In October the world’s fourth largest mining company, Glencore, launched an audacious merger bid for the world’s second biggest miner, Rio Tinto. The approach was rebuffed, and United Kingdom takeover rules—both companies have London listings—forbid Glencore from making any further overtures for the following six months. Yet few in themining business believe that is the end of the story. Glencore’s chief executive officer Ivan Glasenberg has long had his eye on Rio Tinto. Come April, industry analysts expect him to be back with a new proposal. However, any battle over Rio Tinto will be about far more than Glasenberg’s deal-making prowess. It will shape the global mining industry in the post-commodity-boom world. And the outcome will be determined in large part by Beijing, whose anti-monopoly regulators haveshown themselves both willing and able to use their growing international clout to further China’s global resource strategies by forcing the sale of prize assets like copper mines to Chinese state-owned companies. (Kamesaroff, supra, 1.).
That dependence means Rio Tinto has been brutally exposed to this year’s collapse in iron ore prices, which have fallen more than 45% to their lowest level since early 2009. The slump has been propelled in large measure by the actions of the major producers, including Rio Tinto itself, which have flooded the market with low cost ore as a deliberate strategy to force higher cost competitors, particularly those in China, to shutter their operations. The big miners defend their strategy on the grounds that their costs are much lower than those of the smaller competitors they hope to drive out of business (Ibid., 2).
Chinalco’s stake in Rio Tinto has long been a contentious issue within China’s bureaucracy. Apart from the steady loss in value of their investment, two particular issues grate with the Chinese. Firstly, despite being Rio Tinto’s largest shareholder they have never been invited to join the company’s board, which many in Beijing regard as an anti-Chinese slight. The second matter that irks the Chinese is that in 2009 Rio Tinto abrogated a US$19.5bn deal that would have seen Chinalco double its stake in Rio Tinto and in the process gain two seats on the company’s board as well as joint venture status in several key mines, including Rio Tinto’s flagship iron ore mines in Western Australia. At the time Rio Tinto was struggling under a mountain of debt acquired as a result of its
disastrous 2007 tilt at Alcan, and the Chinese saw themselves as the company’s saviors. (Ibid).
Apart from the magnitude of the combined entity’s current copper production, the regulators would also be concerned with the potential of several large development projects to expand each company’s copper output. Rio Tinto has a 33.5% stake in Mongolia’s Oyu Tolgoi, the world’s largest copper project, which is slated to produce 450,000 tons of copper per year before the end of the decade. A large share in both the world’s largest existing copper mine and its biggest copper development project is hardly likely to go unnoticed, especially in China where copper is near the top of the list of commodities nominated as a strategic priority. (Ibid., 5).
Whether China’s political masters will be quite as enthusiastic about picking up Rio Tinto’s assets as the managers of their state-owned enterprises is less immediately obvious. China’s state resource companies are plagued by inefficiency and tainted by corruption scandals. Chinalco’s new head, Ge Honglin, was appointed last month with a brief to improve the company’s disastrous bottom line—its listed subsidiary lost RMB4.12bn in the first half of the year—and has hinted that employee numbers will be heavily reduced. Meanwhile at least two of Chinalco’s senior managers are being probed by the Central Commission for Discipline Inspection for “serious violations of discipline and law”. (Ibid., 6).
As the world’s largest consumer of iron ore, China deems the future of Rio Tinto to be of national importance. An approach to Chinalco by a potential suitor for Rio Tinto would certainly be reported to the National Development Reform Council, which would need to approve the involvement of a state entity, or the purchase of any assets divested by the miner’s new owner. That approval may well be forthcoming. Xiao Yaqing, who as president of Chinalco first proposed a shareholding in Rio Tinto to the NDRC back in 2008, is now an influential deputy director at the State Council. It is highly likely that he would be keen for Chinalco to participate in any takeover of Rio Tinto as a vindication of his original strategy. Similarly, Chinalco’s recently replaced President, Xiong Weiping, is now chairman of the board of supervisors at the State-owned Assets Supervision and Administration Commission. Although not as powerful as the NDRC, SASAC would also be consulted if any state enterprise were to participate in a takeover of Rio Tinto. Like his predecessor Xiao, it is probable Xiong would back the involvement of his former company. (Ibid., 7).