Chinese Steel Themselves For Ore Price Talks
The Age
Thursday December 6, 2007
GLOBAL commodity markets have become so dependent on Chinese domestic demand that a US recession "would hardly even register", says Rio Tinto.
After months of internal analysis and external modelling, the world's third-biggest miner believes the commodities price boom could only be derailed by an economic accident in China.The findings suggest Australia's resources-reliant economy will be virtually bullet-proof over the coming year."China has an overwhelmingly important impact on commodities markets," said Rio's chief economist, Vivek Tulpule, in an interview from London. "And the only way we can get a big Chinese slowdown is if it is generated by a big event in China itself." Rio's new analysis shows China has accounted for between 60% and 90% of global demand growth for iron ore, copper and aluminium this decade.Rio's outlook, which is shared by BHP Billiton, comes a week after both companies began "preliminary" talks with China's Baosteel for iron ore contract prices. It also comes as BHP stalks Rio with its spurned $US150 billion ($A170 billion) takeover proposal.Even Chinese traders say they expect iron ore contract prices to rise more than 30%, despite huge rises in each of the past five years.Anxiety over mining company pricing power has driven Baosteel boss Xu Lejiang to publicly state his company is "very likely" to lead a $US200 billion-plus bid for Rio Tinto to prevent Rio falling into the clutches of BHP. Any such move, though, would need to overcome the Chinese steel industry's notorious fragmentation, which was on display yesterday.Qi Xiangdong, vice-chairman of the China Iron and Steel Association, told BusinessDay there had been "misunderstandings" between Mr Xu and the 21st Century Business Herald journalist who quoted him. Mr Qi said his association had not held any talks on a bid for Rio Tinto, while he had personally told Baosteel "not to speculate about the issue".Mr Qi is, however, bracing for difficult iron ore negotiations."No one can predict whether there will be sudden and sharp rise," he said.A Shanghai finance commentator put the likelihood of Baosteel buying Rio Tinto at "almost zero". Writing in Beijing News yesterday, he said Baosteel's musings were aimed only at inflating Rio's share price in order to make life difficult for BHP. That view reflects the speculation that rather than counter-bid for Rio, the Chinese need only buy a little more than 1% of the company at a cost of $1.8 billion. The suggestion goes that once that position was declared under Britain's takeover laws, Rio shares would take off in a speculative frenzy that a full bid was in the offing - putting further distance between the Rio share price and BHP's rejected offer. BHP's spurned 3-for-1 scrip takeover proposal yesterday valued Rio shares at $128.10, or 12.2% less than Rio's ruling market price of $143.82 a share - the equivalent of 3.36 BHP shares. Earlier this week, broker Austock suggested BHP would have to increase its offer to 3.9-for-1 to get Rio to the negotiating table. BHP shares were down 40? to $42.70 yesterday.Rio yesterday denied reports in a London newspaper, this time claiming Rio had "softened" its position and was ready to consider a formal Chinese bid.KEY POINTS ? Slowdown to China demand unlikely in the coming year.? Iron ore contract prices tipped to rise 30%.? Rio rejects talk of Chinese takeover bid.
© 2007 The Age