Friday, June 5, 2009

The rejection of Chinalco bid for a stake in Rio Tinto is a move to keep China away as a major shareholder

By China Watcher

The dramatic development of the mining conglomerate, Rio Tinto (Rio), to switch bidding partner at the last minute is perceived strongly within the Chinese community as a concerted scheme by Western financial investors to keep China state-owned companies from controlling strategic assets in Western companies.

The acceptance of the bid from BHP Billiton (BHP) on the grounds that the deal would maximize shareholder value and improve the group's capital structure were merely excuses to deny the Chinese company from taking up a sizeable stake in the mining entity.

Under the deal, BHP would pay Rio $5.8bn to take its equity stake in the joint venture to 50pc. Rio plans to raise $15.2billion through a 21-for-40 rights offer, one of the largest rights issues ever. The new shares will be offered at £14 each, which is 49pc below Thursday's closing price in London.

The Chinalco’s deal involves a cash injection of US19.5 billion as part of Rio’s debt restructuring scheme in return for an increase eventually in the shareholdings for Chinalco at 18 percent.

The Rio-BHP deal would allow Australian miners to control 70% of the world’s iron-ore supplies thus providing them with a stronger position to influence price-setting in both good and bad markets. Though the joint-venture must be cleared by competition regulators at home and abroad, I have no doubt that the Australian authorities would be endorsed as soon as the written proposal is submitted as the joint-venture essentially is a Western based deal (without any Asian company involvement). I hate to sound racist here but that is a fact.

Top institutional shareholders, mainly Western based, have indicated their undivided support of the rights issue if the China’s deal is scrapped. The initial objection to the Chinalco deal was very obvious and smeared with racist remarks highlighted by the “yellow threat” which were actively discussed in the Australian media. I am sure those critics or “racists” were relief and happy over the outcome of the latest development. Even the Australian government and the Foreign Review Investment Board have been weighing the option of how to keep the Chinese at bay over the acquisition issue.

Asian steelmakers from China, Japan and South Korea are crying foul over the deal and the likelihood that there would need to pay higher prices in the future. The outlook does not look good since 60 percent of the iron-ore are purchased from Australia due to the geographical closeness.

For comparison purpose, Rio and BHP joint venture would eventually supply 270 million tons of iron ore a year whereas the top producer from Brazil (Vale) supplies only about 240 million tons annually. The monopolistic power of the tied-up would definitely have a longer term bearing on the price of iron-ore.

The Western based companies with its “colonial mentality” may find it hard to dismantle its “yellow threat” philosophy and we would see more Asian companies be sidelined if it takes similar route to acquire a majority stake in Western based companies.

China would now have to work harder to acquire smaller resources based companies and also, to pursue a longer term objective of dealing directly with African and Latin American countries to build conglomerates free from any Western controlling influence. It may take time but at least it is steady and it is an assured ways of winning genuine and trusted partners.

Forget about Rio and BHP, as there may not be around in the next 10 years. Whether Rio and BHP combined entity would generate an expected more than $10 billion in synergies as announced is just an estimated figure and it may not materialize at all.

Being the largest consumer of resources does have its advantages. Work on it.

2 comments:

Jatien said...

Rio Tinto's decision to walk away from a deal to raise $19.5 billion (£12.2 billion) from the Chinese will reinforce the view in Beijing that the West is deliberately blocking access to resources.

China needs oil, gas and metals to keep its industrial machine going and buying stakes in Western companies would give it guaranteed production.

Chinese state-owned companies have been able to buy a few smaller resources producers but every time it has bid for one of the industry's giants, the deals have been blocked.

Rio's rejection of Chinalco could feed a sense of paranoia in Beijing and lead to a view that the West was deliberately trying to starve China of resources.
It may result in a backlash against Rio, which is heavily reliant on sales to China. The Anglo-Australian miner may find it increasingly difficult to strike deals with Chinese steel smelters or copper customers as Chinese buyers deliberately snub the company.

The rejection of the Chinalco deal may also force the Chinese to rethink their resources strategy.

Beijing must either accept that state-owned companies are a poor vehicle for buying stakes in quoted Western companies or China will have to strike more nation-to-nation deals, particularly in Africa.

Both options will have substantial geo-strategic implications in the coming decade.

China Watcher said...

I agreed that the Chinese have felt betrayed by all the backdoor negotiations although it was explained as a commercial move which is nonsense.The fact that the deal was delayed for 3 months spoke much about the anti-Chinese sentiments in the media and the Australian business community. It indicated that the Chinese is not welcome with open arms. The tying of commercial deal with human rights intonation is not commercial but pure "blackmail". If the bid is from a UK company, it will definitely accepted - if that is not a racist move, I don't know what it is. China should plan to invest elsewhere where there are more welcome as a "white knight" with sincere gestures. Scrutinize the white-based shareholders in Rio Tinto like Shroeders and blacklist them in the future business dealings. Perhaps, the non acceptance of the deal would make the Chinese wiser.