Anti-trust is such a simple concept. Keep big companies from controlling markets and messing with consumers. Somehow, we have completely lost sight of that and turned anti-trust regulation into a math game. In pursuing a merger with Rio Tinto, BHP sure hopes the Europeans care about the math games than the reality of the iron ore market. The math game should let the merger happen, but allowing it is like making a kosher pig. The pig might chew its cud, and have split hooves, but it still is a pig and probably is not kosher. A BHP-Rio Tinto merger is a kosher pig. It probably meets the requirements of the math games, but it violates the spirit of anti-trust. It does not help the consumer.
Ten years ago, there was no real market concentration in the mining business. Now five companies dominate: Anglo, the grand old dame; Vale/CVRD, the young kid from Brazil; Xstrata, the baby of smart Swiss traders; and the two Australian/UK/global companies, Rio Tinto and BHP. Getting down to five has meant lots of companies have gone by the wayside: WMC, North, Inco, Falcobridge, and Noranda all come to mind.
This has hurt the overall market because fewer and fewer people now have a balance sheet to build significant projects, and the status quo gets more and more stable as the consolidation continues. I cannot stress the importance of a balance sheet enough. This news from Teck and NovaGold illustrates my point. Nova has a good project that probably pencils out, but Teck does not have the balance sheet to take the risk on this project or on its project in Panama.
The fact is, only the really strong players can put major new projects on the map. Underfunded or smaller players do not have the risk appetite, and this reduction of people to build projects will result in most new mega projects coming from these four to five players. Any junior over the next 50 years with a project that can change the market will have to go to these players.
So after years of consolidation, we now have five major risk takers in the market place, and if this merger goes through, we will have four. Between these four, they have balance sheets that will let them dictate new projects, dictate prices on most major commodities, and frankly, give them power well beyond what any company should have.
Let’s go over what makes a strong oligopoly. It would be very hard to build an oligopoly on tea biscuits. Anyone with some flour and a bit of sugar and eggs can make them. It might be that some people can make them cheaper, or have a better skill at distributing them, but if there was a major player in the business, and they decided to double the price of the best tea biscuit in the world, others would step in and compete on price.
On the other hand, if in coking coal, the top four companies that control the market decide to double prices, then the consumer either pays or shuts down. There is no real substitution for the bloody coking coal, which means that they have complete control over their customers. That’s a damn nice place to be, for the coking coal business. It’s less nice for the customer. Now imagine that in nickel, iron ore, copper, diamonds, and platinum, among other commodities, five companies can dictate prices to the world, and now we are going to four. That kind of oligopoly has the potential to hurt a lot of people.
My conclusion is that the Rio Tinto-BHP merger is a very bad thing for consumers around the world. On the other hand, it will be a very nice thing for the shareholders of both companies and the shareholders of any mining company.
Frankly, I want the merger to happen because it will make me richer. But you have to understand where I come from. I am a scavenger who will sit on the edge of a bigger market and try to figure out how to make money, and the more market concentration, the more value I have because the price for commodities will go up and smaller projects will happen that I can find ways to take advantage of. The thing is, the benefit to me is going to come at a cost to lots of people around the world. The people with the most to lose are the senior management of Rio Tinto, who will be at a high level (C level) out of a job and retired, but many more people will lose in this deal than some executives.
Over the last eight years, anti-trust regulators have done a royally bad job of keeping market concentrations at a reasonable level. I think they have messed up because they have been scared of monopolies, and these market players, as an oligopoly, have escaped regulators’ scrutiny. While the regulators were worrying about monopolies, they underestimated the strength of a well-formed oligopoly.
My bet is the merger will take place if the anti-trust regulators let it. This will only happen if the regulators are completely asleep at the wheel, but that’s not a bad assumption considering how much they have messed up over the last 10 years. I mean, forcing Vale to divest QCM was a joke. The value will be huge in market pricing power and efficiencies of the two companies. There will be one less set of executive offices (never a bad thing), probably a corporate jet or two to be sold (Twiggy might be in the market for one), and a monster of a company that will dominate in the next 20 years.
While people are concerned about math games and stupid synergies (like rail capacity), they are missing the big picture. Five companies control the world’s industrial production, and it will soon be four. Countries (for example, the countries of OPEC) dream of the level of power these companies are going to have.
