With Glencore's Backup, Will Xstrata Muscle In On the Iron Ore Game?

by Taras Berezowsky on

When you think “Clash of the Titans,” Xstrata, Vale, Rio Tinto and BHP Billiton don’t really come to mind. Perhaps you call up the classic Greek myth of Perseus, or the 1981 film — or, worst of all, the 2010 remake of the 1981 film, in which Liam Neeson yells “Release the Kraken!” with rather unconvincing gravitas. (OK, maybe it’s just me who thinks of the latter…)

Anyway, what’s important here is the iron ore “titans” in this case — Vale, Rio and BHP — are not all that excited about Xstrata’s merger with Glencore when it comes to their grip on the world’s iron ore mining. You see, the Glencore/Xstrata merger, which has set the metal commodities world aflutter, would make Glencore-Xstrata the world’s largest thermal coal exporter, the largest zinc producer and third-largest copper miner, as Reuters recently reported; and even though Xstrata doesn’t really have a foot in the iron ore business, they will likely try to get in.

Which gets us to the Iron Ore Titans. They don’t intend to give Xstrata a lot of leeway to get into the iron ore market — but should they be worried that the company will gain access?

The only way Xstrata can break down the doors, according to several analysts, is if they buy up middle-market iron ore miners quickly, and develop creative strategies for new projects. Some suggest that Xstrata look at companies like Fortescue, Atlas Iron, BC Iron and Aquila Resources. However, the other iron ore majors — not to mention China’s state-owned steel enterprises — will be looking to acquire these types of outfits as well.

Steel producers (and, by extension, steel buyers) would be keen to see Xstrata’s efforts succeed, if only to inject some more competition into the market that’s seemingly cornered by the Iron Ore Titans. Iron ore prices could come down if another major player could make a dent in the monopoly.

The Iron Ore Titans shouldn’t be looking in the rearview mirror anytime soon, as they’re pushing ahead on their own M&A efforts. Not only that, they must have Xstrata’s failed bid for iron ore producer AngloAmerican in 2009 in the back of their minds and expect any new effort of that sort to go bust as well.

However, with Glencore’s financial muscle behind the endeavor, we may just see their pursuit of iron ore business succeed. The first mark of success would be another stab at acquiring AngloAmerican, which Felix Freund of Union Investment in Frankfurt did not discount in a recent Bloomberg video segment. (He also pointed to potential rises in copper, zinc and coal prices down the line.)

It’s clear, Freund said, that Glencore/Xstrata (if merged successfully) would wield unprecedented M&A power that could make a clash with the Iron Ore Titans a distinct possibility.

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