Shares in BHP Billiton predictably surged more than 4%, or $1.93 on speculation that Chinese state-owned investor or investors were preparing to swoop to snatch a stake in the giant miner.
The rationale of the media reports was China’s unhappiness at BHP’s determination to take control of Rio Tinto and establish an even bigger global miner with dominating shares of the iron ore, copper, nickel and coal sectors.
Aluminium group, Chinalco was nominated by some as the candidate. It and Alcoa (which has struggled to be relevant in the current resources mad world) swooped on the London listed shares of Rio Tinto in early February, snapping up a 12% stake in those, and 9% overall, when the Australian listed shares are counted.
Other reports reckoned the vehicle for China’s plunge could be iron and steel giant, Baosteel, while other reports suggested it could be one of the wealth Funds being developed by China.
What is interesting is the automatic assumption that this will happen: such moves have been tipped before in the wake of the first BHP move on Rio early last November.
The usual suspects including Baosteel and the wealth funds were mentioned in numerous reports (all denied) from China. Chinalco is now on the list because of its plunge into Rio at just over $133 a share. (It’s back in the money with the recent firming in the Rio price.)
BHP shares leapt by almost two dollars yesterday before settling back to close around $1.51 up at just under $42 a share ($41.91). Rio shares edged up 48c to end at $137.88. The value of the BHP bid of 3.4 of its shares for every Rio share was $142.49, and the premium is a sign the market perhaps believes the latest tale of Chinese intrigue.
But would China risk making itself look foolish by being rejected or halted by the Australian Government when trying to buy shares in BHP without Australian Government approval and thereby trying to influence Australian economic and resource policy?
They might try to sneak up through the share register to get to 5% where it has to disclose. The big global investor, Barclays has just over 5% of the locally-listed shares, which makes it the biggest investor.
The Australian shares matter because it’s an Australian-domiciled company and under the approval given for the Billiton merger 8 years or so ago, it has to keep its head office here, the CEO and Chief Financial Officer here and a majority of Australians on the board.
They might try and buy shares in the London-listed shares of BHP because the Brits don’t really care about what happens in Australia and don’t have a clue about how to handle China.
(Witness the ham-fisted way Prime Minister Gordon Brown received the Olympic torch when the relay was in London, and allied himself with the Government and the Chinese security guards. In contrast Kevin Rudd says Australia and not China will look after security when the torch is in Canberra. He will be in Sydney when that happens (as planned) on April 24. No snub to China because he will be at the special service for the HMAS Canberra, but also not being publicly identified with the torch, the games and Tibet.)
Australian companies cannot buy stakes unannounced in Chinese companies, in China, where control lies. The shares in Chinese companies listed outside China have no meaning except as a way of providing trading and other opportunities for foreigners and some locals.
Chinese steelmakers have expressed repeated concerns about BHP’s ambitious bid for Rio, and have used the current iron ore and coking coal contract negotiations to punish both companies by delaying settlement and not taking spot prices. Both companies are also pressuring Chinese mills to pay a freight premium because Australia is closer than Brazil and the other major global producer, Vale (formerly CVRD).
Chinalco has given the usual conflicting statements: no it doesn’t want more of Rio, and yes if anything raising the stake might be more possible than reducing it.
BHP has six months from February 6 to turn its firm offer into a completed bid, and if it doesn’t happen, then it’s back to the drawing board for a while.
Any move to try and grab a stake in BHP would raise a lot of issues between Australia and China that both countries might not want aired in public. Australia has long had an historical fear of China and China has had a much longer distrust of foreigners.
Big Australian customers for resources in Japan, Taiwan, India, South Korea and other countries would not want to see China trying to control a key supporter, so the political and strategic fallout from any move on BHP would be dramatic.
Japan and China have long had difficult relations and its becoming more so at a business level as China grows and expands, although Japanese companies have no concerns at supplying China lots of manufactured goods in particular. Japanese exports to China rose 14.9% in February. Japanese exports to the US, its biggest market, fell for a sixth month in a row.
