The Sinosteel bid for Midwest confirms the warning issued by Sir Roderick Carnegie last December, that the Rio Tinto-BHP merger plan would trigger a scramble by the by the Chinese to secure alternative sources of iron ore supply (This war will have two losers, Decemeber 17).
If Carnegie is right then Midwest will have a wonderful opportunity to sell at a great price (probably much higher than Sinosteel's first bid) and avoid being caught in the potential long term cross fire.
Carnegie was chairman and chief executive of the listed Australian arm of Rio Tinto (CRA) in the 14 years to 1986. He has made a study of the strategies of commodity buyers over the last century and saw first hand what caused the iron ore glut of the 1970s and 1980s. His understanding of history convinces him that the Rio Tinto-BHP saga will be the trigger that in time ends the iron ore boom.
Right now both Rio Tinto and BHP are turning the screws on the Chinese iron ore buyers (Swings and roundabouts, March 14). Midwest has an ambitious set of iron ore projects which Sinosteel understands well because of their joint venture with Midwest. If Sinosteel secures Midwest they will drive the expansion rapidly. Moreover Midwest will not be the only source of additional iron ore that the Chinese will be seeking.
Both Rio Tinto and BHP have plans to rapidly expand their WA iron ore operations and if the merger does not take place then both are likely to proceed. If there is a merger a more moderate expansion will probably take place. The aim of the Chinese is to create over capacity that will mean they cannot again be held to ransom. Carnegie says history is repeating itself.
Back in the 1960s Australia believed that the increasing Japanese demand would cause the iron ore boom to go on forever. But the Japanese were concerned at their dependence on Australia, given the level of industrial unrest in the iron ore mines. Worse, they were alarmed by the plans of then mining minister Rex Connor to increase the ore price.
The Japanese decided that they needed another major supplier and so they went to Brazil and CVRD emerged as a global rival to the Australians. Meanwhile BHP and Rio Tinto both expanded their capacity and as a result, iron ore prices were depressed until the Chinese entered the market.
Carnegie points out that what the Japanese did in diversifying supply sources was no different to what Britain did at the end of the 19th century and the beginning of the 20th century when it encouraged Australian wheat and meat producers to compete with traditional suppliers, thus forcing down prices.
If the current credit squeeze in the US continues then it is unlikely that the Chinese steel makers will be able to recoup the huge prices rises the iron ore producers are imposing. This will serve to hasten the need for new suppliers even more.
