Iron Investing News

BHP Billiton’s ongoing hostile takeover bid of of Rio Tinto may be over by the year-end. 

 Four months ago, the $142 billion takeover was considered by most to be a sure bet.  But now, all signs are pointing towards the bid running out of steam as the Chinese Ministry of Commerce and the European Commission seem likely to reject the deal as opposition from steel manufacturing heavies is hotting up.

Shares in Rio are selling for 8.8 per cent less than BHP’s bid, and according to a Bloomberg News report, this is a clear “sign investors doubt the biggest mining acquisition will get done this year or even at all.”  Thrice now, Rio’s board has rejected BHP’s bid on grounds that the price offered was too low. Many investment management groups including Templeton Asset Management Ltd. and Midas Management Corp., however, feel it would be a mistake on the part of BHP to raise the bid.

The China Iron and Steel Association (CISA) has long been against the proposed takeover and has repeatedly called upon China’s Ministry of Commerce (MOC) to reject the bid on grounds that it violates fair competition and create a dangerous monopoly in the iron ore sector. China is the world’s biggest iron ore importer and the merger of these two iron ore giants, who together control 40 per cent of China’s iron ore imports, would negatively impact consumers and make it easier for BHP to control the market and prices, says CISA Vice Chairman Luo Bingsheng.

Last November, the International Iron & Steel Institute said the takeover would inevitably create a “virtual” monopoly in iron ore, which in effect could see prices climb even higher. China’s large and medium-size iron and steel manufacturers have already seen costs rise more than 57 per cent in the first half of this year due to hikes in material and fuel prices. Skyrocketing iron ore prices represent the majority of the increase in raw material costs for China’s steel mills.

Last week, China’s new anti-monopoly law, aimed at protecting fair competition and preventing risks associated with monopolies, came into effect. The second Article of the law, when a merger between two foreign companies could affect the domestic market, is very much applicable to the Rio-BHP situation, says MOC economist Mei Xinyu. “China has to object to the merger,” says Le Yukun, BOC International Ltd. analyst. “The deal would leave it with no bargaining power in iron ore price negotiations.”

CISA isn’t the only group of steel manufacturers heated up over BHP’s bid for global dominance. The European steel lobby group Eurofer, which includes industry heavies like ArcelorMittal, feels the takeover would give BHP too much influence. If the company’s takeover of Rio Tinto succeeds, the world’s major iron ore suppliers will be reduced from three to two, leaving BHP as the largest supplier with a 38 per cent stake in the global iron ore market.

The European Commission is set to rule on the takeover on December 9, and many believe the commission may oppose the transaction that would not only give BHP a monopoly on the world’s iron ore, but a 25 per cent market share in mined uranium and 24 per cent of copper concentrate and seaborne coking coal. According to Hugh Dive, a share manager with the Sydney-based, Investors Mutual Ltd., “There is concern European steelmakers will be quite successful in convincing the European Commission they don’t want this to go ahead.”  Anti-trust regulators in the 27-nation European Union have been conducting a probe of the BHP plan and have said they hold “serious doubts” about a move that would garner the company control over more than a third of the world’s iron ore.