LEX As long as the geese are laying golden eggs, everyone wants to be goosemaster. So it is hardly surprising that steelmakers are hatching plans to own their own mines. Prices for the two essential raw materials, iron ore and coal, are once again going through the roof. Rio Tinto, for example, last week agreed iron contract prices for 2008 up 96 per cent on the previous year. With steelmakers flush with cash, there is a risk of a disorderly scramble for commodity assets.
Korean steelmaker Posco on Monday said it had agreed to buy 10 per cent of Australia’s Macarthur Coal. It will join a shareholder register that already features China’s CITIC Resources, which owns 18 per cent, and fellow steel group ArcelorMittal, which has built its stake to 19.9 per cent – just below the threshold requiring a full bid.
That Macarthur’s founder is selling shares should be one warning sign that valuations are getting punchy. It is also worth questioning the benefit that taking a “strategic” minority stake in a supplier can bring. Long-term contracts should provide a sufficiently close relationship to guarantee desired volumes, while the rest of the group’s investors will naturally resist any form of preferential terms. Indeed, few expect the Aluminium Corporation of China and Alcoa to have any influence on the future of Rio Tinto via their joint 9 per cent holding.
With two steelmakers now circling Macarthur, the alternative to stalemate is an expensive bidding war. Would such a battle be worth it? Macarthur, with expected sales of $1bn next year, would not move the needle for either company. But the broader point is that vertical integration is popular when margins are rich and when tight markets put a premium on maintaining security of supply. Developing long-life, capital-heavy infrastructure and mining projects may look less attractive when the cycle turns and returns come plunging back to earth.
