Thursday, March 20, 2008

China vs Rio/BHP

The standoff that is going on right now between Rio Tinto, BHP Billiton, and China is amazing.  This is one of China's very first tests of macro supply chain that will determine how much China can control price hikes in iron ore for decades to come. 

China has summarily refused to accept Rio Tinto and BHP's 71% price increases. 
Although they seem to indicate that the reason is the increase is too high, that is a bit hard to accept given that they handled Vale's 65% price increase just two months ago. No, there is much more at stake with Rio Tinto, BHP, and China.  

China wants a much bigger piece of the deal this time, and they have decided to strike while the iron is hot.  If they can continue to stave off the spot market shipments for a few more months, Rio Tinto and BHP will effectively lose several billion dollars in revenue.  That may cause the market to hammer their share prices and give China more leverage to buy a much larger stake of the planned merger than was originally anticipated.  My guess is that China wants at least 25% of the new company with two or three board members to boot.  

This battle is about the future of China's steel industry and several downstream industries that flow from there such as automotive and construction.  They are betting that they can sweat it out longer than BHP and Rio Tinto's shareholders.  My guess is that they are correct.