The merger of the Australian iron ore businesses of Rio Tinto and BHP Billiton to form a 50:50 joint venture has been more to thwart the Chinalco deal to take significant stake in the iron ore business of Rio Tinto than to push the Chinese steel makers into a corner in the ongoing price talks on iron ore contract for this year.
There is a fear: the Chinese are coming! The question of survival of these global behemoths of national importance to Australia is more important than a couple of dollars more or less they get from the Chinese this year.
Till now, Chinese have refrained from signing any annual price contract because of the obvious reason that they want a larger cut in the price than what the Japanese and other mills have accepted. They were flexing muscles taking advantage of their own strength as big buyers. They also know that the iron ore miners have been in a weak spot currently and cannot ask for the moon. They can show the potential supplies from the mines they have acquired globally and their sense of security in this regard. They have exhibited the huge pile of iron ore they have already imported in the past few months as also the potential ready suppliers from India.
Additionally, the Chinese steel mills could always prove that in the worst case scenario, they could raise their orders on Vale to fill in their requirement and Vale, in this market, will find a great opportunity in it, not only to keep their order book strong, but also upstage their rivals Rio and BHP.
Rio Tinto and BHP both certainly sensed the danger ahead and if Chinalco move had to go through. China would literally control a big chunk of the global iron ore trade, considering also the fact that despite accounting for over 100 million tonne of trade, Indian iron ore mining industry is highly fragmented and they are only price takers. There are no reasons to fear them.
Most would speculate that this move will force the Chinese mills to nod to the price cuts accepted by the Japanese. In fact, in my view, they would have also gone along the same way, even otherwise.
As far as the bargaining strength of Rio Tinto and BHP Billiton is concerned, it hardly matters they are merged into a single entity or are lying apart. They have always negotiated and bargained together despite their huge rivalry. This situation would have certainly changed had Chinalco found a chair at Rio Tinto.
No major global iron ore player can actually ignore the Chinese market and would have actually gone to teach them a lesson. After all, it makes no sense for them to leave the iron ore with mother earth having developed the capacity to mine them, including the infrastructure and logistics to move them to China.
Both Australia and Brazil have developed railways, ports and shipping capacities specifically intended to deliver iron ore to Chinese mills. It makes no sense to leave them idle to make the Chinese buyers eat the humble pie.
The merger of iron ore businesses of Rio and BHP Billiton in Australia is a defensive move ? to save themselves from the cash rich and hungry Chinese companies. It is unlikely that it will make a significant difference to this year?s prices. In fact, it is worth waiting for the Chinese move now.