An intriguing international contest for control of Mozambique-centred Australian coal mining company Riversdale took a dramatic turn last week. CSN, Brazil?s biggest steel manufacturer, increased its holdings in Riversdale from 17.58% to 19.9%. This occurred even as the global mining giant Rio Tinto extended its bid for a takeover of Riversdale for $3.9 billion.
Speculation is growing about CSN?s motives in raising its own equity in Riversdale, which has assets of over 13 billion tonnes of coking coal in the Benga and Zambeze areas of Mozambique. One line is that the Brazilian steel major is manoeuvring for a better bargaining position to entice a higher buyout offer from Rio Tinto, which is currently quoting $15 per share of Riversdale. CSN?s acquisition of additional equity pushed Riversdale?s share price close to $16 in the Sydney stock exchange and this value could reach $20 as the struggle for its acquisition escalates.
By almost reaching the equity threshold for a takeover of Riversdale, CSN may also be preparing for a counter offer against Rio Tinto. With a reported war chest of $7 billion for acquisitions, CSN is raring to make amends for failed high profile M&A attempts of the past. CSN?s maverick CEO, Benjamin Steinbruck, burnt his fingers in abortive bids for the Anglo-Dutch steelmaker Corus (which was won by India?s Tata Steel) and Luxembourg?s Arcelor (which went to the firm then known as Mittal Steel).
The most interesting angle to the intensifying global battle over Mozambique?s rich coking coal resources relates to China, which happens to be Rio Tinto?s lifeline customer for coal supplies. Rio Tinto is today in a commanding position in the commodities sector, with an underlying annual profit jump of 122% because of endless demand from China. Although Rio Tinto and the Chinese government have a chequered relationship, any takeover bid by a Rio Tinto inflated with earnings from Chinese clients raises international suspicions of a proxy Chinese lock looming over the world?s natural resources. China?s official media are portraying CSN as a Brazilian powerhouse ?on the prowl for targets in logistics, mining and cement?. CSN has in turn warned the Brazilian government to ban Chinese steel companies from investing in the Brazil?s strategic iron ore sector.
China?s unquenchable thirst for metallurgical coal?an essential ingredient in steel manufacturing?could be one reason why CSN and Tata Steel (currently the largest share holder in Riversdale) will resist Rio Tinto?s offers to cash out their holdings. When Rio Tinto?s talks with Riversdale emerged, Tata Steel stated that its 24% ownership of the latter was a ?strategic investment? that will be protected (possibly by its own counter bid for takeover).
Given the stinging global shortage of hard coking coal, neither the Brazilians nor the Indians would wish to lose access to the Zambeze and Benga mines? future production.
I learnt from authoritative sources in Mozambique about growing governmental and popular fears regarding Brazil?s looming shadow over their economy. Owing to a shared colonial past as formerly Portuguese-ruled countries, Brazilian companies have targeted Mozambique as a favoured destination for outward investment. Brazilian foreign investors? focus on Lusophone-speaking African countries has triggered concern about monopolistic tendencies. Desiring competition and balance among foreign players, Mozambique worries less about China?s penetration of its mother lodes via Rio Tinto than Brazil?s swamping influence.
The stakes on hand thus transcend mere access to raw materials by competing steel conglomerates. Political preferences and lobbying by governments in emerging economy capitals of China, Brazil and India and in the host countries of Africa will inevitably determine winners and losers of such scrambles. Market structure has a political economy context that should not be ignored while calculating arithmetic about which company ends up getting how much of the pie.
The author is Vice-Dean of the Jindal School of International Affairs