not so rosy now heres the rub

The average weighting of BHP output to Chinese consumption and the same equation when applied to Rio Tinto makes for a lethal tool in the hands of Chinese investors (read government of China by its many proxies).

Marios Kloppers decision to go for Rio Tinto on behalf of his charge BHP is a precarious gamble at a time of great uncertainty in the fickle financial markets of the world where it matters most.

BHP can acquire Rio Tinto quite easily and I will leave the mechanics of that argument to another forum and another time. The key question is whether or not the Indians who play a stealthy and covert hand with their Chinese and European surrogates will allow such a monopolistic monolith in the Rio BHP plan of Kloppers to be consummated.. The answer is a simple no. Neither Europe, Asia, the US or other markets can afford that and their concerns have not been taken into consideration adequately.

There are significant political and economic considerations to be considered in this play. At present the buyer is sovereign. In a time of unprecedented economic growth in the world driven by a more open China and partially deregulated India (domestic markets) Australia believes somewhat immaturely that it is they who have created this economic miracle as it is referred to often. And the answer simply is no.

Australia did have a well prepared mining infrastructure (meaning better than that of Brazil or Africa) when the Chinese did decide to go for broke in manufacturing. No one expected it. Everyone believed the dragon was going to eat up all it made. Wrong.

It has captured our markets to the point it is too expensive and impossible for us to now retake the manufacturing ground back from China. Their infrastructure in their overseas communities, their inroads into our retailers and their inroads into our banks financial institutions and our currencies they hold in reserve means our short and curlies are in their hands.

I would dare go one step further and suggest as well that from the time of a popular Australian labour prime minister, they had made inroads into all of our political and government institutions, the heads of their departments and their collegiate infrastructure which is now part of government culture in Australia.

It is more subtle than we know in some instances and as blatant as the proverbial dogs…....sticking out, but we are opiated in the luxury of their affordable (not cheap) consumer goods that makes all of us feel like we live in Toorak, Hamilton or Double Bay so we couldn't care less.

What the Chinese want and they have them lined up already is a big chunk of the equities, the voting power and the board positions at BHP and Rio or they will lobby through their mates in Canberra (and successfully at that) to have the giant merged and broken up. And the law will be on their side. Now heres the rub.

On a break up of BHP and RIO (which will occur should the merger or take over go ahead), their constituent parts will be offered up for sale. The current debt held by many of these as individual entities is underwritten by the parent. On a de merger or break up they won’t have that underwriting and they will be subject to the highest bidder in order to survive. The benefits of being part of a consolidated entity will no longer be there for them to live off. That highest bidder will be a Chinese or Indian through their US , Singaporean or European nominee.

It will happen and these two unstoppable giants with their European and US partners will then dictate the terms of labour in our world. That will also mean cutting the cost of production to make it comparable to Africa and other low costs mining centres. And why not? This is capitalism anyway and according to the socio economic morality of the Chicago school of economics it is survival of the fittest.

Kloppers will be best served keeping BHP intact for now. If he goes ahead, the Chinese have the power of veto (not on the board but in market terms. Mittal and others are working with the Chinese contrary to popular western misconceptions about the chasm between these two groups). Kloppers must soon disclose what it is they the Chinese have extracted from him to allow the take over or merger to go ahead with their blessings.

A Chinese bird told me that Kloppers cannot not wait for what he has now committed his company and his reputation (including their analysts) and their resources to. The "break Fee is massive". There is no turning back. The break fee is paid to those institutions who have committed to a conditional sale of their shares and those who have unconditionally committed.

The Chinese in waiting will decide their needs are no longer as great as they were a few years ago. They will not consume as voraciously. They have adequate stocks in reserve and alternative sources to buy from. When they pull the plug the price of BHP and RIO shares will fall.

It is then that they will instigate a third party play and up the ante with BHP paying too much for an overvalued Rio. When the party is over, Mittal and Tata will move with their Chinese partners out of Singapore (possibly Tamasek) and wipe up the mess. Either way Kloppers has set in train one of the biggest corporate break ups in history.

What BHP’s senile Melbourne club board believed the late Robert Holmes a Court was going to do to them, Kloppers will do with their consent, albeit ill informed consent.

BHP will fall and be broken up. It will have reached that point where it can no longer be efficient as a conglomerate in an industry susceptible to the vagaries of a volatile market conventional analysts in the west do not understand yet pretend to do.

I have been accurate in all of my posts so far. Well maybe 2% wrong. I do not have to disclose the sources of my information to anyone. Trade at your ignorance. Trade at your peril.