International Mining Stocks: China is about to bust the BHP, Rio Tinto merger

Posted December 4, 2007

"BHP may have more than just China to worry about. European steelmakers have already started prodding the European Commission to raise antitrust concerns. As a British company, Rio Tinto would have to seek approval from the EC before a merger could go through." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore — (TFN): BHP Billiton (BHP: NYSE) could be fighting China’s steelmakers and the Chinese government to get its hands on Rio Tinto (RTP: NYSE). After announcing their trepidation over BHP Billiton’s bid for competitor Rio Tinto, China’s major steelmakers are considering a counter bid. And the country’s government could help them out.

China Iron and Steel Association members are discussing an offer to counter the $134 billion share exchange tender from BHP. The BHP-Rio Tinto deal would unite the first and third largest mining companies worldwide, leaving second-ranked Companhia Vale do Rio Doce far behind. The new company would have a $350 billion market cap and control a major percentage of the world’s mining efforts.

Largest iron and steel consumer

Together, China’s steelmakers are the largest iron ore consumers in the world. Steel is a necessary component in the infrastructure needed to support its booming economy. And the Chinese government has a vested interest in keeping its steelmaking industry cheap.

The combined BHP-Rio Tinto company would control 39% of the current iron ore market, easily making it the largest producer globally. In Asia, the new company would control more than half of the iron ore market, and the consolidation of its major competition would mean BHP could dictate prices.

Naturally, China, and its billions of dollars invested in steel production, is not too happy about this situation. BHP representatives have been calling on Chinese steelmakers to assuage their fears, but that tactic hasn’t worked.

Merger and acquisitions

China is so uncomfortable with the situation that the country’s government is considering throwing in with the steelmakers (to be fair, many of the steelmakers are still majority owned by the government, which likes to keep a controlling grip on the country’s vital industries) to ensure BHP doesn’t get its hands on Rio Tinto.

BHP may have more than just China to worry about. European steelmakers have already started prodding the European Commission to raise antitrust concerns. As a British company, Rio Tinto would have to seek approval from the EC before a merger could go through.

That doesn’t look like it will happen anytime soon. Rio Tinto refused BHP’s first offer without much consideration, saying it grossly undervalued the company. But BHP is still planning to make the scheme a reality, working on Rio Tinto’s major stockholder individually.

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