Wednesday, December 05, 2007

Chinese steel-maker to bid $200 billion for Rio Tinto?

China’s biggest steel-maker, the state-owned Baosteel, claims it is contemplating a bid in excess of $200 billion to top BHP-Billiton’s $125 billion bid for Rio Tinto. The claim is that this would ensure Chinese supply of iron ore. Of course, even if this is all just talk (Baosteel is capitalised at only about $40 billion itself) it has the effect of at least temporarily driving up Rio Tinto’s share price and thwarting the chances of BHP-Billiton. The whole world resource sector is now in play on the back of expectations of enormous ongoing anticipated future growth in China.

I predicted months ago the likely bid by BHP-Billiton and still believe this is the bid most likely to succeed. It is BHP-Billiton that has all the synergies that make a successful huge bid viable. For a Chinese firm these synergies are not there - there are few synergies between an iron ore provider and steel mills - although there would be the potential to offset enhanced monopoly pricing power. Support for the notion of a PACMAN defence by Rio Tinto – Rio turning the tables on BHP-Billiton by seeking to take it over, seem to have faded. This rumour might have been fostered by Rio Tinto again to drive up its purchase price by BHP-Billiton.


Spiros said...

The Chinese have had a strategy of buying raw material producers to complement their manufacturing operations for some time. The China Aluminium Company owns a big undeveloped bauxite resource in Queensland.

If they go ahead with a bid for Rio, it'll be interesting to see whether the Government allows it. There are arguments pro and con. It wouldn't be a great look for our Sino-phile PM to be knocking back the Chinese on national interest grounds, but he'll probably be advised that the strategic risks are just too big.

hc said...

I agree I think the Australian government would have strong reservations about this and I think they should. Strategically Australia's position in these markets is weak.

In addition I doubt the Chinese have the skills to manage a giant like Rio. It is more than a set of mines.

conrad said...

Its an interesting prospect. I don't think it matters what Baosteel is worth, since the money is going to come from the Chinese government slush-fund anyway. The alternative way to look at the bid is that even if the CHinese can't manage Rio Tinto well, a poorly managed Rio Tinto is probably better the trillion dollars of US bonds they have accumulated.

hc said...

I had precisely the same thought Conrad. You get some real assets in exchange for a depreciating US dollar asset.

Anonymous said...

Who says they ought compare US bonds to buying Rio.

Compare like with like. US equities with buying Rio.