BHP-Rio deal and China to spur metals, mining M&A

LONDON (Reuters) - BHP's (BHP.AX) proposed bid for rival Rio Tinto (RIO.AX) and the rise of emerging market players, particularly China, will force further consolidation in metals and mining, industry experts told a conference this week.

At least three more transactions worth over $50 billion are likely by June, Ernst & Young's Partner in Charge for Global Mining and Metals, Michael Lynch-Bell, told the Mines and Money conference in London.

China, India and Russia are likely to play a key role in coming merger and acquisition activity as they seek greater access to raw materials to keep up with their booming economies.

China above all will need to assert itself because it is the world's top consumer of metals but, unlike India and Russia, lacks its own natural resources.

"China will continue to play a key role in the mining sector and will continue to reshape the industry," Standard Bank Plc's Head of Metals and Mining Thys Terblanche said. "It will play a larger role in M&A."

Rio (RIO.L) rejected BHP's (BLT.L) proposed offer, worth $140 billion when it was announced, for being too low.

The combination would create the world's biggest mining force, with control of huge quantities of iron ore, copper, coal, uranium, diamonds and other commodities. It has already provoked complaints from Asian and European customers worried about a monopoly on raw materials, particularly for the iron ore used in steel.

BHP Chief Executive Marius Kloppers is currently touring Asia trying to convince customers a combined company would be able to dig out and deliver more ore, improving supply.

CHINA ROLE

BHP, Rio and Brazil's CVRD (VALE5.SA) control about 70 percent of the iron ore bought by China to feed the world's biggest steel industry.

The country's dependence on raw materials has prompted speculation China may try to somehow play a role in the merger.

If not, a combined BHP-Rio could at least spur it into seeking to exert more control over the industry, either by buying smaller companies listed on markets like London's AIM or by taking minority stakes in some of the world's mining giants, delegates said.

"The Chinese are participating in M&A but starting on a very small scale. The question is, are they going to be able to step up to a bigger playing field?" Standard Chartered's Terblanche said.

One drawback was China's inability to make major acquisitions using shares, he added.

Delegates said China was adapting its investment policy after learning from mistakes such as the failed bid by state-backed oil firm CNOOC (CEO.N) for U.S. peer Unocal, which was blocked by U.S. political opposition.

"They clearly misunderstood some of the political consequences. What they are now saying is that they understand that better. They are likely to take smaller stakes," Ernst & Young's Lynch Bell said, adding that state companies were also beginning to show a willingness to employ Western management.

BHP's move on Rio was likely to cause upheaval in the industry, from giants like CVRD, Anglo American (AAL.L) (AGLJ.J) and Xstrata (XTA.L) down to mid-tier companies, delegates said.

Metals and mining companies must bulk up to afford the cost of research and development needed to find more resources in increasingly inaccessible and hostile terrains, Magnus Ericsson, chief executive of mining research and analysis firm Raw Materials Group, told the conference.

Another key trend for the sector was the emergence of nationalism as countries use their control of depleting resources to reinforce political power, delegates said.

"We will see more government involvement, like nationalization or the kind of thing we have seen in the Russian oil industry -- we will probably see that in metals," Raw Material's Ericsson said.

(Editing by Quentin Bryar)