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China's steel industry too fragmented to save Rio from BHP

CHINA'S fragmented steel industry is approaching a consensus that it can do nothing to stop BHP Billiton from swallowing Rio Tinto.

The world's investment bankers are swarming through Beijing, hawking every imaginable mining and petroleum deal permutation to China's state-owned corporate giants. But the steelmakers themselves say they can only stand back and hope the proposal falls over.

"They have got Chinese steelmakers over a barrel and there's nothing the Chinese can do," said a Shanghai spokeswoman for Steel Business Briefing, after speaking with some of China's top steelmakers.

Investment bankers have been touting their wares to PetroChina - the world's biggest oil producer, at least on a crude multiplication from its Shanghai share price - as well as China's big banks and sovereign wealth funds.

Target names are rumoured to include the China Development Bank, the Bank of China, a new sovereign wealth fund managed by China Investment Corporation, and the aluminium giant known as Chalco.

Yesterday Chalco's president, Luo Jianchuan, said he was "worried" about the BHP proposal but unaware of any Chinese entity buying a stake in Rio.

"Yesterday someone told me that if they combine copper ore and iron ore, prices may double next year," Mr Luo told Bloomberg.

And China Development Bank was again forced to deny reports that it was buying into Rio Tinto, this time after a German newspaper said it was preparing a share purchase contract.

The Industrial & Commercial Bank of China, China Construction Bank and Agricultural Bank of China have also denied buying Rio shares.

A merged BHP and Rio would control close to two-fifths of traded iron ore and almost one-fifth of traded alumina.

China's steel companies are seen as too small to afford a meaningful stake in Rio Tinto and too parochial to combine their resources effectively.

"It is the most fragmented steel industry in the world - to band them together has proved impossible," said the Steel Business Briefing spokeswoman.

Many of the largest steelmakers, including Baosteel, Angang and Wugang, say they have no plan to buy Rio shares and they don't expect to snap up "spare" iron ore assets either because they will be expensive or there won't be any.

Instead, the Chinese Government is redoubling efforts to artificially dampen iron ore demand during the secret but all-important contract price negotiations.

The official Xinhua news agency says the Government is prepared to use macro-economic controls to dampen demand as well as steep steel export tariffs.

"It is expected that the spot market for imported iron ore will be greatly influenced by the policy," said Xinhua.

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