More than 10 months after Rio Tinto CEO Tom Albanese denounced a bid from mining giant BHP Billiton as "dead in the water," the takeover bid remains on the table, despite mounting pressure against the proposal. A merger between mining company BHP Billiton and current rival Rio Tinto would create a near-monopoly in iron-ore markets, and the leverage for a combined company frightens most steelmakers. It isn't just iron-ore, either; the combined company could also control coking coal and copper. World steelmakers, dealing with lower demand, shrinking prices, and global financial crisis, spent the past year raising their voices against what could become one of the largest takeovers in history.
The latest stumbling block for BHP Billiton came last week, when the European Commission pointed out antitrust concerns that would arise from such a deal. "By increasing the new entity's market power in iron ore and metallurgical coal, there is a serious risk that the planned takeover could have a negative impact on the outcome of price negotiations with steel customers," EU representatives shared after their investigation this summer.
To gain acceptance, European antitrust authorities suggest that BHP Billiton consider new moves, like divesting assets, to avoid creating a price-setting powerhouse. Prices have rapidly fluctuated in recent months, and the iron-ore price hikes from earlier months have swiftly changed into iron-ore price cuts, partially due to decreased output among steelmakers. Global steel cutbacks are reaching 30 million metric tons. On MetalMiner, Stuart Burns reported earlier this week that ArcelorMittal, the world's largest steel producer, announced their own fourth quarter cuts, with output dropping 40 percent.
Once valued at $170 billion, the troubled economy has now made BHP Billiton's offer worth a smaller $70 billion. Although Rio Tinto leaders insist the bid undervalues their company, some analysts wonder if the offer might begin looking more tempting in current economic conditions. Rio Tinto announced that their chairman, Paul Skinner, would step down next year, and current numbers show that shareholders could approve the takeover. According to the Wall Street Journal, "BHP plans to present the offer directly to shareholders" with regulatory agencies' approval. "The odds are high that, if made today, a tender would be accepted by a majority of Rio shareholders, since the value of BHP's offer has now swelled 27 [percent] above the price of Rio's shares."
Rio Tinto still needs to deal with their piling debt, and slowing iron-ore production isn't helping the company with payback. Originally slated to avoid slashing output, Rio Tinto announced plans yesterday to decrease iron-ore production 10 percent, alongside Fortescue Metals. "Rio now expects to ship 170 million to 175 million metric tons of iron ore this year, down from earlier expectations of about 195 million metric tons," Purchasing.com explains. BHP Billiton, on the other hand, still plans to continue current production levels. Like all other iron-ore producers, however, the company expects iron-ore prices to fall 20-40 percent -- a stark contrast to the 85 percent increases and tripled spot prices witnessed earlier this year.