UPDATE 2-China's Baosteel may launch Rio Tinto bid -report

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By Alfred Cang and James Regan

SHANGHAI/SYDNEY Dec 4 (Reuters) - China's top steelmaker, Baosteel, may bid at least $200 billion for miner Rio Tinto Group (RIO.L) (RIO.AX), topping a takeover proposal by BHP Billiton, Baosteel Chairman Xu Lejiang told a Chinese newspaper.

"We are considering (a bid). The possibility of a takeover plan going ahead is very big," Xu said in an interview with 21st Century Business Herald, adding it was important for Baosteel to have its own mines.

Asked about the price of a possible deal, he said: "200 billion is probably not enough."

Ian Head, Rio's spokesman in Melbourne, declined to comment on what he called market speculation, and a supervisor at Baosteel Group's publicity department said he was not aware of any talks that would link Baosteel with a bid for Rio Tinto.

BHP Billiton (BHP.AX) (BLT.L) has approached Rio Tinto with a $125 billion all-share takeover proposal, and BHP Chief Executive Marius Kloppers has toured China, South Korea and Japan in an attempt to get support from steelmakers.

BHP Billiton has not launched a formal bid for its smaller rival and, under British law, is under no pressure to make good on its "possible offer" until the bid is formalised.

Some shareholders are keen for BHP to make a firm bid, but Kloppers says he will be patient. The process could be dragged out further as both BHP and Rio are now beginning the annual round of iron ore contract negotiations.

That could give rivals time to build their own bids.

"Rio's assets, particularly in iron ore, are very valuable and will attract interest from any number of interested parties," said mining analyst James Wilson of DJ Carmichael & Co in Perth. "Whether they can actually buy them is another story."

TOO SMALL?

A combined BHP-Rio would hold about 27 percent of the world market for iron ore. Steelmakers around the world have called for any merger to be blocked, while Chinese steel mills have called on Beijing to set up a national iron ore reserve.

Baosteel is almost entirely dependent on imports of iron ore, largely from Australia, but it might be too small to mount a bid by itself.

Its listed arm, Baoshan Iron and Steel Co (600019.SS), which accounts for more than 75 percent of the parent's output, has a market value of just $35 billion, which might force it to seek partners if it wanted to make a bid for Rio.

"It's still unclear whether Baosteel would do it on its own, to take a minority stake and gain a stable supply of iron ore," said Helen Lau, a China steel analyst at Daiwa Securities in Shanghai. "All the possibilities are open."

Buying up iron ore supplies makes sense for China, but Rio's 200 million tonne output goes far beyond the needs of Baosteel, with steel production of around 30 million tonnes, she said.

If Baosteel teamed up with other steelmakers, one candidate could be Japan's Nippon Steel Corp (5401.T), with which it has a joint venture, she said.

But a bid for the whole firm would need to find a home for Rio's copper and aluminium businesses, while the use of Chinese state funds could prompt political opposition abroad, Lau warned.

Kloppers last week dismissed speculation that China might launch its own bid for Rio using its well-heeled sovereign funds.

Another report on Tuesday quoted an executive at Chinese steel firm, Shougang, as saying the government and major steelmakers were studying a joint bid for Rio Tinto.

But the report, published by Bloomberg News, was denied by a Shougang executive, who said the report was incorrect.

"Shougang is not involved in, and will not be involved in, any joint bid for Rio Tinto Group," Tan Yixin, general manager of China Shougang International Trade and Engineering Corp Mineral Import and Export Co, told Reuters.

"The company is not aware of any joint bid among steelmakers in China for Rio Tinto Group."

Asked about the reports, Qi Xiangdong, a deputy secretary general with the China Iron and Steel Association, told Reuters: "We do not know anything on the takeover plan."

A number of steelmakers such as ArcelorMittal (ISPA.AS) MTP.PA, the world's largest steel producer, plan to boost their own iron ore production to protect themselves against price rises that could flow from the concentration of the sector.

Chinese industrial firms are scouring the outback in search of Australian mining companies willing to swap equity for cash to fund exploration and development. But none are on a scale of the sort it would take to acquire Rio.

Rio and BHP are the dominant iron ore miners in Australia's Pilbara region, the world's single largest deposit, shipping hundreds of millions of tonnes annually to steel mills in Japan, Korea and, increasingly, China.

Rio Tinto's London-listed shares were up 0.1 percent by 1100 GMT, while in Shanghai, Baoshan Steel closed up 5.2 percent. (Reporting by Niu Shuping, James Regan and Alfred Cang, writing by Tom Miles, editing by Dominic Whiting and Ken Wills)