BHP Confident, China Isn’t.

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BHP Confident, China Isn’t
November 29th. 2007 - Australasian Investment Review – (AIR)

BHP Billiton’s play for Rio Tinto has overshadowed the impact of the volatile commodities markets on its share price (and Rio’s) in recent weeks.

It’s shares rose sharply in September and October on the back of expectations of a higher iron ore and coal price, rising prices for copper, gold and especially oil; but also the fact that unlike the US, Australia wasn’t damaged by the credit crunch or subprime mess.

The shares in BHP and Rio drove the market higher and then, at the end of October, BHP’s ambitions for Rio were forced out into the open and the share prices surged again, but the prices of copper and other commodities started turning down. Oil and gold rose, fell, rose and speculation continued that iron ore and coal would have a good rise next year, if the merger plan was out of the way.

Monday the prices of copper, gold, silver and oil those commodities were stronger, so the sharp drop in the stockmarket eased Tuesday afternoon.

Wall Street rose, but our market eased and then fell 1% as commodity prices like copper, oil and gold eased, despite the fact that the merger is really about iron ore and coal, which are not widely traded (compared to copper), plus aluminium and copper.

Copper rose overnight but gold and oil both fell amid the euphoric reaction to signs the US Fed will cut interest rates next month for the third time in row.

For BHP, the Rio deal is now the main driver and that’s why the attitude of customers is important and why china’s reaction is vital.

China put its bib into the Rio deal on an official basis and this also introduced a note of weakness into the BHP share price.

In fact you could argue that the Rio bid talk has help up the BHP share price when it should have been following the copper price down.

BHP shares fell 65c to $41.30 yesterday and Rio was off 75c at $135, still more than $11 above the three for one offer Rio says is not in the right ballpark.

Iron ore might be the boom commodity, but copper is the one where, along with nickel, BHP has made an absolute killing in the past year to 18 months.

BHP has been selling the proposed offer hard, explaining it to major shareholders and customers, especially in Japan and China , but it looks as though its falling on deaf ears

BHP had its Australian shareholders meeting in Adelaide yesterday where optimistic statements came from chairman Don Argus and CEO Marius Kloppers, but the Chinese Government intervened by way of a statement on ABC radio expressing official concern about the thinking behind the merger.

Those brief comments were a dose of realism and elevated the story from a commercial to a government to government one.

“Combining those two companies is supposed to be a business activity so we don’t normally play close attention to it but what we care about is the issue of pride in the international resources market,” a Chinese government spokesman told ABC Radio.

“We want the market comprised of international resources to reflect supply and demand.”

Australian iron ore is crucial to the production of steel in China and the spokesman said iron ore prices must remain stable.

“The price should be long-lasting, stable and beneficial to everybody,” the Chinese government spokesman said.

“Everybody I just mentioned not only refers to the mineral resource exporting countries but also to the importing countries.”

Chinese steelmakers and the country’s new government investment fund this week rejected reports that they were planning to team up to make a counter bid for Rio but you’d have to wonder if the suggestion was planted to give an indication of what might happen, rather than what was happening.
Mr Kloppers told the AGM yesterday that investors agreed with the logic of the plan, which would accelerate the rate of resource development to meet increasing demand.

“Many already see the logic of our proposal and the benefits of more product to market, more quickly,” Mr Kloppers said.

“We remain hopeful that Rio Tinto will engage with us on this important proposal which is about creating additional value for shareholders of both companies.”

Rio Tinto has already declared a proposal from BHP Billiton of three of its shares for every Rio Tinto share, valuing the target at about $US124 billion ($A141.79 billion), as “way out of the ball park”.

Mr Kloppers and BHP Billiton executives have spent the past two weeks visiting investors and customers around the world to spruik the proposal.

Unfortunately for him and BHP, his choice of words yesterday included ‘investors’ but he failed to add ‘and customers’ in telling shareholders about the support for the deal.

Its unfortunate because it reveals he either doesn’t understand the whip hand Chinese customers are in (and there’s pressure from German steel makers on the European Commission to oppose the merger)

“Overwhelmingly, investors see the logic in our proposal,” Mr Kloppers said.

“We know our customers well and we will continue to talk with them about these and other issues.”

Mr Kloppers added a combined Rio Tinto and BHP Billiton would be worth more as a combined entity.

“The bottom line here is simple - these two companies are worth more together than apart,” he said.

“It is not a question of us needing them or them needing us.”

“This is about unlocking value for both sets of shareholders that neither company can access on its own.”

BHP has to get customers, especially China, thinking like that.

On current operations Mr Kloppers said the company was expecting further growth in volumes for the 2008 fiscal year of nine per cent.

“Looking forward, this current financial year will be very exciting in terms of the number of growth projects coming on-line,” Mr Kloppers said.

“We are expecting a nine per cent further growth in volumes from 2007 to 2008.”

BHP Billiton chairman Don Argus said the short term outlook for commodity prices was strong, and that the proposed merger with Rio Tinto made strategic sense.

“In the short term at least, we expect commodity prices to stay high and volatile,” Mr Argus said.

“Let me conclude by saying that this proposal makes strategic and economic sense for both our two companies and makes sense for our customers.”

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