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Battle of the ore titans to determine dry bulk sector

Battle of the ore titans to determine dry bulk sector

Sydney: BHP Billiton's proposed merger with long time rival Rio Tinto has dry bulk shippers holding their breath as the future of the steel market hangs in the balance. If accepted, the move would unite two out of the three key ore suppliers and considerably reduce the steel mills' bargaining power.

"The steel mills are worried that they will be limited to two options - CVRD and the merged company," says an analyst who asked not to be named, adding that many importers may put off signing long term contracts until they could better predict the market. In particular, Chinese mills are likely to hold off purchases until prices stabilise and they can guarantee long-term imports at cost effective prices.

Although the Rio Tinto board unanimously rejected this proposal last week (and two prior attempts) on the basis that the proposed share exchange (three of BHP for every Rio Tinto share owned) on the basis that it "significantly undervalues Rio Tinto and its prospects," BHP is aggressively promoting the merger to shareholders. It has cited benefits such as economies of scale for production, improved supply logistics, and most importantly, an expected $3.7bn in shareholder value annually derived from enhanced earnings and cost savings. It has also announced a planned buy back of $30bn worth of its own shares upon completion of the deal.

"The deal itself is unlikely to directly affect the shipping industry," explains the analyst, "it is how the mills will react that will affect the dry bulk trade." One of the possibilities is that the merged company would be required to sell a number of its ore assets to comply with anti-competition laws, enabling steel producers to purchase their own mines, changing the fundamentals of the spot market.

Another possibility is that China may choose to fast-track a consolidation of its state-controlled steel and coal mining industries, which could reduce immediate demand by the country, and plunge dry bulk freight rates in the short term.

However, the analyst believes that there is a third option - one that would appeal to steel producers. "There are a number of new players, like the Fortescue Metals Group (FMG), that are poised to enter the market and will offer mills alternatives," he says, adding, "how long they would last before they would be taken over as well is anyone's guess."  [14/11/07]