Chinese may join takeover battle for Rio Tinto

A takeover of London-based Rio Tinto by BHP would hand the combined entity 40% of the world's iron-ore supply and almost half the Asian market. China's rapid industrialisation is at the heart of the current commodities boom. It has pushed demand for raw materials to record levels, putting pressure on local companies to own the means of production.

A bid by Chinese steelmakers, the largest buyers of iron ore, would be China's biggest overseas takeover, and would secure supply of the raw material needed to support the fastest growth of any major economy.

Chen Hanyu of Shougang, China's ninth-largest steelmaker, said the issue was being discussed at top level, and added that members of the China Iron and Steel Association have also held talks.

Chinese companies have grown more acquisitive. The Industrial and Commercial Bank of China is buying a 20% stake in Africa's largest lender, Standard Bank Group, for £2.6 billion in the country's largest overseas purchase. Ping An Insurance last month bought 4.2% of Fortis, Belgium's largest financial-services company.

Any bid for Rio would require approval from the Australian regulatory authorities, while the new Labour government may block any foreign bid for the Anglo-Australian mining group. Industry observers and commodity companies expect demand for raw materials to remain strong for several years. A tie-up between BHP and Rio would be the second-biggest deal in takeover history, and has placed the entire mining industry on takeover alert.

Fuelled by strong demand and high metal prices, potential buyers are flush with cash and led by chief executives anxious to make their mark. BHP chief executive Marius Kloppers, who is leading the charge, has been in his post just over a month. While other sectors take a battering, metals and mining companies can afford to think big because rising commodity prices will allow them to generate more cash.

A move by the Chinese could force BHP into an auction, substantially boosting the price it would have to pay for Rio Tinto, which has so far rebuffed BHP's advances. It said last week that it has lined up £7.3 billion of asset divestments as part of its defence.

It would also force the hand of other potential bidders. UK miners such as Anglo-American, which is in the process of selling non-miningrelating subsidiaries, has been touted as a possible bidder. Anglo last week fired Goldman Sachs as its financial adviser because the US firm is backing BHP.

Other bidders could include Companhia Vale do Rio Doce (CVRD) of Brazil, and sovereign funds from Asia and the Middle East want to own the means of production. Sovereign funds, backed by cashrich governments, are eyeing assets from mining to telecoms across the world.

China created a sovereign wealth fund, China Investment Corp, in September with $200 billion (£97 billion) to seek investments to improve returns on its $1.46 trillion of reserves.

Takeovers in the mining sector have hit record levels this year. Rio, the world's second-largest miner, bought Canadian aluminium rival Alcan in a friendly £21 billion deal during the summer while India's Tata Steel swooped for Corus at the start of the year. BHP Billiton was created by a £7.6 billion merger in 2001.