There's growing opposition reported to the BHP Billiton plan to merge with rival Rio Tino and the market is reflecting the growing pessimism that the deal will not get up.
BHP tumbled $1.68 to a low yesterday of $39.71 in yesterday's uneasy market. That was the first time BHP shares had been below $40 since announcing its ambitions for Rio a fortnight ago. BHP's recovered the $40 level to end at $40.30, still down $1.29, or around 3%.
Rio shares fell $5.45 to a low of $130.55 yesterday morning before bouncing to $131.90, still off $4.10.
As well the shares in both mining giants are being pressured by scatty world commodity prices and the roiling impact of the subprime mortgage mess which continues to hack into the value of big US, European and Japanese banks, the very people who would have to provide the $US70 billion in cash BHP has suggested it might need for an agreed offer.
Copper prices have slumped 13% or more this month, gold, is down almost 7% and oil is mixed and looking for a reason to go lower off the back of the gloomy news about the state of the US economy.
Now there's opposition surfacing in the Japanese steel industry and there were reports yesterday out of China suggesting a rising level of unhappiness.
Japanese steel makers already have significant shareholdings in BHP and Rio mines in the Pilbara, as well as coal and other producing assets. They are loath to give up their front row seats to Chinese buyers who are the effective underwriters of the proposed three BHP shares for every one Rio share offer.
Chinese steel mills are buying more and more iron ore, while the booming Chinese economy is dragging in more imports of alumina, aluminium, copper, lead, zinc, oil and gas and a host of other commodities, some of which are produced by BHP and Rio in world leading quantities.
It's the market leading position in iron ore, copper, nickel and the aluminium and alumina industries and the pricing power that brings, which is also driving much of the growing opposition.
BHP CEO, Marius Kloppers is expected to meet with Chinese customers tomorrow after visiting South Korea and Japan for the last day and a half, and before that South Africa.
The International Iron and Steel Institute (IISI), which represents 180 steel producers and is based in Europe, doesn't like BHP's proposal.
It says it will create a monopoly and is not in the public interest.
"Not only will the steel industry strongly oppose the potential merger of BHP Billiton and Rio Tinto, but it is vital that the competition authorities in the EU, USA, China, Australia and Japan also recognise the threat that this merger poses to the interests of steel consumers and the general public," IISI secretary general Ian Christmas said in a statement issued yesterday
"This merger is not in the public interest and should not be allowed to proceed."
But it isn't a monopoly: with CVRD of Brazil, the two groups will control 76%-78% of world seaborne trade in iron ore. That makes it an oligopoly but smaller rivals are appearing, like Fortescue Metal Group in Australia which is dealing exclusively with Chinese buyers.
Besides, the steel industry has undergone significant consolidation in recent years with the rapidly growing Mittal group buying the European-based Arcelor last year to create the world's biggest steel group by a mile. As well, the Tata group in India bought the Anglo Dutch steel group, Corus, to create another giant.
Both mergers happened because of the boom in steel in China and India and to give the merged companies more clout in dealing with the likes of BHP and Rio. Now the big steel companies don't like BHP eyeing Rio, which seems to be typically hypocritical.
BHP will have to pay more attention to the attitude of the Japanese and Chinese steel mills.
As said earlier, many Japanese groups (trading houses mainly, but some mills) have small but irritating equity stakes in a number of iron ore projects in the Pilbara and have been resisting moves by Posco of South Korea and the Chinese groups, to muscle in.
Mitsubishi has half the Queensland coal assets of BHP, which produce more coking coal for the export market than any other group in the world. Rio has big coking coal interests in Queensland, as well as thermal coal interests in Queensland, NSW and the US. BHP has thermal coal in South Africa as well.
Reuters reported the Japan Iron and Steel Federation chairman Hajime Bada as voicing opposition to the merger saying it was undesirable for competition and pricing.
The Japan Iron and Steel Federation represents over 120 groups, including iron and steel producers.
Mr Bada, who is also the president of Japan's second largest steelmaker, JFE Steel Corp, met with Mr Kloppers yesterday to discuss the proposed merger.
That's a bit rich coming from the Japanese mills which have been ganging up on Australian, Canadian, Brazilian and other iron ore and coal suppliers for years and negotiating as a monopoly.
Rio Tinto chief executive Tom Albanese is expected to break his silence on the merger tonight, our time, when he hosts an investor briefing in London.
Newsagency reports claimed that Mr Kloppers had indicated in South African meetings with BHP shareholders that it was not considering a cash component to any current offer for Rio.
If that's the case, the bid is doomed to failure because there is a group of shareholders who would want cash (hedge funds) instead of Rio shares.
If BHP really wants Rio, it will have to offer cash up front and shares.
BHP will have to have cash to replace the Alcan debt in Rio of around $US38 billion and other debt. It has talked about a $US30 billion share buyback after the bid is completed.
That would be aimed at Rio shareholders in London. More than 6
