China looks warily at mineral
merger By Andrew Symon
SINGAPORE - Australian minerals giant BHP
has come a long way from the days more than 120
years ago when a sheep station boundary rider,
Charles Rasp, discovered what would prove to be
one of the world's richest lead-silver-zinc
deposits in the red arid country of central
Australia.
What Rasp, a German immigrant
educated in chemistry, found in 1883 at a place
called "broken hill" in the far west outback of
New South Wales and close to the northeast border
of South Australia, would become the foundation
for the company he and six partners
from
the Mount Gipps station established in 1885 - the
Broken Hill Proprietary Company.
Today
BHP, already the world's largest mining group, now
wants to create an even greater behemoth through a
merger with the Anglo-Australian group, Rio Tinto,
another massive mining company.
Out of
this would become a group with a market
capitalization of more than US$350 billion and
unprecedented production strength, if not
dominance, in a host of important mineral and
energy commodities from mines and plants in more
than 25 countries - iron ore, bauxite, aluminum,
copper, nickel, titanium, cobalt, manganese, lead,
zinc, gold, silver, diamonds, uranium and coal.
(BHP also has petroleum interests, which, while
significant, are not large in multinational
company terms).
For the world's major
buyers, led now by China's steel mills and other
processing plants, powering the country's
industrial juggernaut, the possibility of a
BHP-Rio merger raises fears of a supplier with
such market power that it can dictate prices and
contract terms.
China, with the fastest
growing and increasingly largest demand of any
country for many of these commodities, feels
vulnerable. In the case of steel, for example,
where China produces more than a third of world
output, it would face a BHP-Rio producing 40% of
world supply.
An idea of the concerns the
Chinese have at this prospect were already
evidenced last year in iron ore negotiations with
BHP, Rio and other producers. Beijing, worried
about sharply increased prices its steel mills
faced, threatened to impose a price ceiling to its
buyers. In the end it backed down with producers
arguing it would be contrary to China's World
Trade Organization (WTO) obligations not to
restrict import freedoms. But on the international
minerals supply side though the WTO does not
appear to have any mandate.
BHP has
already been quick to assure Chinese, Japanese and
other buyers that a merger in fact would be to
their benefit as it would mean lower production
costs and more output to meet demand. Buyers would
benefit.
But what cannot be denied is that
a BHP-Rio would create a group of such a size that
the conventional economics of important minerals
commodities markets would not longer hold - at
least for the time being.
And it is
difficult to see what national competition
regulators could really do. Unless mines are
producing for domestic markets, then there are no
grounds for national regulators to intervene. But
most mines in countries where these companies are
operated are export oriented.
The various
segments of the mining industry have generally
operated reasonably close to text book economics
models of competitive markets. There are many
producers and many buyers and none are large
enough to influence prices. The product, a
commodity, is standardized, so producers cannot
gain any market leverage through differentiation
of their product.
A tonne of iron ore from
whoever is producing it is pretty much the same.
You don't put labels on mineral ores and gain
market share by product differentiation. So
producers have operated in world where they have
had to accept the prevailing market price. The
name of the game then for mining managers is to
reduce costs as far as possible so as to maximize
returns given that market price.
But a
BHP-Rio would by the size of its production and
the scale of its reserves in several important
mining segments be able, if it wished, to
influence price. At the bargaining table it would
be in a good position to dictate prices and
contract terms.
The proposed merger is a
culmination in a trend now over the past two
decades or so for aggregation of mining companies.
Companies have merged with and taken on others as
a means of reducing costs through economies of
scale and also reducing market risk by
diversifying their production portfolios over
several mineral commodities.
In the case
of BHP, this can be seen in its merger with
British (originally Dutch) group, Billiton in 2001
- which resulted in a dual listing of the company
on London and Australian stock exchanges but with
the corporate headquarters remaining in Melbourne
- and acquisition of Australia's Western Mining
Corp in 2005, and with that, the world's largest
uranium mine, Olympic dam in South Australia.
Together, a BHP-Rio would produce more than 25
percent of the world's uranium oxide supply.
These moves were part of a great
rejuvenation in the last decade in the company's
energies after a crisis in the mid 1990s when what
has long been known as the "Big Australian" found
itself stumbling, with profits and share prices
plummeting after several big investment blunders.
In 1998 both the BHP chief executive
officer (CEO)and chairman fell on their swords.
BHP's board then made the dramatic step for what
had long been a very conservative company - "the
mighty BHP," as poet Dorothy Hewett called the
company, has always been commanded from Melbourne
by faceless men in blue suits - and established
new and more visible leadership under a new
American CEO, Paul Anderson, who had come from US
company, Duke Energy.
Anderson, assisted
by rising commodity prices as China's demand grew,
shaped a new BHP, handing over the reins after the
Billiton merger to Billiton's Brian Gilbertson.
Gilbertson fell out with the board after six
months and was succeeded in 2003 by another
American, a protege of Anderson, Chip Goodyear,
who maintained the momentum created by Anderson.
Goodyear retired this year and was succeed in May
by the 44-year-old South African, Marius Kloppers,
a chemical engineer who came to BHP via the
Billiton merger. Now Kloppers, just six months
into the job, wishes to make his mark on BHP's
history.
Rio Tinto's similarly has
enlarged itself through major acquisitions. Rio
recently took over Canada's Alcan, making it the
largest aluminum producer in the world. Originally
formed by British investors, including the famous
bankers, the Rothchilds in both London and Paris
in 1873 to take over mines opened in ancient times
in southern Spain, a century later it established
what would become a large Australian based
company, Conzinc Rio Tinto through acquisition of
Australian mines. Like BHP, Rio has a dual listing
on London and Australian stock exchanges with its
headquarters in London.
Driving the
formation of these mega mining companies are also
demand side factors: smaller mining companies have
long complained about the bargaining strength of
large buyers, especially the Japanese, and now the
Chinese, who may act effectively as consortia in
annual negotiations to gain leverage over a more
fragmented mining world.
Certainly, if a
BHP-Rio were created, the tables would be turned.
But for how long?
Ultimately there are not
high barriers to entry to mining. Mining
technology is advanced but not restricted. It is a
capital intensive business and economies of scale
do help but there are still generally abundant
mineral resources around the world that can be
tapped by other companies. And markets, driven by
Chinese demand, plus increasingly the other
industrializing giants, India and Brazil, will
continue to grow strongly.
What we will
see is China's mining companies, backed up by
China's state banks, scrambling further to gain
alternative sources of mineral supplies
particularly in Africa and Central Asia where they
have already been busy staking out positions.
Andrew Symon is a
Singapore-based journalist and analyst
specializing in energy and mining
andrew.symon@yahoo.com.sg. (Copyright 2007
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