa jointly bought a A$14.05 billion stake, 9%, of Rio Tinto. Anthony Loo, president of Rio Tinto in charge of the China/Asia area, confirmed to this paper that CHALCO has become the largest single shareholder of Rio Tinto. Earlier Lu Youqing said at a press conference that the company currently maintains a large floating surplus from Rio Tinto’s stock ownership and the exchange rate and it is expected the annual profit will be 1.44 billion yuan.
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