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big ownership shift at the top of the global oil industry – either merger or takeover – should not be ruled out

Logic dictates Kloppers’ big deal

Last week, BHP Billiton delivered a record set of annual results for the seventh successive year. The world’s largest mining outfit – listed in both London and Sydney – made a cool £12.6bn during the twelve months to July, a rise of 22 per cent. BHP is clearly benefiting from high prices for its main products – iron ore, copper, coal and crude oil. This latest display of strength allowed Marius Kloppers, BHP’s boyish chief executive, to turn up the heat on rival Rio Tinto, observing that a takeover now “makes more sense than ever”.

To pull off such a deal, Kloppers will, of course, have to find the right price to tempt Rio Tinto shareholders. But he’ll also have to keep walking a thin line between two arguments that, in many ways, conflict. On the one hand, BHP needs to talk up the long-term prospects of the commodity sector in general.

While China may be in for a slowdown, growth is unlikely to dip below 8 per cent. The commodity needs of the People’s Republic – the biggest driver of global resource demand – will continue to escalate. Similarly in India, Indonesia, Brazil and the other emerging economies, rapid urbanisation and fast-population growth generates the need for an awful lot of metals, minerals and cement – all of which is great news for mining companies. On the other hand, Kloppers needs to point to soaring mining sector costs, and the recent fall in commodity prices, to highlight the logic of his proposed take over of Rio Tinto.

Certainly, mining inputs such as diesel and explosives, along with ever more scarce skilled technicians, are now extremely expensive. That’s putting pressure on industry margins – a process likely to continue – so making economies of scale and other synergies look more attractive.

Many industry insiders think Kloppers will win the day. US competition authorities have already given approval. Australian regulators want more time and the Europeans, also, are unlikely to give a verdict before next year. But the signs are that BHP will soon find a way through the anti-trust maze, particularly if it sells off some of its iron ore mines, so allaying fears that it over-dominates global supplies of a key steel-making input. A BHP-Rio mega-deal would, of course, change the face of global mining. But it could also have a much wider impact – not least among the world’s biggest energy companies.

The oil majors – the likes of Exxon, Shell and BP – are suffering from the same sky-high costs as the mining giants, to say nothing of a severe lack of accessible new reserves. Over the next couple of years, while also subject to regulatory approval, a big ownership shift at the top of the global oil industry – either merger or takeover – should not be ruled out. And BHP-Rio could be the deal that sparks it.

Liam Halligan is chief economist at Prosperity Capital Management

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