Russian steelmaker OAO Severstal said today (Friday) that it’s agreed to acquire ArcelorMittal (MT) SA’s historic Sparrows Point steel mill near Baltimore, in an $810 million deal that will expand its U.S. reach.

It expects to conclude the all-cash deal in the second quarter. Money Morning reported just yesterday (Thursday) that major global steel firms from both Russia and India were seriously interested in acquiring the sprawling mill that for years was operated by the former Bethlehem Steel Corp.

"We expect to realize synergies in Sparrows Point and with [Severstal North America] that will fuel increased production and profitability," Chief Executive Officer Alexei Mordashov said in a statement. "We remain committed to growth in North America and believe in the long-term promise of the U.S. market; we’re confident that this acquisition will create value for our shareholders while strengthening our U.S. platform as a whole."

The transaction must still be approved by the U.S. Justice Department and some other regulatory agencies. It was the Justice Department that ordered Mittal Steel Co. to divest the Sparrows Point facility when it announced the merger with rival Arcelor SA.

According to a report today by Thomson Financial News, Severstal has agreed to enter into a collective bargaining agreement with the United Steel Workers union, although the company provided no additional details.

Thomson said that Sparrows Point currently has an annual productive capacity of 3.6 million metric tons of steel, and shipped 2.3 million metric tons of finished steel products last year.
The Cherepovets, Russia-based Severstal is launching a five-year capital investment program to improve the plant’s operations. With 2007 revenue of $15.2 billion, free cash flow of about $3.7 billion, and total steel production of 17.5 million metric tons, Severstal is one of Russia’s biggest steelmakers.

The company expects the Sparrows Point facility to contribute to its overall bottom line within a year and to operate closely with its existing operations in Mississippi and Michigan.

A List of Contenders

A day ago, published reports stated that several Russian steelmakers and India’s Essar Steel Ltd. were all competing for the Sparrows Point plant. India’s Financial Express and the global industry trade journal, the Metal Bulletin (MB), said that Essar was merely the latest addition to the list of suitors interested in the mill, though also noting that Essar had started negotiations with the Luxembourg-based ArcelorMittal.

ArcelorMittal had earlier signed an agreement to sell the mill to a consortium led by Esmark Inc. (ESMK), but the deal fell through when the Wheeling, W.V.-based Esmark couldn’t pull a financing package together.

It put the mill back on the market, with various potential buyers looking into a purchase, it said. The U.S. Justice Department in August 2006 moved to block the merger of Arcelor SA and Mittal Steel Co. NV based on the contention that it would reduce competition for tin mill products in the eastern United States. Mittal was ordered to sell the Sparrows Point plant to allow its merger with Arcelor to gain Justice Department approval, the newspaper said.

Once that happened, Russia’s Severstal, Evraz Group SA and OJSC Novolipetsk Steel and India’s Essar entered the bidding for Sparrows Point. Most of the suitors had inspected the property.

"Essar has been in, and so have Severstal and Evraz," an industry source with knowledge of the negotiations with Arcelor told the Metal Bulletin. "They all want it for the same reason: They see this market as a good one."

Investment bank Morgan Stanley (MS) was brought in to manage the sale.

ArcelorMittal, formerly Mittal Steel Co. NV, is a global steel producer. The company has steelmaking operations in 26 countries on four continents, including 64 integrated, mini-mill and integrated mini-mill, steelmaking facilities. Mittal Steel produces flat-steel products – including both sheet and plate steel – and so-called "long" steel products as bars and rods. It also produces stainless-steel products.

Although ArcelorMittal shares remain below their 52-week high of $83.88, they have risen nearly 20% since the end of January, helped by strong surges in commodity prices. The shares closed Thursday at $74.09.

The Rise and Fall of Sparrows Point

In the right hands, the Sparrows Point mill could be a solid property.

The mill was started by Maryland Steel in 1887. It was acquired by Bethlehem Steel in 1916 and by the middle part of the 20th Century was the world’s largest steel mill: It stretched four miles from end to end and at its height employed more than 50,000 workers. The traditional "open-hearth" method it used to produce steel ingots was both labor- and energy-intensive, which would come back to haunt the company when the industry changed in the late 1980s and early 1990s.

Before that, however, the Sparrows Point plant of the Bethlehem, Pa.-based steelmaker enjoyed many high-profile successes: Steel from the mill ended up being used for girders in the Golden Gate Bridge, for cables in the George Washington Bridge, and was a vital part of war production during both World Wars.

The huge mill also had a shipyard attached. Shipbuilding began in 1891. And through the years, under Bethlehem’s stewardship [and known as the Bethlehem Sparrows Point Shipyard], the ship facility became part of a series of shipyards and produced tugboats, coastal passenger ships, dredgers, cargo ships and even some U.S. Navy destroyers. It also serviced and repaired ships and manufactured industrial products.

In World War II, the shipyard operated as part of the government’s Emergency Shipbuilding Program. In one of several deals through the years, the other shipyards were divested.

By 1961, the mill was producing more than 670,000 tons of steel annually. But changes in the steel industry, including a rise in imports and the emergence of so-called "mini-mills" [which use simpler oxygen furnaces and recycled scrap metal] started and then exacerbated the competitive decline of the Sparrows Point steelmaking complex in the 1980s and 1990s.
In the latter part of the 1990s, Bethlehem invested nearly $1 billion in the facility in an effort to wrest back some of its competitiveness, but plunging steel prices from escalating foreign competition made it impossible for the vertically integrated steelmaker to compete.

Bethlehem spent millions re-lining the Sparrows Point blast furnace. It invested in a new mill for the production of cold-rolled steel. It also modernized other, existing facilities. And it slashed its largely unionized work force by the thousands through buyouts and job-reduction actions.

The Sparrows Point plant is now owned by Mittal Steel following its acquisition of Bethlehem Steel successor company International Steel Group in 2005.

Court-Ordered Divestiture

Morgan Stanley has started soliciting bids from prospective buyers of the plant, said Joseph G. Krauss, a Washington lawyer who was appointed by a federal judge in August to oversee the sale of the Sparrows Point steel mill.

Back in February, Archelor – then called Mittal Steel – agreed to divest the Sparrows Point mill in order to resolve U.S. Justice Department antitrust concerns that its $41 billion buyout of Arcelor SA would give the merged venture far too much muscle in the tin-plated steel market.

In December, an agreement that called for E2 Acquisition Corp. to buy Sparrows Point for $1.35 billion fell apart over what Mittal said was E2’s inability to put together the required financing. E2 is an international investment group led by the Chicago Heights, Ill.-based Esmark Inc. (ESMK).

ArcelorMittal Upgraded

In January, Citigroup analyst upgraded ArcelorMittal shares to a "Buy" from a "Hold." In doing so, the Citi analyst said "we believe that the risks to raw material prices are on the upside and will shift ArcelorMittal further down the cost curve [allowing improved future profitability compared to its peers]."

London-based billionaire Lakshmi Mittal, the steel tycoon who heads the world’s largest steelmaker, and his family will make $935 million in share dividends from their stake in ArcelorMittal this year, according to figures the company published back in late January.

Mittal ranked fifth last year on Forbes magazine’s list of the world’s wealthiest people, with an estimated fortune of $32 billion.

Born in India [he now lives in Britain's most expensive house], he led Mittal Steel Co.’s battle for control of the Luxembourg-based Arcelor in 2006. That battle led to the combination of the world’s No. 1 and No. 2 steelmakers into a Global Titan that will control fully 10% of the world’s steel production, putting it well ahead of Japan’s Nippon Steel Corp. (PINK: NISTY). The newly combined company has $80 billion in sales, with operations in more than 60 countries and employs 330,000.
Mittal is the chief executive officer.

This year, shareholders will see four quarterly dividends of 37.5 cents per share [a total of $1.50 annually].

Profits in the third quarter alone were $3 billion, up 36% from the year before.

With their 44% stake, or 623.62 million shares, members of the Mittal family are the company’s biggest shareholders. That will give them $233.8 million in dividend payouts per quarter – or $935 million over the course of the year.
News and Related Story Links:

• Forbes.com/Thomson Financial News:
  Severstal to acquire ArcelorMittal’s Sparrows Point mill for $810 Million.

• The Financial Express:
  Essar Joins Race to Buy Sparrows Point Mill.

• The Associated Press:
  Morgan Stanley managing steel mill deal

• StreetInsider.com:
  Citi upgrades ArcelorMittal (MT) to Buy

• MSNMoney.com:
  Mittals to Make $935 Million From Shares

• Reuters:
  Wheeling-Pittsburgh and Esmark merger gets shareholder OK

• Forbes.com:
  Lakshmi Mittal

• Wikipedia:
  Lakshmi Mittal

• Wikipedia:
  Sparrows Point Shipyard

• Wikipedia:
  Sparrows Point

India’s Essar Steel Ltd. and several Russian steelmakers are competing suitors for the Baltimore-region Sparrows Point steel mill now owned by ArcelorMittal SA (MT), India’s Financial Express newspaper reported yesterday (Thursday).

"The most prominent suitors continue to be Russian producers, although India’s Essar Group also has been mentioned prominently, according to market sources," the newspaper said.
The Financial Express cited the trade journal, the Metal Bulletin (MB), as the source of its report. The newspaper noted that Essar has been the most recent company to express an interest in the historic Maryland steel mill, and has started to negotiate with the Luxembourg-based ArcelorMittal.

ArcelorMittal had earlier signed an agreement to sell the mill to a consortium led by the Chicago Heights, Ill.-based Esmark Inc. (ESMK), but the deal fell through when the company couldn’t pull a financing package together.

Story continues below…

Sign up right now, and we’ll send you an important new report for free: "The Three Best Investments in Asia."

The U.S. Justice Department in August 2006 moved to block the merger of Arcelor SA and Mittal Steel Co. NV based on the contention that it would reduce competition for tin mill products in the eastern United States. Mittal was ordered to sell the Sparrows Point plant to allow its merger with Arcelor to gain Justice Department approval, the newspaper said.

Now, Russian steelmakers JSC Severstal, Evraz Group SA and OJSC Novolipetsk Steel all are considered to be in the running for the Sparrows Point facility – as well as Essar.

"Essar has been in, and so have Severstal and Evraz," an industry source with knowledge of the negotiations with Arcelor told the Metal Bulletin. "They all want it for the same reason: They see this market as a good one."

A spokesman for Essar told the Financial Express that the company was open to good investment opportunities. But he would not comment on specific proposals or suitors.
Essar already owns Algoma Steel Inc., based in Sault Ste. Marie, Ontario, and the Minnesota Steel Industries LLC operations that are set to begin construction on the so-called "Minnesota Iron Range."

It put the mill back on the market, with various potential buyers looking into a purchase, ArchelorMittal said. Investment bank Morgan Stanley (MS) is managing the sale, a court-appointed trustee has told The Associated Press.

ArcelorMittal, formerly Mittal Steel Co. NV, is a global steel producer. The company has steelmaking operations in 26 countries on four continents, including 64 integrated, mini-mill and integrated mini-mill, steelmaking facilities. Mittal Steel produces flat-steel products – including both sheet and plate steel – and so-called "long" steel products as bars and rods. It also produces stainless-steel products.

Although ArcelorMittal shares remain below their 52-week high of $83.88, they have risen nearly 20% since the end of January, helped by strong surges in commodity prices.

The Rise and Fall of Sparrows Point

In the right hands, the Sparrows Point mill could be a solid property.

The mill was started by Maryland Steel in 1887. It was acquired by Bethlehem Steel in 1916 and became the world’s largest steel mill by the middle part of the 20th Century – stretching four miles from end-to-end and at its height and employed more than 50,000 workers.

The traditional "open-hearth" method it used to produce steel ingots was both labor- and energy-intensive, which would come back to haunt the company when the industry changed in the late 1980s and early 1990s.

Before that, however, the Sparrows Point plant of the Bethlehem, Pa.-based steelmaker enjoyed many high-profile successes: Steel from the mill ended up being used for girders in the Golden Gate Bridge, for cables in the George Washington Bridge, and was a vital steel producer during both World Wars.

The huge mill also had a shipyard attached. Shipbuilding began in 1891. And through the years, under Bethlehem’s stewardship [and known as the Bethlehem Sparrows Point Shipyard], the ship facility became part of a series of shipyards and produced tugboats, coastal passenger ships, dredgers, cargo ships and even some U.S. Navy destroyers. It also serviced and repaired ships and manufactured industrial products.

In World War II, the shipyard operated as part of the government’s Emergency Shipbuilding Program. In one of several deals through the years, the other shipyards were divested.

By 1961, the mill was producing more than 670,000 tons of steel annually. But changes in the steel industry, including a rise in imports and the emergence of so-called "mini-mills" [which use simpler oxygen furnaces and recycled scrap metal] started and then exacerbated the competitive decline of the Sparrows Point steelmaking complex in the 1980s and 1990s.

In the latter part of the 1990s, Bethlehem invested nearly $1 billion in the facility in an effort to wrest back some of its competitiveness, but plunging steel prices from escalating foreign competition made it impossible for the vertically integrated steelmaker to compete.

Bethlehem spent millions re-lining the Sparrows Point blast furnace. It invested in a new mill for the production of cold-rolled steel. It also modernized other, existing facilities. And it slashed its largely unionized work force by the thousands through buyouts and job-reduction actions.

The Sparrows Point plant is now owned by Mittal Steel following its acquisition of Bethlehem Steel successor company International Steel Group in 2005.

Court-Ordered Divestiture

Morgan Stanley has started soliciting bids from prospective buyers of the plant, said Joseph G. Krauss, a Washington lawyer who was appointed by a federal judge in August to oversee the sale of the Sparrows Point steel mill.

Back in February, Archelor – then called Mittal Steel – agreed to divest the Sparrows Point mill in order to resolve U.S. Justice Department antitrust concerns that its $41 billion buyout of Arcelor SA would give the merged venture far too much muscle in the tin-plated steel market.

In December, an agreement that called for E2 Acquisition Corp. to buy Sparrows Point for $1.35 billion fell apart over what Mittal said was E2’s inability to put together the required financing. E2 is an international investment group led by Esmark Inc.

ArcelorMittal Upgraded

In January, Citigroup analyst upgraded ArcelorMittal shares to a "Buy" from a "Hold." In doing so, the Citi analyst said "we believe that the risks to raw material prices are on the upside and will shift ArcelorMittal further down the cost curve [allowing improved future profitability compared to its peers]."

London-based billionaire Lakshmi Mittal, the steel tycoon who heads the world’s largest steelmaker, and his family will make $935 million in share dividends from their stake in ArcelorMittal this year, according to figures the company published Monday.

Mittal ranked fifth last year on Forbes magazine’s list of the world’s wealthiest people, with an estimated fortune of $32 billion.

Born in India [he now lives in Britain's most expensive house], he led Mittal Steel Co.’s battle for control of the Luxembourg-based Arcelor in 2006. That battle led to the combination of the world’s No. 1 and No. 2 steelmakers into a Global Titan that will control fully 10% of the world’s steel production, putting it well ahead of Japan’s Nippon Steel Corp. (PINK: NISTY). The newly combined company has $80 billion in sales, with operations in more than 60 countries and employs 330,000.
Mittal is the chief executive officer.

This year, shareholders will see four quarterly dividends of 37.5 cents per share [a total of $1.50 annually].

Profits in the third quarter alone were $3 billion, up 36% from the year before.

With their 44% stake, or 623.62 million shares, members of the Mittal family are the company’s biggest shareholders. That will give them $233.8 million in dividend payouts per quarter – or $935 million over the course of the year.

News and Related Story Links:

• The Financial Express:
  Essar Joins Race to Buy Sparrows Point Mill.

• The Associated Press:
  Morgan Stanley managing steel mill deal

• StreetInsider.com:
  Citi upgrades ArcelorMittal (MT) to Buy

• MSNMoney.com:
  Mittals to Make $935 Million From Shares

• Reuters:
  Wheeling-Pittsburgh and Esmark merger gets shareholder OK

• Forbes.com:
  Lakshmi Mittal

• Wikipedia:
  Lakshmi Mittal

• Wikipedia:
  Sparrows Point Shipyard

• Wikipedia:
  Sparrows Point

Investment bank Morgan Stanley (MS) will manage the sale of Mittal Steel Co. NV’s (PINK: AMSAF) Sparrows Point steel mill near Baltimore, a court-appointed trustee has told The Associated Press.

In two related developments, a Citigroup Inc. (C) analyst has upgraded the shares of ArcelorMittal (MT) – the company that has grown out of Mittal Steel – from a "Hold" to a "Buy." And billionaire investor and steel tycoon Lakshmi Mittal and his family will make $935 million in stock dividends from their stake in ArcelorMittal this year, according to new media reports.

The Rise and Fall of Sparrows Point

The Sparrows Point plant outside Baltimore was started by Maryland Steel in 1887. It was acquired by Bethlehem Steel in 1916 and by the middle part of the 20th Century was the world’s largest steel mill: It stretched four miles from end to end and at its height employed more than 50,000 workers. The traditional "open-hearth" method it used to produce steel ingots was both labor- and energy-intensive, which would come back to haunt the company when the industry changed in the late 1980s and early 1990s.

Before that, however, the Sparrows Point plant of the Bethlehem, Pa.-based steelmaker enjoyed many high-profile successes: Steel from the mill ended up being used for girders in the Golden Gate Bridge, for cables in the George Washington Bridge, and was a vital part of war production during both World Wars.
The huge Sparrows Point mill also had a shipyard attached. Shipbuilding began in 1891. And through the years, under Bethlehem’s stewardship [and known as the Bethlehem Sparrows Point Shipyard], the ship facility became part of a series of shipyards and produced tugboats, coastal passenger ships, dredgers, cargo ships and even some U.S. Navy destroyers. It also serviced and repaired ships and manufactured industrial products.

In World War II, the shipyard operated as part of the government’s Emergency Shipbuilding Program. But through the years, the other shipywards were divested in one way or another.

By 1961, the mill was producing more than 670,000 tons of steel annually. But changes in the steel industry, including a rise in imports and the emergence of so-called "minimills" [which use simpler oxygen furnaces and recycled scrap metal] started and then exacerbated the competitive decline of the Sparrows Point steelmaking complex in the 1980s and 1990s.

In the latter part of the 1990s, Bethlehem invested nearly $1 billion in the facility in an effort to wrest back some of its competitiveness, but plunging steel prices from escalating foreign competition made it impossible for the vertically integrated steelmaker to compete.

Bethlehem spent millions re-lining the Sparrows Point blast furnace. It invested in a new mill for the production of cold-rolled steel. It also modernized other, existing facilities. And it slashed its largely unionized work force by the thousands through buyouts and job-reduction actions.

 The Sparrows Point plant is now owned by Mittal Steel following its acquisition of Bethlehem Steel successor company International Steel Group in 2005.

Court-Ordered Divestiture

Morgan Stanley has started soliciting bids from prospective buyers of the plant, said Joseph G. Krauss, a Washington lawyer who was appointed by a federal judge in August to oversee the sale of the Sparrows Point steel mill.

"We are working toward reaching a conclusion in as timely a manner as possible," Krauss told The AP in an e-mail note Friday.

Back in February, Mittal agreed to divest the Sparrows Point mill in order to resolve U.S. Justice Department antitrust concerns that its $41 billion buyout of Arcelor SA would give the merged venture far too much muscle in the tin-plated steel market.

In December, an agreement that called for E2 Acquisition Corp. to buy Sparrows Point for $1.35 billion fell apart over what Mittal said was E2’s inability to put together the required financing. E2 is an international investment group led by the Chicago Heights, Ill.-based Esmark Inc. (ESMK).

However, E2 has reportedly said it will make another bid. Asked about the potential bid on Friday, E2 Chairman Craig T. Bouchard declined comment.
Back in late November, steelmaker Wheeling-Pittsburgh Corp., and steel distributor Esmark announced that their shareholders had approved the merger of the two companies.

The privately held Esmark took control of Wheeling-Pittsburgh in December 2006, following a proxy battle.

Esmark shares closed Friday at $9.90 each, up 80 cents each, or 8.79%. They are down 51% from their 52-week high of $20.04.

ArcelorMittal Upgraded

On Friday, a Citigroup analyst upgraded ArcelorMittal shares to a "Buy" from a "Hold." In doing so, the Citi analyst said "we believe that the risks to raw material prices are on the upside and will shift ArcelorMittal further down the cost curve [allowing improved future profitability compared to its peers]."

ArcelorMittal, formerly Mittal Steel Co. NV, is a global steel producer. The company has steelmaking operations in 26 countries on four continents, including 64 integrated, mini-mill and integrated mini-mill, steelmaking facilities. Mittal Steel produces flat-steel products – including both sheet and plate steel – and so-called "long" steel products as bars and rods. It also produces stainless-steel products.

ArcelorMittal shares closed Friday at $62.98, down 82 cents (1.29%) each. The shares are down 25% from their 52-week high of $83.88.

Mittal Family to Profit

London-based billionaire Lakshmi Mittal, the steel tycoon who heads the world’s largest steelmaker, and his family will make $935 million in share dividends from their stake in ArcelorMittal this year, according to figures the company published Monday.

Mittal ranked fifth last year on Forbes magazine’s list of the world’s wealthiest people, with an estimated fortune of $32 billion.

Born in India [he now lives in Britain's most expensive house], he led Mittal Steel Co.’s battle for control of the Luxembourg-based Arcelor in 2006. That battle led to the combination of the world’s No. 1 and No. 2 steelmakers into a Global Titan that will control fully 10% of the world’s steel production, putting it well ahead of Japan’s Nippon Steel Corp. (PINK: NISTY). The newly combined company has $80 billion in sales, with operations in more than 60 countries and employs 330,000.

Mittal is the chief executive officer.

This year, shareholders will see four quarterly dividends of 37.5 cents per share [a total of $1.50 annually].

Profits in the third quarter alone were $3 billion, up 36% from the year before.

With their 44% stake, or 623.62 million shares, members of the Mittal family are the company’s biggest shareholders. That will give them $233.8 million in dividend payouts per quarter – or $935 million over the course of the year.

Mittal began his career in Calcutta, in his family’s steel business. He founded his first steel plant in Indonesia in 1976; he then moved on to Trinidad and Tobago to turn around another steel company.

By the early 1980s, Mittal was a global steel player, and he never looked back: He bought companies in Canada, Germany, Ireland, Kazakhstan and Mexico.

Four years ago, he paid $125 million for a 12-bedreoom mansion in London’s Kensington district, and media reports labeled it the world’s most-expensive house. Mittal’s neighbor: The Sultan of Brunei.

The house is emblematic of his lifestyle, according to other media reports. In May 2004 – just a month after Mittal purchased the Kensington mansion – the Sunday Times of London reported that he spent $60 million to hire singer Kylie Minogue to entertain guests during a Paris wedding bash for this daughter that lasted six days.

According to The AP, Mittal has donated generously to Britain’s governing Labour Party, including a total of $3.6 million in 2006. Back in 2001, Mittal was alleged to have donated $178,000 to the Labour Party just weeks before Britain’s Prime Minister Tony Blair wrote a letter to his counterpart in Romania, supporting Mittal’s bid to buy Combinatul Siderurgic Sidex SA Galati, that country’s state-run steelmaker.

Not content to just dominate one industry – steel – Mittal is branching out. One of his latest deals was to spend $980 million for a 50% stake in Kazakh oil firm Atlantic Caspian Investment Resources PLC, a subsidiary of Russia’s Lukoil (LUKOY).

News and Related Story Links:

• The Associated Press:
  Morgan Stanley managing steel mill deal

• StreetInsider.com:
  Citi upgrades ArcelorMittal (MT) to Buy

• MSNMoney.com:
  Mittals to Make $935 Million From Shares

• Reuters:
  Wheeling-Pittsburgh and Esmark merger gets shareholder OK

• Forbes.com:
  Lakshmi Mittal

• Wikipedia:
  Lakshmi Mittal

• Wikipedia:
  Sparrows Point Shipyard

• Wikipedia:
  Sparrows Point

It’s been something of an "open secret" that Chinese interests were considering countermeasures to the proposed takeover bid between BHP Billiton (NYSE:BHP) and Rio Tinto Plc (NYSE: RTP) Now China’s largest steelmaker – Baoshan Iron & Steel Company, otherwise known as Baosteel – is ready to make its move with a counter-bid for Rio Tinto.

If BHP Billiton and Rio Tinto did merge, the combined company would have market value of about $380 billion and annual sales of about $54.6 billion, based on 2006 figures. Rival Anglo American PLC (NASDAQ:AAUK) had revenue of only $33.1 billion last year.

More importantly, the company would also control 38% of the seaborne iron ore trade, according to Australia & New Zealand Banking, and that’s what really has China quaking.

Iron has been integral in the construction of China’s skyscrapers, towers, bridges, railroads and ports. China’s soaring demand for the raw material is part of the reason Macquarie Group Ltd. (ASX: MQG) believes iron ore will soar 50% in price next year.  With escalating commodity prices and growing demand, China’s steelmakers can’t risk losing any leverage in negotiations. And a BHP-Rio Tinto conglomerate would control almost half the Asian market for iron ore.

"Yesterday, someone told me that if they combine copper ore and iron ore, prices may double next year," Aluminum Corp. of China (NYSE:ACH) President Luo Jianchuan told Bloomberg. "It makes us worried."

Now, after weeks of consideration, Baosteel is reportedly planning to launch a bid for Rio Tinto. In fact, Baosteel chairman Xu Lejiang publicly acknowledged such plans Monday in an interview with the 21st Century Business Herald.

"We are currently considering this and there’s a strong possibility of launching a bid," Xu was quoted as saying. "We are still studying the plan and are discussing how to launch a bid."

It’s important to note that Xu is asking how, not if. A Baosteel approach to Rio Tinto is close to certain. And, strategically, it makes sense. With the long-term interests of Chinese steelmakers in jeopardy, someone had to step up to the plate. 

BHP’s bid was worth $134 billion and Rio responded indignantly, saying the offer "significantly undervalued Rio Tinto and its prospects."  In another statement, Rio Tinto’s Chief Executive Tom Albanese said the board believes, "that the value in Rio Tinto is yet to be fully reflected by the market." The company then vowed to raise its dividend by 30%.

If Baosteel wants to show it’s serious, it may have to bring $200 billion or more to the table. If that’s the case, the company will need some help. It has long been rumored that Baosteel would combine forces with fellow steelmakers Angang and Shougang and sovereign fund China Investment Corporation to make ends meet on the deal. CIC was created in September with a $200 billion cache to improve returns on the $1.46 trillion China has in reserves.

Even if the Baosteel bid fails to woo Rio Tinto, it may still succeed in driving up share prices and putting the pressure back on BHP. The consortium may also have plans to acquire a substantial stake in Rio Tinto, which would give it the option of blocking any future merger attempt.

Britain’s Daily Telegraph recently reported that China Development Bank, another state-owned investment arm, is already building up a stake in Rio Tinto, hoping to gain enough clout to veto any potential deal. CDB has denied those reports, however.

A Commodity Monopoly or Economic Insurance Policy?

Strategically, a takeover of Rio Tinto would fit well with China’s economic and political agendas. China wants to ensure that its economic and industrial growth spurt continues unabated. And for it to do so, China will need a large and consistent supply of raw material, particularly iron.

Rio currently produces about 150 million tons of iron ore a year, according to Forbes. If China bought Rio it would take care of about 30% of its entire annual iron ore needs. Furthermore, at a price of $200 per ton- not taking into account a rise in price next year- it would cost China $30 billion annually to acquire the equivalent of all Rio Tinto’s iron ore output. A $150 billion all-cash offer to Rio would only amount to five times China’s annual iron ore spending.

This would also be the latest in a long line of strategic Chinese acquisitions. After being encouraged by President Hu Jintao to "go global" several Chinese companies have pounced on a multitude of foreign assets.

Aluminum Corp. of China bought Peru Copper Inc. for $860 million in August. The very next month, Anshan Iron & Steel Group agreed to a $1.6 billion joint venture with an Australian iron ore company. Last year, CNOOC Ltd. (CEO) invested $2.7 billion in the development of Nigerian oil fields. CNOOC was, however, thwarted by U.S. lawmakers in its attempt to buy Unocal Corp. in 2005.

China’s investment arms are extending their reach as well. Earlier this week, the Industrial and Commercial Bank of China Ltd. announced it would buy a 20% stake in Africa’s largest lender, Standard Bank Group Ltd. And last month, Ping An Insurance Co. bought a 4.2% stake in Fortis, Belgium’s largest financial services company.

This string of acquisitions has left China with the reputation of a commodity hog trying to monopolize the planet’s resources. But Money Morning’s Keith Fitz-Gerald sees things differently.

"China isn’t trying to seize control of the world’s commodities," Fitz-Gerald said in a phone interview. "They’re simply trying to ensure their own economic survival.  There’s nothing defensive or nefarious about it."

According to Fitz-Gerald, it’s a subtlety nine out of ten Western investors are missing, but China isn’t trying to achieve global dominance. It’s simply trying to ensure long-term prosperity.

"If it looks like the rest of the world is going to be in short supply [of commodities], China will only be all too happy to sell to us," he said. "China just wants to make sure its needs are met first."

India’s benchmark stock index yesterday eclipsed the 19,000 level, the first time that’s happened, The Associated Press reported.

The Bombay Stock Exchange’s 30-share Sensex peaked at 19,059, a 639.6 point gain and a new all-time high.  The Sensex has soared by 1,000 points in just five trading sessions, similar to the leap it made last month when the index roared from 16,000 to 17,000.

On the National Stock Exchange, the 50-company Standard & Poor’s Nifty index jumped 242 points, or 4.5%. Foreign institutional investors have fueled India’s market surge with cash inflows totaling $16.5 billion to date, nearly double the amount invested in all of last year. Foreign investment in October alone has roared past the $4 billion mark.

Indian indexes got a boost from blue chip stocks such as Tata Steel, a subsidiary of the larger Tata Sons, and Reliance Energy Ltd. Tata Steel was up 7.5% at Monday’s close, but Reliance was the day’s big winner soaring 12.9%. 

Enter Your Email Address Below:

Reliance Industries is the largest petrochemical company in India’s private sector. The stock’s dramatic surge came one day after it had announced it would be breaking $28 billion out of its war chest to press forward with foreign acquisitions.  According to the Financial Times, Reliance Chairman Mukesh Ambani detailed the plans at the company’s annual meeting.

A renewed focus on foreign acquisitions and open-mindedness towards partnerships "will give Reliance the ability to pursue both organic and inorganic growth opportunities of significant scale and size," Ambani said.

It is not yet known specifically what types of acquisitions Reliance will target, but many analysts expect the company to make a strong move into Western markets. Reliance is already building what will be the world’s largest refinery complex in the Indian city of Jamnagar.  And, according to Ambani, the company will be investing $4 billion in oil and gas exploration "in the coming years." 

Mukesh Ambani is on his way to becoming the richest man in India, as he possesses a 47% stake in Reliance, estimated to be worth $50 billion.

News and Related Story Links:

• The [Indian] Financial Express:
  2007 FII inflows hit $16 billion.

Enter Your Email Address Below: