When Push Comes to Shove

The proposed $140 billion bid by Australian-based BHP for UK-based Rio Tinto throws up interesting permutations of how China will respond to this possible creation of the world's biggest mining force.

As the country soaks up more raw materials like iron ore, copper and coal for its growth, many do not expect it to stand quietly aside as a monopoly on these commodities is formed. The prospect of higher prices set by a monopoly is simply not palatable.

According to data compiled by UBS AG, China will consume 59 percent of the world's iron-ore production, 40 percent of aluminum production and 29 percent of refined copper by 2012.

A recent Reuters article writes:

"China above all will need to assert itself because it is the world's top consumer of metals but, unlike India and Russia, lacks its own natural resources."

The question, though, is what action China will take. Will it go the route of headline-grabbing acquisitions or small strategic moves?

A weekend report by Beijing-based weekly China Business said China will join the bidding for Rio Tinto with an initial offer of about $200 billion. The paper said China's newly-launched sovereign wealth fund - China Investment Company - will tie up with local steelmakers Baosteel, Shougang group, Angang group and some other firms controlled by the central government to make the bid.

However, others think the country will not put itself out there in any politically-sensitive move. Recent investments indicate Chinese companies are gunning for stakes that give it influence and access to skills, rather than big direct purchases of overseas companies.

A recent Economist article writes:

"If the progress of foreign firms in China sometimes seems a bit like a game of draughts, with companies jumping over themselves to gain better positions, the advance of Chinese firms abroad is more like a game of chess. They are taking calculated steps as part of a long-term strategy."

The Reuters article notes: "...A combined BHP-Rio could at least spur it (China) into seeking to exert more control over the industry, either by buying smaller companies listed on markets like London's AIM or by taking minority stakes in some of the world's mining giants."

These are exciting times for the mining industry. Mining stocks are in play as many predict more consolidation to happen in the industry. The spotlight is on China to see what it would do when push comes to shove to safeguard critical areas affecting its future. I think any action it takes during this bid will say alot about how it chooses to engage with the investing world.