Glencore’s Chinalco talks - Poor timing

The directors of China’s Chinalco must be wishing for better timing. They have Glencore knocking on their door wanting to talk about Rio Tinto, just at a time when all their attention is turned to the question of corruption.

Glencore has let it be known that they approached Rio Tinto with a suggestion about a takeover about 3 months ago, but got rejected. They have now let it be known that they have approached Chinalco, who hold 9% of Rio Tinto, for further discussions.

But how accommodating were the Chinalco Board? They have just lost their President, Sun Zhouxue to a corruption campaign. One thing about corruption investigations in China - it never stops at one. Consider the recent clearing of the ranks at CNPC PetroChina, where more than a handful of senior execs resigned or were arrested after its President was taken down for corruption. So the folks sitting around the table in Beijing will likely be doubly cautious when it comes to talking with foreigners about investment opportunities.

I understand that the company has set up a small working party to evaluate its options.

Chinalco being a State Owned Enterprise (SOE), it is certain that any decision will be passed upstairs to its political masters before any action is taken. The Chinese government’s priority will be on resource security and outbound investment, but also on risk management. RT is not only a partner to Chinalco in deals such as Simandou in Guinea, it is also one of the big suppliers of iron ore to China. Beijing will be keen to protect and enhance its access to iron ore at lowest costs. It will also want to understand how having Glencore in the mix would change the picture and whether there would be increased risks to prices or supply.

But there’s one thing we can count on - Glencore won’t have raised the subject with RT or with Chinalco if they didn’t think they could win - eventually. There’s a playbook in the Glencore boardroom that will contain many more plays than what we have seen yet.