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.