13/11/2007 - 22:00

BHP-Rio merger poses questions

13/11/2007 - 22:00


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One month ago, WA Business News published an in-depth report on Western Australia’s export boom, which highlighted the prominence of three giant resources sector producers.

One month ago, WA Business News published an in-depth report on Western Australia’s export boom, which highlighted the prominence of three giant resources sector producers.

BHP Billiton Ltd, Rio Tinto Ltd and Woodside Petroleum Ltd either own or manage projects that account for more than half of WA’s merchandise exports, which in total were worth just over $60 billion last financial year.

That represents an extraordinary concentration of commercial power and it could get even more concentrated if BHP Billiton gets its way.

The world’s largest mining company, BHP Billiton, wants to get bigger by acquiring the world’s third largest mining company, Rio Tinto.

Collectively, they would dominate the Pilbara iron ore industry and have a big presence in nickel, alumina, diamonds and oil and gas, generating annual exports from WA of more than $20 billion.

BHP’s push to acquire Rio reflects a longer term trend towards globalisation, which has affected just about all markets and industries.

Is it something we should be worried about?

Will it have adverse consequences for WA?

Or could it actually boost the state?

Looking at the experience of other industries in WA – where ownership has become increasingly concentrated - gives a few pointers.

Local companies used to play a prominent role in the gold mining industry, but that fundamentally changed during the 1990s and early part of this decade as a handful of big North American and African producers, like Newmont, Barrick and AngloGold Ashanti, moved to a dominant position.

They have continued to operate their mines, been good corporate citizens and invested in expansion of the industry.

In making those expansion decisions, projects in WA have to compete with projects scattered around the globe.

But it’s not just the global mining giants that think this way.

There is a plethora of West Perth companies that have chosen to invest in Africa, South America and other parts of the world because they believe it makes more commercial sense than investing in Australia.

The nickel industry is experiencing a similar change.

BHP has bought WMC Resources, Swiss company Glencore controls Minara Resources and its sister company Xstrata is set to acquire Jubilee Mines, Russia’s Norilsk bought LionOre Mining and Brazilian mining giant CVRD Inco is moving towards development of Heron Resources’ giant Kalgoorlie nickel project.

Alcoa is another global player with a big presence in WA, as the state’s biggest bauxite miner and alumina producer.

It has copped a lot of flak in recent years, particularly over its management of the Worsley alumina refinery, but is widely acknowledged for its commitment to sustainable production practices, supporting its local communities and investing in growth.

The only really big player in the resources sector that is run locally is Woodside Petroleum, which famously fought off a takeover proposal from Anglo-Dutch oil giant Shell because the Howard government wanted Woodside to stay in local hands.

There was concern at the time that Shell would overlook Woodside’s development opportunities in WA.

As events have transpired, Woodside has enthusiastically pursued expansion of its North West oil and gas interests.

Despite being a Perth-based company, it has been criticised for awarding engineering and construction contracts to offshore firms rather than local suppliers.

However, with the labour and skills shortages likely to become more acute, other project developers increasingly are expected to follow the same path.

Back to BHP.

It has argued that a merger with Rio would facilitate faster and more efficient development of their Pilbara iron ore deposits.

With the two companies having adjacent iron ore projects that currently use separate rail networks linked to different harbours, it is logical that development could be streamlined if they were jointly managed.

That is likely to be good news for shareholders – assuming BHP can complete a takeover at an appropriate price, which will certainly be higher than its initial three-for-one scrip proposal.

Shareholders are also likely to benefit from the increased bargaining power a combined BHP-Rio would have in their dealings with Chinese steel mills.

Whether this is good news for WA is less clear.

The rapid expansion currently being pursued by BHP and Rio will continue, even if they merge, because they are still a long way short of meeting increased global demand for iron ore.

The combined group would also look for ‘head office’ cost savings, which almost inevitably would reduce opportunities in Perth.

That might not seem like a big issue in the current economic environment, but it could have an impact in future years.


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