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China mulls bid for Rio to counter BHP takeover plans

China's biggest steel maker may be set to gatecrash BHP Billiton's $125bn (£61bn) bid for rival Rio Tinto.

In an interview with a Chinese newspaper, Xu Lejiang, the chairman of China's Baosteel, said that he was "considering" a bid for the Australian miner and that any offer could exceed $200bn. "The possibility of a takeover plan going ahead is very big," Mr Xu said in an interview with 21st Century Business Herald. On price, he added "$200bn is probably not enough".

Baosteel is much smaller than Rio, but it is owned by the Chinese state, which has become much more aggressive in recent months in investing its more than $1.4trn in foreign exchange reserves abroad.

Rio's London-listed shares were the FTSE 100's top riser on the news, ending the day up 1.3 per cent at £55.15 per share. Rio and BHP declined to comment.

Despite the financial muscle that Baosteel could bring to bear, market sources said yesterday that such a deal was unlikely given the price and the likely opposition of Rio management and possibly of Australian politicians. "I would be surprised if it happened given the other players involved and the money they have," said Dan Smith, metals analyst at Standard Chartered.

The Rio Tinto chief executive, Tom Albanese, has said BHP's all-share offer is "ball-parks away" from Rio's fair value and has been talking up the company's prospects as an independent group, highlighting its expansion plans for its Pilbara iron ore mine in western Australia.

Most analysts believe BHP will have to increase its offer to get a deal done.

A Rio-BHP combination would create one of the world's largest companies with a 27 per cent share of the iron ore market – the basic material for steel – as well as a top position for several other commodities.

If Baosteel were to bid, it would probably have to partner with another company or draw heavily on government funds. The state-owned enterprise would likely face political opposition in Australia, where Rio is one of the largest companies.

Baosteel's motives, however, are similar to other steel producers who have begun buying up iron ore assets to shield them from rising prices. Since January, iron ore prices have risen by more than 70 per cent to reach nearly $200 per ton at delivery, said Mr Smith. That's up from a low of $18 per ton at the port of the country of origin five years ago.

ArcelorMittal, the world's largest steel producer, has been furiously signing deals around the globe in an effort to reach its stated goal of 75 per cent self-sufficiency – it currently provides 45 per cent of its own ore. Baosteel is almost completely dependent on outside suppliers. The world's leading steel maker and miners are currently locked in talks to set the 2008 price for iron ore. Mr Smith is forecasting an increase of up to 50 per cent due to strong demand, mainly from China. A dearth of freighters and high oil prices have exacerbated the situation by pushing up ore transport costs.

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