Marius Kloppers
Betting on China
By MARY KISSEL
March 29, 2008; Page A9
Melbourne, Australia
Pinning down Marius Kloppers, CEO of BHP Billiton, the world's largest mining company, is no easy task.
"Can you come to Melbourne next week?" his public relations minder asked me over email last month – after already having switched the interview from Melbourne to London.
Ismael Roldan
There's good reason for Mr. Kloppers's globetrotting: Over the past five months, he's been busy pitching a $150 billion merger between BHP Billiton and Rio Tinto to regulators and major shareholders of both companies. If consummated, the merger would be the second-largest in corporate history (after Vodafone-Mannesmann's $183 billion deal in 2000). It would also represent one of the biggest-ever bets on China's economy, which is consuming BHP and Rio's products at an unprecedented pace and scale.
For a CEO at the center of all of that action, Mr. Kloppers in person is immediately striking for what he isn't: brash or flashy. A Fulbright scholar and a graduate of MIT and a French business school, he picks his words carefully.
"This is all on the record, is it?" the 45-year-old South African asks quietly, settling into a conference room chair overlooking downtown Melbourne on a gray day. He gently dismisses the company waiter, telling him, "I'll look after everybody." He speaks so softly that I ask him to move closer to me.
In November, after less than a month on the job, he launched his initial offer: a $142 billion, stock-only bid for Rio Tinto. The two companies, if combined, would be the world's largest producer of copper and aluminum and second-largest producer of iron ore.
BHP-Rio is the latest in a string of industry-consolidation bids that is marking the beginning of Big Oil's new brother: Big Mining. Rio Tinto snapped up America's Alcan Inc., an aluminum producer, last year. Brazilian giant Companhia Vale do Rio Doce, or Vale, the world's largest iron ore producer, ingested Canada's Inco Ltd., a big nickel producer. Swiss rival Xstrata bought Canada's Falconbridge in 2006. Industry experts say there are more deals in the pipeline – even though Vale's exploratory merger talks with Xstrata fell apart this week.
What's driving this urge to merge? "There are a couple of events in world history that drive energy and commodities demand," Mr. Kloppers says. "One could look at the colonial age . . . as something that was driven primarily by resource constraints and so on, so people went abroad and settled continents." The next big boom came courtesy of the post World War II reconstruction, "with Europe reindustrializing, and Japan."
Now, Mr. Kloppers reckons there's another, even bigger boom under way. In "the changing composition of the world's economy, people look at that as China only. But in reality, it's also the industrialization of large parts of Southeast Asia, India and so on."
Thanks largely to trade liberalization, some of Asia's most populous countries have enjoyed a huge spurt of growth over the past few years. Last year alone, China grew by over 11%; India, over 8%; Indonesia, a touch over 6%. But China is the behemoth, now the world's largest consumer of copper, steel and aluminum, among other commodities. In 2002, China accounted for 4.9% of BHP's revenue. Last year, it hit 19.6%.
Says Mr. Kloppers: "World GDP and GDP development is being driven by . . . new people entering the modern industrial age . . . by massive urbanization processes." This, he adds, is "having a huge knock-on effect in demand for our products."
BHP's bid for Rio Tinto, in his mind, is more than just cost synergies – it's a matter of positioning the company to profit from the biggest single economic upgrading in history: The movement of people from China's inner regions to the coastal cities, from farming to industrial jobs. As they gain wealth, those consumers start snapping up everything from new houses to cars to refrigerators and air conditioners, products that require a lot of base metals.
Rio Tinto has sniffed this trend, too – it was part of its calculus behind the Alcan acquisition. But Rio's CEO, Tom Albanese, has resisted Mr. Kloppers's advances. Last month, pressed by a British regulatory deadline, BHP upped its bid to 3.4 shares per Rio Tinto share from the original 3-to-1 offer, valuing the smaller rival at around $147 billion. Rio refused, Mr. Albanese explaining there is still a lot of "clear water" between the two parties.
Mr. Kloppers has said he'll go hostile if Rio refuses to negotiate. "We're asking them to take two pieces of paper and exchange that for one more valuable piece of paper," he says.
But could BHP be overpaying, buying Rio at the top of the commodity cycle with inflated shares? Mr. Kloppers doesn't think so. "We're not asking people to take a view on the cycle. What we're saying is, if you put these two companies together, they can unlock things that, that separately they just simply can't do."
He has a point. The two companies have substantial, overlapping mining operations and port and rail infrastructure in Australia and elsewhere. They operate the world's largest copper mine together in Escondida, Chile. Both are dual-listed in Britain and Australia. A large majority of BHP shareholders are also Rio shareholders. When BHP upped its bid, the company estimated $3.7 billion a year annual savings, in seven years' time. "It's about volume and cost," Mr. Kloppers acknowledges.
Little wonder BHP has been eyeing Rio for years. One of Mr. Kloppers's predecessors approached Rio back in 2003 with a similar idea; he was promptly fired. This time around, Mr. Kloppers enjoys the board's full support. Still, is betting heavily on demand from a highly export-dependent China such a good idea when growth in the mainland's biggest customers – the U.S. and Europe – is slowing?
"It would be difficult to argue that any negative turn of events" in the U.S. "is not going to have negative knock-on effects in the rest of the world," Mr. Kloppers says. "And I don't think that anybody is making those arguments in China."
He says it's on the supply side, not the demand side, that the crunch will come. In Australia, ships queue up daily outside major ports like Newcastle, waiting to be loaded with wares. Prices have soared. Last month, Brazil's Vale renegotiated a stunning 65%-71% price hike in iron ore sold to big Japanese, Korean and Chinese steelmakers. Mining analysts said that was a concessionary price range, given supply constraints.
That's led some regulators to question consolidation is an attempt to control supply and prices – a motive that Mr. Kloppers is quick to dismiss. "Look at where iron ore prices have gone over the last six months," he notes, "and it's very clear that the iron ore price that prevails in China is set by marginal Chinese production." Even if BHP and Rio Tinto were merged, "it will deliver only about 20% of the iron ore units . . . consumed in China as a whole . . . And you simply don't set prices with 20% of commodities supplied."
The European Union, and its steel lobby, may not agree with this analysis. EU steelmakers consume only about 5% of Australia's iron ore output, but they're making noises about the emergence of a strong player in a "price-setting" region like Asia. BHP concedes that Europe's competition regulators will focus on the proposed BHP-Rio Tinto's iron ore business. Australian, Canadian and American regulators, too, will have a look.
China isn't waiting to see what happens. Last month, state-owned Aluminum Corp. of China (better known by its acronym, Chinalco) and Alcoa bought 12% of Rio's London-listed shares – a few days before BHP was due to up its bid or walk away. Chinalco says its purchases were for purely "financial" purposes. But it's more likely that the company wanted to get an insider's look at commodity pricing – a strategy Japanese firms have used to their advantage – before making more acquisitions itself. Chinalco could also be positioning to snap up assets that a combined BHP-Rio would be forced by regulators to sell. Or it could simply be angling to break up the deal, to reduce whatever pricing power a BHP-Rio combination could have wielded.
Mr. Kloppers won't comment on how national champions might influence – or block – market consolidation. (Brasilia, for instance, has a "golden share" in Vale, allowing it to block mergers.) But he does say that "I'm a free marketeer. The market always delivers product at the market price." How long has he been a believer in free markets? "Well," he says, laughing for the first time in the interview, "it's not a label that you hang around your neck. It's just that markets work."
Big mining companies today, Mr. Kloppers notes, do not conform to "the popular picture of man with pick ax over shoulder." They're "very large equipment, high capital investment, very efficient" businesses. And while BHP's headquarters is in Australia, it is very much a transnational. BHP's CFO is Brazilian; its chief development officer is Colombian; and an American runs the petroleum arm.
"If there's one industry where this country can be globally competitive," he says of Australia, "it's the natural resources business."
And the natural resources business, as his bid for Rio Tinto shows, is changing – fast. "I actually wonder if people across the world really understand what this massive revolution that we're seeing in the world economy actually means for the very basic industries that are going to supply that," he says.
"As with any change, the longer you have evidence of the change going on, and the more clear it becomes to you what the fundamental drivers are, the more clear perhaps your course of action," Mr. Kloppers says. He continues: "I took a view that China was going to be a world power. My kids started learning Mandarin when they were four years old."
Ms. Kissel is editor of The Wall Street Journal Asia's editorial page.
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