TEN years ago this week, Rio Tinto made a move that has arguably since proved the key to its current strength and was pivotal in making the Pilbara an economic powerhouse.
TEN years ago this week, Rio Tinto made a move that has arguably since proved the key to its current strength and was pivotal in making the Pilbara an economic powerhouse.
Way back on August 11 2000, Rio secured 50 per cent control of what was then the world’s number four iron ore miner – Melbourne-based North Limited – handing it the keys to the Robe River Iron Associates business in the western Pilbara.
At the time, many people questioned Rio’s $3.5 billion takeover of North as overly generous given the tough prevailing iron ore and steel markets of the time.
For, strange as it may seem today, the Pilbara industry was not then in such a happy state.
Indeed, with the effects of the Asian financial crisis lingering and China’s economic explosion still little more than a theory, iron ore miners were at the mercy of customers who had gleefully forced through big cuts in successive annual price negotiations.
In fact the entire Pilbara industry was nowhere near its current size, with total iron ore production just passing 150 million tonnes in 2000, less than half the 315mt shipped last year.
The gap is even more staggering when measured by value, with sales surging from $3.7 billion to $33.5 billion over the decade.
Rio’s share of that output was a measly 60mt in 1999, mostly from its Hamersley Iron business, about double the amount being produced by Robe River, with arch rival BHP accounting for most of the remainder.
But despite the gloom, Rio’s newly appointed chief Leigh Clifford had clearly recognised stirrings in China that have underwritten the Pilbara’s subsequent rise.
Rio and North had been at loggerheads for years, largely because the Japanese steel interests that owned 47 per cent of Robe saw it as a guard against either Rio or BHP gaining undue influence over world iron ore markets.
Such fears were the primary reason behind Japan’s use of its buying power to block a mooted merger of the pair’s iron ore businesses the year before – a move that is eerily similar to China’s threats over the pair’s current Pilbara joint venture proposal.
So when Rio swooped with a shock $2.8 billion bid for North in June 2000, Japan’s steel industry hit the panic button.
Within a month, Japanese trading house Mitsui used the offer of a global alliance with Anglo American Corp to convince the South African miner to make a rival bid for North.
But despite their best efforts, neither could match Rio’s firepower when it upped its bid by $700 million just two weeks later.
Astonishingly compared to the drawn out bidding wars of recent times, the whole contest was over in two months.
Yet the echoes of that bid continue to reverberate across the Pilbara to this day.
Rio’s defeat of Anglo’s Japanese sponsored counterbid was arguably the last time that iron ore buyers have held the upper hand over suppliers – much to the chagrin of China’s steel buyers –as prices have trebled in the ensuing years
The combination of the Hamersley and Robe businesses also gave Rio the clout and flexibility to underpin a massive rolling expansion in the Pilbara that continues today.
Rio estimates that it has invested more than $11 billion in its Pilbara business since taking over North, including the $860 million committed last week to expand the Cape Lambert port and boost its annual Pilbara output to 330mt by 2016.
Rio’s aggressive growth helped ensure a matching response from BHP, which has progressively doubled its own capacity to 155mt en-route to 300mt by 2015.
But the North takeover also continues to reverberate on another front.
Back in 1999, North was thwarted in a legal battle to gain access to the Hamersley railway to reduce the cost of its new West Angelas mine when the Federal Court ruled the railway was an integral part of Rio’s production process.
North had been hinting at a likely High Court challenge at the time of the offer from Rio, which promptly sought WA government permission to use its Hamersley railway to fast-track development of West Angelas once its bid had succeeded.
Insiders at Fortescue Metals Group, which this year won a gruelling five-year legal battle to partly open BHP and Rio’s existing rail network to third-party users, believes Rio’s takeover of North set its case back by four years because that is how long it took to overcome the precedent set by the 1999 ruling.
