From Gina’s mining newsletter:
Bernstein’s London-based senior analyst, Paul Gait…told The Australian Financial Review that Glencore’s shock announcement it would shut down its Australian coal operations for three weeks is a strong indication that Mr Glasenberg will try again for Rio.
Mr Glasenberg would be able to point to Glencore’s willingness to pull tonnes out of an oversupplied market in a direct challenge to Rio over its expansion in iron ore, Mr Gait said. “To me this coal announcement is clearly Ivan playing games,” he said. “It had the language of someone trying to make his credentials on managing the market as a CEO. It’s a shot across the bows to Rio.”
…Mr Gait believes winning the support of Rio’s big shareholders in China and London will be crucial to get any deal with Rio over the line. Australia’s FIRB also presents a major hurdle.
…“Historically, Chinalco borrowed $14 billion to buy this stake in Rio, it’s halved in value and people have been shot for far, far less than that in China. Politically, this is not a good thing,” Mr Gait said. “Ivan’s opening line to Chinalco I’m sure would be – ‘Guys are you happy? Tell me what’s upsetting you in the world of commodities’.”
Ahem, yeh, right. Given Chinalco bought the RIO stake to block BHP’s super consolidation, nobody is being shot in Beijing. Right about now they’re being toasted for their foresight as Pilbara competition works nicely in their favour. Why do anything to upset that now?
And who wants Simandou? The thing is dead now. And Chinalco hoped to use RIO to develop it. Some nice copper assets would be OK but they can always be bought or developed without having to give up the strategic advantage in iron ore.
As for Glasenberg’s coal games, that will only underline to the Chinese that a vertically integrated Glenrio can’t be trusted to operate rationally. In fact, I find the entire approach to the merger strategically nonsensical. It’s been mooted too early, before RIO shareholders are in enough pain and is holding up the share price making it more expensive. Moreover, the pitch to shareholders that new management will cut supply will also hit RIO growth, as well as aggravating the Chinese.
If it were done right, the merger plan should have been kept quiet for another eighteen months while iron ore falls to $50, then launched on the basis purely of value with nods and winks to the Chinese that production growth will go on. Once you’ve got it you can then quietly tighten supply.
Glencore has misjudged the cycle, the Chinese, RIO shareholders and strategy.
