Vale seeks diversity with Xstrata, not synergy

A sign advertising for the purchase of scrap precious metals is seen in Hatton Garden, London on May 16, 2006. A bid by Brazilian mining giant Vale to buy smaller rival Xstrata will inevitably draw comparisons to BHP Billiton's approach for Rio Tinto, but it may be more notable for its differences than its similarities, analysts said.

HONG KONG/SYDNEY (Reuters) - A bid by Brazilian mining giant Vale to buy smaller rival Xstrata will inevitably draw comparisons to BHP Billiton's approach for Rio Tinto, but it may be more notable for its differences than its similarities.

While both may represent the pinnacle of dealmaking in the mining sector after years of rallying raw materials prices, they differ in rationale and relevance to the commodities markets.

Big Asian stainless steel producers are unlikely to kick up a fuss over a Vale deal, even though a combined entity would be the world's biggest nickel miner. By contrast, fear of a dominant monolith in the form of BHP/Rio has raised concern among Asian steelmakers who negotiate iron ore prices every year.

And while the two dual-listed Anglo-Australian companies will find they have opportunities to boost output or cut costs by combining similar operations, Vale's deal -- if concluded -- would be about breaking into new markets and expanding overseas.

"BHP and Rio is about synergies, Vale-Xstrata is about diversification," James Wilson of DJ Carmichael & Co said.

On Monday Vale (VALE5.SA), the world's biggest iron ore producer with nearly a fifth of global production, said it was in talks with Anglo-Swiss rival Xstrata (XTA.L) about a takeover, a deal that analysts said could top $100 billion.

That comes in the wake of top global mining house BHP Billiton's (BLT.L) effort to buy Rio Tinto (RIO.L), facing a February 6 deadline to sweeten its around $130 billion offer or step aside.

For Vale, the deal gives it significant production of copper and zinc, as well as thermal coal, but the focus for analysts was on the fact it would allow the Brazilian firm to leapfrog Russia's Norilsk Nickel (GMKN.RTS) as the top nickel miner with an estimated 30 percent of refined output.

A takeover would bring together Canada's former two top nickel producers -- Inco, which Vale bought in 2006 for $17 billion and Falconbridge, which was bought by Xstrata. Both promised to seek savings in the Sudbury, Ontario, Nickel Belt.

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But unlike iron ore, the price of which is determined in annual and oftentimes acrimonious talks between key producers and top Asian buyers like China's Baosteel, nickel is traded openly on the London Metals Exchange (LME) and also through spot deals.

And while a handful of companies control most of the world's iron ore, nickel production is more widely dispersed.

"The problem of concentration is less serious than for iron ore from BHP/Rio Tinto," said Geoffrey Cheng, director of equity Research at Daiwa Institute of Research (H.K.) Ltd.

Nickel, used in the manufacture of stainless steel, saw prics soar to above $50,000 on the LME in 2007 on the back of low stocks and short supplies, but has nearly halved since then to trade at around $27,000 a tonne MNI3 on Tuesday.

CHINA AT EASE

China already buys about half its nickel from Canadian mines formerly owned by Inco, and analysts said importers were unlikely to be overly alarmed by the possible joining of forces.

"For iron ore, you have only three suppliers in the world, but on the nickel side, we have Jinchuan and some new other emerging nickel pig iron producers," said Xu Aidong, an analyst at China's Antaike.

"We can import also from Norilsk in Russia. Now they are trying to develop the Chinese market."

That's in sharp contrast to the tidings of woe with which Asian consumers greeted news of the BHP/Rio Tinto combination. The two firms supply two-fifths of China's iron ore and three-fifths of South Korean giant POSCO's (005490.KS).

While China's stainless steel industry is expanding, it is also relying more heavily on nickel pig iron, giving it more leverage to win reasonable prices.

"Thanks to nickel pig iron, we have felt a lot better in nickel price negotiations in recent years," said Hao Peigang, senior economist at Taiyuan Iron & Steel (Group) Co.

Xstrata, which has been the subject of takeover speculation for months, declined to comment.

(Additional reporting by Rujun Shen in Shanghai, Polly Yam in Hong Kong)

(Editing by Jonathan Leff)