RIO TINTO’S rebuff of the takeover approach from mining and commodities trader Glencore looks sensible. The logic is easy to see from Glencore’s point of view, but less so from Rio Tinto’s perspective. First there was the naked opportunism.
When Glencore’s driven boss Ivan Glasenberg made his approach in July the price of Rio’s most profitable product – iron ore – was flirting with five-year lows.
As iron ore accounts for nine-tenths of Rio’s profits, that is not a nice place to be. The situation is exacerbated in the short-term as most of the iron ore that comes out of Rio’s Australian operations goes to feed China’s steel industry, and that is faltering a bit.
However, it would mean the target effectively doing a deal with the voracious Glasenberg in what is a buyer’s market – never a happy thought for a company about to be subsumed.
Also, how would Rio’s more conservative culture rub along with Glencore’s aggressively trading mentality? It makes much more sense from Glencore’s viewpoint, quite apart from the price. A deal would give it overnight scale in low-cost, high-quality iron ore alongside its established positions in copper, nickel, zinc and coal.
Glasenberg’s group is also heavily leveraged. Swapping paper under advantageous terms with Rio would address that, giving the indebted Glencore access to the target’s balance sheet.
Meanwhile, analysts have estimated the two companies could save about half a billion dollars just by merging neighbouring coal operations in Australia. Conversely, Chinalco of China owns almost 10 per cent of Rio, and would almost certainly demand some asset sell-offs from a new mining leviathan to address competition issues.
In short, the creation of a $160 billion (£100bn) mining giant looks good on paper for one of the parties. But there does not seem to be a great deal in it for Rio, so why would it change its negative stance?
A hostile bid as an alternative is, I think, unlikely. Glencore has had public relations issues since its flotation in 2011 at 530p a share (compared with last night’s closing price of 331.05p).
It is also still digesting Xstrata, which it merged with last year. Perhaps Glasenberg would be better off hunting individual assets that many mining groups are looking to sell as part of financial and operational right-sizing. It would lack the flamboyance but would probably face less hurdles.
Slowing factory output fits recent picture
THE strength of sterling and weak demand in the eurozone continue to put the brakes on Britain’s manufacturing sector. Output growth slowed in August to 0.1 per cent, down from 0.3 per cent in July, with the Office for National Statistics attributing part of the slowdown to motor manufacturers halting production lines longer than usual for maintenance.
Britain has become a bit of a poster boy for the European Union in terms of economic recovery. But the latest data, though undramatic, will add to the feeling of some sceptics that our recovery still owes too much to consumer spending rather than being a wider, more sustainable, rebound.
It is also consistent with some other recent private sector surveys suggesting a slowing of growth in our smokestack and ball-bearing industries.
While beleaguered southern European economies, in particular, will still look at the British performance with envy, factory output here is still more than 4 per cent below its peak before the 2008 financial crisis.