BHP Billiton Ltd., the Australian mining company bidding to buy Rio Tinto Group, may fail to convince customers concerned about a duopoly of the iron ore trade that the combined company will be able to overcome labor and port constraints hindering production, analysts said.
BHP's chief executive officer, Marius Kloppers, is meeting Chinese steelmakers today to convince them of the proposal. Kloppers has told investors the combined company would be capable of producing more iron ore at a faster rate than is currently possible. Separately, Melbourne-based BHP and London- based Rio already plan to almost double production.
"They may not be deliverable in the time frame that Marius suggests they will," because delays have affected most expansion at Australian mines, Stephen Bartrop, an analyst at Stock Resource in Sydney who has covered mining for 13 years, said. "Construction seems to take longer because there is a lot of demand on resources right across the sector."
Kloppers' tour of his Asian customers is part of an effort to win the support of steelmakers who've threatened to urge regulators to block BHP's $130 billion all-stock purchase of Rio because of concerns that the deal concentrates iron ore production in fewer hands. A combined BHP and Rio would control 38 percent of the seaborne iron ore trade, similar to the market share of Brazil's Cia Vale Do Rio Doce, the largest producer.
Japan's JFE Holdings Inc., South Korea's Posco, the International Iron & Steel Institute, the China Iron & Steel Association and the European Confederation of Iron and Steel Industries this week all voiced opposition to the proposal.
Pricing Control
"We have concerns that an acquisition will give them further pricing control," Akihiko Ide, chairman of the Japan Mining Industry Association, which represents mining and smelting companies, said today in Tokyo.
Rio wants to expand Australian iron ore production to 320 million tons a year, up from the 220 million tons it expects to have by 2009. BHP is studying an expansion to 300 million tons a year, up from the 155 million tons it would have from 2010.
Their iron ore volume growth in the past five years lagged behind Vale, Merrill Lynch & Co. said in September. Fortescue Metals Group Ltd., seeking to become the third-largest Australian iron ore producer, said Australia has lost market share in China to Brazil as BHP and Rio haven't sped expansion.
BHP rose 75 Australian cents, or 1.9 percent, to A$41.05 at the 4:10 p.m. close in Sydney on the Australian Stock Exchange. Rio fell A$1.00, or 0.8 percent, to A$130.90.
Rising Costs
Mining companies in Australia are contending with rising costs and delays as they compete for labor and equipment.
Oxiana Ltd, Australia's fourth-largest copper mining company by value, last month blamed rising materials and labor costs for a 30 percent budget increase of its Prominent Hill mine in South Australia. Rio last month said it faces rising costs at its Western Australian mines.
BHP produced 25.9 million tons of iron ore in the first quarter ended Sept. 30, missing forecasts by UBS AG, as expansion works restricted production. It is promising to deliver 120 million tons of iron ore for the year. Rio also missed production estimates by analysts due to train derailments.
"I really find it hard to see how they are going to lift output," Gavin Wendt, a senior resources analyst at Fat Prophets Funds Management, said in Sydney. "There might be a small incremental increase."
Asian Opposition
Kloppers visited South Korea's Posco, Asia's third-largest steelmaker, and Japan's two biggest steelmills Nippon Steel Corp. and JFE earlier this week.
Posco yesterday said it opposes the combination of BHP and Rio because of the increased concentration of raw material supplies. Hajime Bada, president of the steel division at Japan's JFE, said Monday the combination "will be harmful to the fair trade of iron ore," and the International Iron & Steel Institute said it could create a "virtual" monopoly and should be blocked.
Iron-ore prices have tripled in the past five years on increased Chinese demand. Prices for the commodity may rise by 50 percent next year, Macquarie Group Ltd. said last month.
Shougang Corp., China's ninth-biggest steelmaker, said Nov. 9 a combination of BHP and Rio may lead to higher iron-ore prices.
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