BHP-Rio Tinto merger ends in collapsing iron ore market
Factors include credit crunch, reduced steelmaking and lowered ore buying
By Tom Stundza -- Purchasing, 12/1/2008 9:23:00 AM
Global miner BHP Billiton’s late-November decision not to proceed with its downgraded $68 billion hostile takeover offer for rival miner Rio Tinto came as iron ore prices has dropped dramatically. BHP Chairman Don Argus said in a statement that the recent fall in commodity prices, slowing metals refining and worsening world economy made the merger too risky to complete.
Merrill Lynch & Co. commodity analyst Tom Price says the iron ore market is going into surplus as the deteriorating global economy has forced major production cuts by steel producers worldwide and reduced spot iron ore sales. Spot market prices for iron ore fines with 62% ferrous-content have fallen to just under $60/dry metric ton from a peak of around $180 last July--and lower than the $77 of early 2008.
Reason: Steel mills around the world already have announced production cuts amounting to 36.1 million metric tons this quarter. The outlook is for more steelmaking cuts in 2009 as most research firms believe demand will decline by a much as 10%. This quarter, European Union steel mills have accounted for 10.5 million metric tons of the production cutbacks; China for 10 million metric tons, Russia for 5.5 million metric tons and North America for 5.5 million metric tons, according to Price.
So, 2009 iron ore contract discussions have been delayed over the continuing uncertainty in the iron and steel markets created by the global financial crisis. And now, Australian commodities consultant Michael Dixon at AME Mineral Economics forecasts that average iron ore contract prices could plummet by up to 30% in 2009 contract settlements as steel mills rein in demand because of the economic downturn. Contracts increased 65% in 2008.
The proposed BHP-Rio deal had dragged on since November 2007, when Rio Tinto spurned the advance, saying the all-stock offer—$142 billion at the time—undervalued the London-based company. The proposed deal would have linked the world's largest and third-largest mining companies, measured by production, and created an international commodity juggernaut, with operations from Australia to Alaska and interests in copper, aluminum, iron ore and other vital raw materials.
The merger would have left 70% or more of the world's seaborne iron ore, a key steelmaking ingredient, in the hands of two companies—BHP-Rio and Brazilian mining concern Vale—giving them extraordinary leverage over buyers. Steelmakers worldwide had protested the merger from the outset.
See also: BHP Billiton makes final offer for Rio Tinto
More firms are reducing iron ore production
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