Commodities, sovereignty and vertical integration

Aluminum Corporation of China, (Chinalco), suprised everyone, buying into Rio Tinto yesterday.

China on Friday weighed into the bidding battle for the world’s minerals deposits when it launched the largest-ever dawn raid to snap up a 9 per cent stake in Rio Tinto, the UK-listed mining giant at the centre of a takeover battle.

Chinalco, a state-owned mining company, in a joint exercise with Alcoa, the US aluminium group, spent $14bn in a move designed to block a planned $119bn takeover bid from rival miner BHP Billiton.

Together they secured up to 12 per cent in Rio’s London-listed shares. This investment gives them a 9 per cent overall stake in Rio which enjoys dual listing in London and Sydney.

BHP had been expected to launch an offer of three BHP shares for each Rio share on Wednesday, the deadline set by the UK Takeover Panel. But the Chinalco gambit threw BHP’s plans into disarray. Marius Kloppers, its chief executive, will this weekend decide whether to plough on with the bid or walk away.

Surprising because, the last we heard, China had no real intentions of becoming so defensively involved, and no real aspirations as to being able to. Back then, though, I wrote about how in China’s interests such a move was and, clearly, Chinalco has agreed:

A person close to the deal said the Chinese government had been looking at ways to block BHP’s takeover ambitions since late last year, and had finally decided that Chinalco would be the best state-owned enterprise to use as a vehicle.

One leading Rio shareholder said “this is global capitalism for political gain”.

These are the fortunes of war, which – in the world of international finance and commodities – this is. Everyone wants the source material for production, and everyone wants it as inexpensively as possible. If China is frozen out of the bench-mark pricing negotiations, we can hardly grumble when she takes her own initiative to secure the supply of a critical resource. Hey – at least they didn’t invade us and build a bunch of walled sub-cities and the biggest embassy the world has ever seen.

With such a substantial level of foreign engagement it shall be interesting, too, to see how our bottle-neck’d ports go as an international economic/diplomatic complaint.

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