Rio Tinto challenged BHP Billiton on December 11 with a possible deadline to make a formal takeover offer in what could be the second largest takeover ever.

On November 8 BHP made public an informal proposal worth around $140 billion, offering three of its shares for every one Rio share, but Rio rejected this proposal. Over a month later, Rio applied to the Panel on Takeovers and Mergers in the UK to set a deadline for the potential bidder to formalize its intention in a "put up, or shut up" rule.

If the rule is triggered, BHP would need to either make a firm offer within a designated period-typically one or two months-or declare the deal dead.

The proposal has met with stiff opposition from Asian steel mill customers and particularly Chinese customers. They believe a merger would give BHP too much pricing power in the iron ore market. If successful, the deal between the world's biggest and third biggest mining giants would create a $400 billion mining behemoth that would control almost 40 percent of the world's iron ore production.

"We don't want to see this merger create an even bigger monopoly," said a statement by China Iron and Steel Association (CISA) on its website on November 20. "The excessive industry concentration of the iron ore producers ... is unfair for steel producers." According to the statement, as the world's biggest steel producer, China "has the most to lose," because the country "relies on imports from Western Australia for 38 percent of its iron ore."

What, then, are the countermeasures of China's steel producers if the deal succeeds and does create a monopoly situation? These steel producers have long been at a disadvantage in negotiations over iron ore pricing.

More bidders?

Rio's request to the British regulator follows weeks of speculation that a number of other suitors were ready to throw out counteroffers.

China's high dependence on imported iron ore has led to speculation that China's steelmakers might organize a counteroffer, including industry leader Shanghai Baosteel Group Corp.

In an effort to clear up the rumor, Baosteel Chairman Xu Lejiang said on December 5 that Baosteel at present is "not capable of stopping the merger or planning a counteroffer."

Just one day before Rio's announcement of its request to BHP, The Daily Telegraph reported that U.S. private equity giant, Blackstone, might team up with Chinese steel producers in a break-up bid for Rio Tinto. China Investment Corp. has a 10-percent stake in Blackstone. Blackstone later that day denied any involvement.

Zhou Luohua, a finance professor with the University of Shanghai, expressed through China Business News his opposition to counter offers by steelmakers like Baosteel because "it will do a steelmaker no good to merge with a supplier and in doing so, the steelmaker will only get spoiled and lose motivation to innovate and cut costs."

But Zhou said he would appreciate corporations like Sinosteel, China's second largest iron ore trader, to encourage and organize large domestic suppliers to jointly make a counteroffer. This solution, in Zhou's eyes, will "safeguard the national economic security and ensure competition within the steel and iron industry and the mining industry."

In the throes of growth

BHP's new CEO Marius Kloppers visited customers in Japan, South Korea and China on November 19-22, in an effort to soothe their worries and sell the merits of a merger.

All three countries depend heavily on imported iron ore, in particular from Western Australia, which is presently dominated by BHP and Rio.

"We are worried that such a merger would impede a healthy market price mechanism," said Hajime Bada, Chairman of the Japan Iron and Steel Federation, at a press conference with a group of Japanese steelmakers the same day Kloppers made his first stop in Japan.

Kloppers met customers and CISA officials in China during the last two days of his Asian trip, trying to convince them that the mega-merger will result in market-related iron ore prices and increased supply.

The merger is "aimed at more market shares and producing more products," said Kloppers in an exclusive interview with Caijing magazine on November 22. "A merger with Rio will bring our shareholders value unparalleled by any other mining company."

Baosteel Chairman Xu didn't think the arguments were convincing, because "there are ways other than a mega-merger to maximize the benefits of shareholders."

According to Xu, synergy from combining the two companies' iron ore production is a key draw in BHP's proposed takeover of Rio, as Rio's iron ore resources are much larger than BHP's.

"BHP won't expand investments and productions after the merger," said Xu. "Instead, it might limit the production with an eye on price hikes, and this move will tighten the imbalance in the demand-supply situation for iron ore in Northeast Asia."

BHP and Rio meet Chinese steel mill customers annually to negotiate prices. The prices agreed in China tend to set a global benchmark for other companies to follow. Iron ore prices have tripled in the past five years on increased Chinese demand and may rise by 50 percent next year, according to estimates from Australian investment and banking provider, Macquarie Group.

With that prospect, "Rio is probably right in saying the offer undervalues it and maybe BHP will have to raise the offer to four-for-one," said James Wilson, a mining analyst with Australian stock broking firm, DJ Carmichael & Co.

According to CISA, China's iron ore imports between January and September were on average 27 percent more costly than a year earlier, with the price up nearly 32 percent as of September 1. It said some steel mills had been forced to shut down because they could not afford the price increases.

Painkillers needed

There are voices amidst the worries over the mega-merger calling for the Chinese Government to figure out long-term solutions to address the severe shortage of mining resources. The key is, as many experts believe, to set up a communication and coordination mechanism among high-ranking officials in order to offer Chinese enterprises effective instructions in the search of overseas mining resources.

China's overall overseas mining investments have been unsuccessful in the past two decades, due to the absence of effective and flexible coordination and management mechanisms in government administration, lack of experience, as well as the poor interaction between the government and enterprises.

China's first case of overseas mining investments was between China Metallurgic Import and Export Corp. (CMIEC), which was later merged into Sinosteel with several other enterprises, and CRA's Hammersley Iron, to explore its iron mine in the Pilbara region of Australia. Under the agreement reached in November 1987, CMIEC owned 40 percent of the mine and was responsible for selling 10 million tons of iron ore every year.

The sales commitment became a headache for the CMIEC in the early 1990s and resulted in a large number of bad debts, according to Dong Zhixiong, a former official with the CMIEC. As a result, overseas mining investment became a sensitive topic until Sinosteel formed a joint venture with Northern Transvaal Development Corp. to run the South African partner's Dilokong chrome mine in 1995.

"The iron mine in Australia and chrome mine in South Africa prove to be two most lucrative businesses of Sinosteel today," said Dong.

In many other cases, it was because Chinese investors failed to secure a 50-percent benchmark stake in the potential project in order to win the green light from the National Development and Reform Commission.

Dong questioned the necessity of obtaining a controlling stake and recommended Japan's experience in supporting competition and preventing monopoly in Western Australia.

Japan has offered financial support to local mining companies and helped them with infrastructure construction since the 1960s. Based on this partnership, Japan formed a pricing negotiation mechanism with Australia and Brazil in the 1980s, which is still practiced today.

According to Dong, most of Japan's investments in Australia came with a 5-10 percent stake. Through these projects, they have eyed a long-term stable supply and collected information for price negotiation in the future. They seldom invested in mining giants and instead chose rivals to cultivate competition. They are not interested in production and daily operations, and thus avoid complicated issues related to local employment, labor, and land use.