Sunday, December 14, 2008

Time to prepare for Chinese 'invasion'

Terry McCrann [Herald Sun], December 09, 2008

JUST a few months ago it would have taken more than $200 billion to buy Rio Tinto. Now our second biggest resources group - and all its resources - could be picked up for about $40 billion.

Plus of course, the necessary takeover premium. Although I suggest what would now be 'necessary' is something less than the incumbent board thought was required from BHP Billition.

Especially if any future buyer was paying cash. Like for instance a buyer with the word 'China' in its name.

Now I'm not suggesting that is imminent. Although the Chinese Chinalco company must be seriously considering its options.

It spent $14 billion to buy a stake of less than 10 per cent in Rio - a stake which is now worth just a quarter of that.

Rather, this is prompted by suggestions that the Chinese National Petroleum group is interested in Santos now that the 30-year-old restrictions on investment in the SA-based oil and gas group have expired.

Any attempt by CNP - or indeed any move on Rio - would require not just approval by the Australian Government but the overturning of effective prohibitions on such buying.

Which is precisely the critical point. Can we really say no to such buying if it happens? Should we say no?

It would of course be opportunistic. Over the next 10 or 10 or 100 years, the Chinese are going to buy billions of tonnes of iron ore from Rio (and BHPB and the Brazilian Vale group).

If they can instead be buying it from themselves, by buying the resource cheap now at the bottom of the market, wouldn't you?

Should we, as in the Australian (and in the case of Rio, also the British) government, say no? Or should that be left to shareholders?

We might think it is entirely ours to answer the question. But will we necessarily still have the power to say 'no', if and when our balance of payments goes back into major deficit and our dollar plunges?

This is precisely the time when 'we' should start thinking about this sort of difficult issue. The 'we' being both government and company boards and managements.

Only a few months ago we thought we were riding an unstoppable China boom. One in which the Chinese would happily pay ever rising prices for ever rising volumes of key commodities.

It's not just that has been 'put on hold'. But in a way that has dramatically reduced the price of the 'alternative'.

Instead of making 'us' ever richer, seizing the chance to buy those long-term resources supply cheap. In a global context where cash is king, and the Chinese have plenty of it.

Except to date, they have poured literally trillions of it into Fannie Mae and Freddie Mac - 'keeping the money' was the reason for that panicked guarantees. And US treasuries.

Ask yourself what makes more sense. Investing trillions of dollars in US paper securities; which requires you to bet on the US dollar and the US budget?

Or to buy supply security into the long term for your entire economy?

We should expect the Chinese to come knocking on doors Down Under. The only questions are when and how defenceless we will be at the time?