It's tempting to characterize 2007 as the
year of consolidation in the metals industry. But if there's a
good reason not to, it's because there's every chance that what
we've seen during the past year will pale in comparison to what
might take place in 2008. As long as the China-fueled
commodities boom lasts, there will be demand for natural
resources-and producers, profiting from high prices, will have
money to spend on acquiring competitors, suppliers or
The steel, aluminum, copper and scrap sectors
have all experienced major consolidation during the past year.
But if the players in any one of those sectors need any
reminder that the consolidation process probably still has some
distance to run, they need look no further than recent events
in the iron ore industry.
The potential takeover by BHP Billion of
Anglo-Australian rival Rio Tinto has caused quite a storm, and
rightly so. Steel mills, particularly in China, are concerned
about a potential combination of the second- and third-largest
producers of a key raw material. But steel producers not
reliant on Australian iron ore, and even companies in other
metal sectors altogether, also should be watching this
potential deal closely. BHP's bid for Rio Tinto tells us so
much about how far the consolidation of the raw materials
sector has come, and where it might be going.
One thing it demonstrates is that
globalization has made it very difficult for regional
regulators to control merger and acquisition activity. Only a
few years ago, the threat of a single player controlling a
significant proportion of a market in one nation or one region
was enough to spook regulators. Today, the matrix on which
every commodities deal is judged is a global one.
Even in today's industry, there are few metal
or raw material markets that really have a high degree of
concentration, measured by a few companies controlling a
majority of global supply. Iron ore is the exception. BHP
Billiton, Rio Tinto and Brazil's Vale control more than 70
percent of the international iron ore market. And if BHP does
succeed in buying Rio Tinto, it suggests that we might be a
long way from reaching the limits of consolidation in markets
like alumina, aluminum, copper or steel. ArcelorMittal's
control of 10 percent of global steel production looks puny by
One certain consequence of a BHP-Rio Tinto
deal would be to spark many more mergers and acquisitions.
Competitors in the various markets in which the combined
company operates-like Vale, Xstrata, Alcoa, United Co. Rusal
and Freeport-McMoRan Copper & Gold-would doubtless refocus
their attention on the next deal they could make to prevent
themselves from falling too far behind their giant rival.
Customers of BHP and Rio Tinto would start thinking about
consolidation, too, because the easiest way to retain
bargaining power when dealing with such a giant supplier would
be to grow to be a giant yourself.
With each successful merger, the bar as to
what constitutes an acceptable deal from an antitrust
perspective will be raised even higher. So if BHP and Rio Tinto
form an aluminum producer with 5.5 million tons of capacity,
there can't be any complaints if UC Rusal and Alcoa put
together deals to take themselves to a similar level. In a
short time, half of the world's aluminum production would be in
the hands of three companies and there might be little that
antitrust authorities could do about it.
The sounds of concern emanating from China
about BHP's intentions were muted in the weeks following its
announcement, but there's no guarantee that won't change. China
and its rapidly growing state-funded metal enterprises are
increasingly aware of the need to secure sources of much-needed
If a Chinese government entity or a
state-owned steelmaker like Baosteel Group Corp does enter the
bidding for Rio Tinto it will create a major stir. For all of
China's integration into the global economy, there remains
strong concern in the West about state-run companies acquiring
the cream of the developed world's privately owned enterprises,
as the failed attempt by China Minmetals to buy Canada's
Noranda three years ago demonstrates.
But it is by no means certain that there
would be such strong opposition this time around. Anti-China
sentiment isn't nearly as pronounced outside North America-note
the lack of much furor when the Chinese government took a stake
in Britain's Barclays Bank in 2007. Australia might be expected
to kick up the largest fuss, but the country is increasingly
dependent on Chinese raw materials demand to underpin its
economy, and also has just elected a Prime Minister who is seen
as far more pro-China than his predecessor.
Even if a Chinese player doesn't enter the
fray this time, the world has at least been served notice that
such a deal is a distinct possibility in the future. And for
those who still fear Chinese control of Western assets, that
should ring alarm bells. Indeed, as publicly listed companies
in London and New York continue to gobble each other up and
form ever-larger global commodity players, the impact of a
major Chinese buy, if and when it finally comes, could be huge.
China buying Rio Tinto would be one thing; China acquiring a
joint BHP-Rio Tinto in a year or two would have an entirely
different impact on the global market.
So 2007 was a year of consolidation, but
probably not the year of consolidation. If BHP's bid
for Rio Tinto opens the industry's eyes as to where we're
heading in this process, 2008 might well be that year. At least
until 2009 arrives.
SENIOR VICE PRESIDENT