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The world’s largest mining company, Australia’s BHP Billiton, launched a takeover bid for London-based Rio Tinto on Feb. 5, offering $147 billion in a deal that would have created a mining goliath worth nearly $350 billion. Rio Tinto rejected the bid Feb. 6, saying the offer “significantly” undervalued Rio Tinto. This followed a Feb. 1 Alcoa Inc. and Aluminum Corporation of China (Chinalco) joint purchase of 12 percent of Rio Tinto shares for an estimated $14.05 billion, the largest-ever overseas investment by a Chinese firm.
The BHP Billiton-Rio Tinto merger would have given a single company market dominance of key minerals such as aluminum, uranium, coal and copper. This raised concerns among nations interested in securing reliable supplies of such resources — particularly aluminum — and steady prices (most notably China), as well as among private and government mining companies that fear fiercer competition. It also had implications for nations seeking to create a greater market share for their mineral exports (Russia in particular).
China
Like all of China’s other energy and raw material-related buys, the Rio Tinto share acquisition was motivated primarily by national energy security concerns and secondarily by thoughts of profit (though Chinalco’s partnership with U.S.-based Alcoa is meant to portray the deal as a sound business decision, which it might be, since Chinalco might be able to sell its shares of Rio Tinto for a nice price). The timing of the deal, right before BHP Billiton’s Feb. 6 offer deadline, gave the Australian mining company very little time to adjust its strategy or raise more funds.
Beijing has no qualms about throwing state funds into acquiring energy assets — even at a loss — because of the political (rather than economic) cost-benefit analysis it uses to assess potential deals. China wants control over what it considers strategic resources — energy reserves, minerals and metals that feed its industrial growth. It seeks minimal reliance on imports and pursues self-sufficiency as a matter of national security; Beijing’s grip over China’s internal political and social stability depends on continued economic stability, for which stable energy and industrial supplies are essential.
At present, buying up controlling ownership in resource assets overseas is Beijing’s first choice, since it reduces the risk of foreign companies or governments reneging on contracts and crimping parts of China’s supply chain.
China produced approximately 12.3 million tons of aluminum in 2007. Its consumption was just under that — 12 million tons. The Australian Bureau of Agricultural and Resource Economics expects aluminum demand in China to rise 14 percent in 2008. Aluminum is a key metal for infrastructure and transportation construction, which are rapidly growing economic sectors in China. The thin line between production and consumption compels China to look strategically outward for aluminum sources.
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