Global miner Rio Tinto has scrapped a planned $US19.5 billion partnership ($24.3 billion) with China's state-owned Chinalco in favour of an iron ore joint venture with rival BHP Billiton, and a $US15.2 billion deeply discounted rights issue.
The collapsed deal is a loss of face for one of China's most ambitious state-run firms, and will reshape global iron ore miners' annual price negotiations with China, the world's biggest steel maker.
Hubris humbled ... again
When Chinalco struck the landmark deal in February, the aluminium giant's then-president Xiao Yaqing was seen as a high-flying dealmaker - a rare figure in the tightly-controlled world of China's state-owned industries, where executives are expected to keep a low profile.
But the deal's collapse makes clear that many democratic countries are still uncomfortable with Chinese ownership of large chunks of natural resources, for both political and financial reasons.
In 2005, US regulators vetoed the sale of Unocal to China's offshore oil specialist CNOOC after political controversy erupted.
Chinalco could conceivably make another bid for Rio, but that appears unlikely given the political furore and shareholder dissatisfaction that erupted with this tie-up attempt.
Possibly with that in mind, Prime Minister Kevin Rudd met Chinalco's president late Friday. Rudd wants the Chinese to focus on the fact that the collapse of the proposed deal was a commercial matter.
More deals?
Bankers say China, and possibly Chinalco, will continue to seek small- to medium-sized deals with foreign resources companies in the near-term.
In December, Chinalco was named by regional dealmakers as a potential bidder for OZ Minerals, along with its compatriot Minmetals, which went on to seal a $US1.2 billion deal - though only after Australian regulators said the Chinese firm couldn't have OZ's Prominent Hill mine because it is too close to a weapons-testing area.
But mega deals with global leaders such as Rio involving strategic natural resources assets might still be out of China's reach - except when sellers are in extreme distress.
Chinalco was trying to negotiate a new strike price for the convertible bond element of its Rio tie-up, but enormous pressure from both Rio shareholders and Australian politicians - and a compelling behind the scenes offer from BHP - killed that off.
Steel mills left wondering
China is currently holding out for a lower iron ore price than a 33 per cent price cut agreed to recently by Japanese and South Korean steel mills for 2009/10.
Chinalco's failure to take its planned 15 per cent stake in Rio's massive Hamersley iron ore mine will give global miners much more clout with Chinese steel mills.
As one investment banker noted: It's more logical for the suppliers to gang together and the buyers to gang together and not cross the fence.
Reuters
