BHP and RIO Removing the Competition

It hasn’t been a great start to the year for big miners BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO]. Share prices for both companies have fallen considerably; BHP is down 8%, while RIO has declined 8.4% for the year. Rumours have also surfaced which might drag BHP and RIO further down for 2016.

BHP Billiton and Rio Tinto

Source: Yahoo finance

Billions to buy rivals

BHP and RIO could be set to sell as much as $29.7 billion of shares to buy out distressed rivals, reported the Australian Financial Review this morning. BHP and RIO have been extremely eager to eliminate competitors over 2015, and the attitude continues into 2016.

Have you ever wondered why coal and iron ore prices are so low? China’s demand is an important factor. But BHP and RIO have continued to oversaturate the market with commodities, causing prices to fall substantially. Oversupply is a sure way to drive down competitor profits.

This could’ve been their plan all along. BHP and RIO squeeze the smaller rivals to the point of bankruptcy. Then when the time is right BHP and RIO swoop in, buying mining assets at rock bottom prices.  This might just be all in my head, but now could be a better time than any.

A Bank of America analyst wrote to clients discussing the BHP and RIO situation, stating:

We think there is no time like the present. Strengthening balance sheets would give flexibility if/when tier-one assets come to market.

Will acquiring the competition fix BHP and RIO’s situations? I don’t believe it will.

Big miners still have the growing concern of how to combat China’s decline. Instead of buying out competitors, which will provide short term returns, BHP and RIO needs to perform structural changes to stay relevant. Instead of dirty inefficient minerals, BHP and RIO should supply China with cleaner and more efficient resources.

More miners are being forced to scrap dividends and sell assets. The date for BHP to pay their first 2016 dividend is coming soon. Many analysts believe BHP will cut dividend payments to minimise losses. Either way, shareholders won’t have to wait until dividends are announced for analysts to form assumptions on BHP’s health.

Act now before the situation becomes dire

China loves copper and iron ore. It’s one of the main reasons BHP started to increase its copper production. It was seen it as a great long term investment. Yet miners are still being slammed by China’s sluggish growth.

At the start of this week China’s manufacturing PMI (Product Manager Index) missed by 0.7 points. What does this tells us? China’s manufacturing industry is receding. And being a manufacturing country, analysts aren’t confidence for China’s future economic growth.

Even the World Bank is predicting slower growth. The World Bank has cut its previous forecast for global economic expansion by 0.4%. And what do you think played a huge role for the World Bank’s revised figures?

China.

The World Bank believes this year the world economy will pick up slightly from 2015. Yet the World Bank has been constantly revising figures down from previous forecasts. I don’t want to get off topic here, but I wanted to bring the message home. The point is, things aren’t going to get a whole lot better for 2016.  And if BHP and RIO continue to increase their market share in dying resources, they may be digging their long term future into a hole.

Härje Ronngard,

Junior Analyst, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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