http://online.wsj.com/article/SB120693250849776335.html?apl=y&r=185416
Betting on China
THE WALL STREET JOURNAL ASIA
March 31, 2008
MELBOURNE, Australia -- Pinning down Marius Kloppers, CEO of BHP Billiton,
the world's largest mining company, is no easy task.
"Can you come to Melbourne next week?" his public relations minder asked
me
over email last month -- after already having switched the interview from
Melbourne to London.
There's good reason for Mr. Kloppers's globetrotting: Over the past five
months, he's been busy pitching a $150 billion merger between BHP Billiton
and Rio Tinto to regulators and major shareholders of both companies. If
consummated, the merger would be the second-largest in cor****ate history
(after Vodafone-Mannesmann's $183 billion deal in 2000). It would also
represent one of the biggest-ever bets on China's economy, which is
consuming BHP and Rio's products at an unprecedented pace and scale.
For a CEO at the center of all of that action, Mr. Kloppers in person is
immediately striking for what he isn't: brash or flashy. A Fulbright
scholar
and a graduate of MIT and a French business school, he picks his words
carefully.
"This is all on the record, is it?" the 45-year-old South African asks
quietly, settling into a conference room chair overlooking downtown
Melbourne on a gray day. He gently dismisses the company waiter, telling
him, "I'll look after everybody." He speaks so softly that I ask him to
move
closer to me.
In November, after less than a month on the job, he launched his initial
offer: a $142 billion, stock-only bid for Rio Tinto. The two companies, if
combined, would be the world's largest producer of copper and aluminum and
second-largest producer of iron ore.
BHP-Rio is the latest in a string of industry-consolidation bids that is
marking the beginning of Big Oil's new brother: Big Mining. Rio Tinto
snapped up America's Alcan Inc., an aluminum producer, last year.
Brazilian
giant Companhia Vale do Rio Doce, or Vale, the world's largest iron ore
producer, ingested Canada's Inco Ltd., a big nickel producer. Swiss rival
Xstrata bought Canada's Falconbridge in 2006. Industry experts say there
are
more deals in the pipeline -- even though Vale's exploratory merger talks
with Xstrata fell apart last week.
* * *
What's driving this urge to merge? "There are a couple of events in world
history that drive energy and commodities demand," Mr. Kloppers says. "One
could look at the colonial age . . . as something that was driven
primarily
by resource constraints and so on, so people went abroad and settled
continents." The next big boom came courtesy of the post-World War II
reconstruction, "with Europe reindustrializing, and Japan."
Now, Mr. Kloppers reckons there's another, even bigger boom under way. In
"the changing composition of the world's economy, people look at that as
China only. But in reality, it's also the industrialization of large parts
of Southeast Asia, India and so on."
Thanks largely to trade liberalization, some of Asia's most populous
countries have enjoyed a huge spurt of growth over the past few years.
Last
year alone, China grew by over 11%; India, over 8%; Indonesia, a touch
over
6%. But China is the behemoth, now the world's largest consumer of copper,
steel and aluminum, among other commodities. In 2002, China accounted for
4.9% of BHP's revenue. Last year, it hit 19.6%.
Says Mr. Kloppers: "World GDP and GDP development is being driven by . . .
new people entering the modern industrial age . . . by massive
urbanization
processes." This, he adds, is "having a huge knock-on effect in demand for
our products."
BHP's bid for Rio Tinto, in his mind, is more than just cost synergies --
it's a matter of positioning the company to profit from the biggest single
economic upgrading in history: The movement of people from China's inner
regions to the coastal cities, from farming to industrial jobs. As they
gain
wealth, those consumers start snapping up everything from new houses to
cars
to refrigerators and air conditioners, products that require a lot of base
metals.
Rio Tinto has sniffed this trend, too -- it was part of its calculus
behind
the Alcan acquisition. But Rio's CEO, Tom Albanese, has resisted Mr.
Kloppers's advances. Last month, pressed by a British regulatory deadline,
BHP upped its bid to 3.4 shares per Rio Tinto share from the original
3-to-1
offer, valuing the smaller rival at around $147 billion. Rio refused, Mr.
Albanese explaining there is still a lot of "clear water" between the two
parties.
Mr. Kloppers has said he'll go hostile if Rio refuses to negotiate. "We're
asking them to take two pieces of paper and exchange that for one more
valuable piece of paper," he says.
But could BHP be overpaying, buying Rio at the top of the commodity cycle
with inflated shares? Mr. Kloppers doesn't think so. "We're not asking
people to take a view on the cycle. What we're saying is, if you put these
two companies together, they can unlock things that, that separately they
just simply can't do."
He has a point. The two companies have substantial, overlapping mining
operations and ****t and rail infrastructure in Australia and elsewhere.
They
operate the world's largest copper mine together in Escondida, Chile. Both
are dual-listed in Britain and Australia. A large majority of BHP
shareholders are also Rio shareholders. When BHP upped its bid, the
company
estimated $3.7 billion a year annual savings, in seven years' time. "It's
about volume and cost," Mr. Kloppers acknowledges.
Little wonder BHP has been eyeing Rio for years. One of Mr. Kloppers's
predecessors approached Rio back in 2003 with a similar idea; he was
promptly fired. This time around, Mr. Kloppers enjoys the board's full
sup****t. Still, is betting heavily on demand from a highly
ex****t-dependent
China such a good idea when growth in the mainland's biggest customers --
the U.S. and Europe -- is slowing?
"It would be difficult to argue that any negative turn of events" in the
U.S. "is not going to have negative knock-on effects in the rest of the
world," Mr. Kloppers says. "And I don't think that anybody is making those
arguments in China."
He says it's on the supply side, not the demand side, that the crunch will
come. In Australia, ****ps queue up daily outside major ****ts like
Newcastle,
waiting to be loaded with wares. Prices have soared. Last month, Brazil's
Vale renegotiated a stunning 65%-71% price hike in iron ore sold to big
Japanese, Korean and Chinese steelmakers. Mining analysts said that was a
concessionary price range, given supply constraints.
That's led some regulators to question whether consolidation is an attempt
to control supply and prices -- a motive that Mr. Kloppers is quick to
dismiss. "Look at where iron ore prices have gone over the last six
months,"
he notes, "and it's very clear that the iron ore price that prevails in
China is set by marginal Chinese production." Even if BHP and Rio Tinto
were
merged, "it will deliver only about 20% of the iron ore units . . .
consumed
in China as a whole . . . And you simply don't set prices with 20% of
commodities supplied."
The European Union, and its steel lobby, may not agree with this analysis.
EU steelmakers consume only about 5% of Australia's iron ore output, but
they're making noises about the emergence of a strong player in a
"price-setting" region like Asia. BHP concedes that Europe's competition
regulators will focus on the proposed BHP-Rio Tinto's iron ore business.
Australian, Canadian and American regulators, too, will have a look.
* * *
China isn't waiting to see what happens. Last month, state-owned Aluminum
Corp. of China (better known by its acronym, Chinalco) and Alcoa bought
12%
of Rio's London-listed shares -- a few days before BHP was due to up its
bid
or walk away. Chinalco says its purchases were for purely "financial"
purposes. But it's more likely that the company wanted to get an insider's
look at commodity pricing -- a strategy Japanese firms have used to their
advantage -- before making more acquisitions itself. Chinalco could also
be
positioning to snap up assets that a combined BHP-Rio would be forced by
regulators to sell. Or it could simply be angling to break up the deal, to
reduce whatever pricing power a BHP-Rio combination could have wielded.
Mr. Kloppers won't comment on how national champions might influence -- or
block -- market consolidation. (Brasilia, for instance, has a "golden
share"
in Vale, allowing it to block mergers.) But he does say that "I'm a free
marketeer. The market always delivers product at the market price." How
long
has he been a believer in free markets? "Well," he says, laughing for the
first time in the interview, "it's not a label that you hang around your
neck. It's just that markets work."
Big mining companies today, Mr. Kloppers notes, do not conform to "the
popular picture of man with pick ax over shoulder." They're "very large
equipment, high capital investment, very efficient" businesses. And while
BHP's headquarters is in Australia, it is very much a transnational. BHP's
CFO is Brazilian; its chief development officer is Colombian; and an
American runs the petroleum arm.
"If there's one industry where this country can be globally competitive,"
he
says of Australia, "it's the natural resources business.
And the natural resources business, as his bid for Rio Tinto shows, is
changing -- fast. "I actually wonder if people across the world really
understand what this massive revolution that we're seeing in the world
economy actually means for the very basic industries that are going to
supply that," he says.
"As with any change, the longer you have evidence of the change going on,
and the more clear it becomes to you what the fundamental drivers are, the
more clear perhaps your course of action," Mr. Kloppers says. He
continues:
"I took a view that China was going to be a world power. My kids started
learning Mandarin when they were four years old."
Ms. Kissel is editor of The Wall Street Journal Asia's editorial page.
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