China to Benefit From BHP¡¯s Dropped Bid for Rio Tinto (Update2)

China, the world¡¯s largest iron ore consumer, will benefit from BHP Billiton Ltd.¡¯s dropped bid for Rio Tinto Group as the failure to create a dominant supplier strengthens its ability to drive prices lower next year.

Chinese steelmakers, importers of $53 billion of iron ore this year, will gain from the competition between BHP and Rio Tinto, Shan Shanghua, secretary-in-general of the China Iron & Steel Association, said today in a phone interview.

Steelmakers including China¡¯s Baosteel Group Corp. and Japan¡¯s Nippon Steel Corp. have sought to have the bid blocked by regulators. The $66 billion combination of BHP and Rio would have created a company controlling more than a third of the iron ore market, and the biggest producer of copper and aluminum.

¡°Iron ore prices may fall more with the competition between BHP and Rio,¡± said Wu Kan, a fund manager in Shanghai at Dazhong Insurance Co., which oversees $285 million. Chinese companies may also slow overseas acquisitions, meant to secure alternative supplies, with the failure, Wu said.

Baoshan Iron & Steel Co., the traded unit of Baosteel, rose 3.9 percent to 5.02 yuan in Shanghai trading. Angang Steel Co., the second-largest Chinese steelmaker, gained 6 percent to 7.10 yuan in Shenzhen.

¡°Competition between BHP and Rio Tinto would be good to steelmakers especially at a time when the market is in oversupply,¡± the steel association¡¯s Shan said. ¡°The takeover plan had been firmly objected by Chinese, Japanese and European steelmakers as it would create a monopoly in Australian ore.¡±

Prices Drop

Contract iron ore prices may halve next year as steel demand drops with the world economy tipping into recession, Australia and New Zealand Banking Group Ltd. said Nov. 17. Rio Tinto and BHP are the world¡¯s second-largest and third-largest iron ore suppliers, with most of their mines in Australia.

China got 37 percent of its imports from Australia this year, Umetal.com analyst Hu Kai said. The country bought $53 billion of iron ore in the first ten months of the year, twice as much as a year ago, according to customs.

The dropped bid would ¡°benefit our price negotiations for next year,¡± the steel association¡¯s Shan said. ¡°We haven¡¯t started official talks yet.¡±

Contract iron ore prices are normally set yearly, with new prices taking effect from April 1. Prices jumped as much as 97 this year, hurting steelmakers¡¯ profit. Rio Tinto had announced a 10 percent output cut because of falling demand.

Debt Exposure

BHP Billiton, the world¡¯s largest mining company, yesterday abandoned the stock offer for Rio as the purchase would have boosted debt exposure and it would have been difficult to sell assets, Chief Executive Officer Marius Kloppers said.

BHP may try bidding for London-based Rio when global economies recover, Angang Steel said.

¡°It could only be a temporary decision by BHP because of the worsening market conditions,¡± Fu Jihui, board secretary of Angang Steel. ¡°China should reduce its reliance on imported iron ore through its steel industry consolidation.¡±

China posted its slowest economic growth in five years in the third quarter. The government this month unveiled a 4 trillion yuan ($586 billion) stimulus package to revive growth.

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