What does BHP Billiton chasing Rio Tinto mean for the future of iron ore pricing?

BHP Billiton Ltd., the world’s biggest mining company, plans to pursue a takeover of Rio Tinto Group after an earlier approach was rejected, in what would be the largest acquisition in history.

A purchase of Rio, which has a market value of $159 billion, would create a company that controls more than a third of the iron-ore market, supplies the most energy coal and copper, and owns mines and oilfields in six continents. Rio, the third-largest miner behind Anglo American Plc, surged 21 percent in London trading.

“If the name of the game at the moment is resources in the ground, then why pussyfoot with junior or medium-size miners when you can go to the top?” said Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London. “This deal will happen, it’s just a question of time.”

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The combination would raise antitrust issues, particularly in the iron-ore market, said Charles Bailey, an analyst at Brewin Dolphin Securities in London. BHP, Rio and Brazil’s Cia. Vale do Rio Doce control about 80 percent of seaborne trade in the ore.

Rio, the world’s second-largest iron-ore exporter after Vale, may now decide to combine with its Brazilian rival, according to Ian Henderson at JPMorgan Asset Management in London.

I’m curious about what this means for the future of the bench-mark pricing of iron ore. BHP (if you recall ), the smaller of the Big Three (relative to Rio and CVRD) want a spot-price/futures market; the bigger two do not. If BHP secures Rio Tinto, I would expect that process to accelerate (China, are you paying attention?). If, on the other hand, Rio Tinto were to merge with CVRD, I would expect the bench-mark approach to remain.

Given a merger of Rio Tinto and CVRD, one also wonders what would become of the standardisation of the bench-mark. Australian ore is closer to Asia, and deserves a premium for that expediency; Brazilian ore is of a higher quality, and deserves a premium for that. If one firm was extracting ore of both types, would we be more likely to see two prices emerge, or still just the one? It seems to me that a merged Rio Tinto/CVRD would see an advantage in price differentiation – even if they retained an annualised bench-mark pricing mechanism. The monopsony power would also be likely to put a stop to China’s pressure for discount-pricing.

Who in hell would mine under a river, anyway?

I mean, I realise that I just wrote, below, about agents and self-interest, but this was – to me – a lesson in recklessness; that’s even allowing for the fact that we’re talking about coal-mining.

Mines blamed for threat to water supply

Unrestricted underground coal mining south of Sydney is cracking riverbeds, draining swamps and putting the city’s water supply at risk, experts say.

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In one of the most dramatic cases, longwall panels 500 metres beneath the Waratah Rivulet, to the west of Helensburgh, have cracked the sandstone bedrock, in some places 20 metres across, split rock ledges and tilted the riverbed. Water flows have disappeared down fractures along a 2 kilometre stretch of river, environmentalists say.

Within 20 years, 91 per cent of the Upper Nepean and Woronora catchments will have been undermined, the Sydney Catchment Authority has told a government inquiry. Dams in these areas are the sole source of water for the Illawarra, Camden, Campbelltown, and part of Wollondilly, and provide water to the Prospect water treatment plant.

It appears that this is filtering out via an inquiry into the effects of coal-mining beneath water catchments. The return to the government is AUD600m per year. The process:

Longwall mining removes a panel of coal by working a face of up to 300 metres wide and up to two kilometres long. The main problem is subsidence, most of which happens as soon as the mining begins.

Nor is this peculiar to NSW. Subsidence, the collapse of overlying rock layers into the void created by the mined-out coal (i.e. pretty bloody predictable) is inexorably going to follow longwall mining. All over.

Martin Krogh, in his submission to the inquiry (that link is to a .pdf), provided the following (by all appearances fairly accurate) summation:

“The short-term gains in increased efficiency of coal extraction (and profit from sales) may come at the expense of the long-term sustainability of Sydney’s metropolitan drinking water supply and environments,”

His submission is quite interesting, as are a bunch of others, findable by wandering aroung on Google. It still strikes me as idiotic to hollow-out out a mass of rock, with another mass above it and a river above that. Especially when we bloody need that river for drinking.

I look forward to the burgeoning market for the technological ‘fix’ to re-extract the fresh water from the bottom of a polluted coal shaft. Water-mining. You read it here first.