The Hindu Business Line : Mittal sparks rush for coal resources

Approval limit
Australian foreign investment rules look a little simple. Any foreign investment can be made into a company up to 14.9% without prior approval

Mr L. N. Mittal

M.R. Subramani

Perth, May 24 On Tuesday, a mystery investor was reported buying nearly 10 per cent stake in Macarthur Coal, one of the top five companies in that sector in Australia. The stake was bought at $20 a share, a premium of eight per cent after trading hours. By Wednesday, it became clear that the mysterious buyer was Indian-born Mr L.N. Mittal.

Mr Mittal announced that he had picked up 14.9 per cent stake in Macarthur Coal. The average payout for him works to $19.96 a share. Providing space for Mr Mittal’s play in the company were Mr Nathan Tinkler, a racing enthusiast who sold his entire 10.4 per cent stake in the company, and Mr Ken Talbot, Macarthur’s founder who offloaded 4.27 per cent stake. Mr Talbot can still continue calling shots in the company’s affairs with a nearly 16 per cent stake.

Immediately after buying these stakes, Mr Mittal said he was interested in buying the entire company.

“Mr Mittal can buy Macarthur for around $5 billion. We would be surprised if the Foreign Investment Review Board (FIRB) doesn’t approve it,” said a journalist with West Australian daily. “The deal will help Mr Mittal source coal for his steel mills,” he said.

FIRB to take decision

Australian foreign investment rules look a little simple. Any foreign investment can be made into a company up to 14.9 per cent without prior approval. After that, the FIRB will have to take a call. The board’s decision will be based on whether the takeover move is in Australia’s interest.

“It has been very rare for FIRB to shoot down any proposal to buy over a company. The one that comes to mind is the rejection of the takeover of a liquefied natural gas producer by the Dutch firm Shell,” said Mr Steve Smith, Australian Foreign Minister, during a chat with a team of Indian journalists on a trip here sponsored by the Australian Department of Foreign Affairs and Trade. A section of the Australian media has termed this move of Mr Mittal as a “Sino-India resource war”. But others see this as part of the steel major’s rush across-the-globe scrambling for coal supply.

For Mr Mittal, the buying is seen a strategic one since it would ensure supply for his steel mills in various parts of the globe. A speculation doing the rounds is that he could source coal for his greenfield Indian project. The move also follows his decision to buy three coking coal mines in Russia for $718 million.

Prices of coking coal, used by steel mills world over, has more than doubled to over $300 a tonne f.o.b currently, while the coal known as pulverised coal injection (PCI) has trebled to $250 a tonne delivered.

Coal prices were estimated to decline 25 per cent in short term, but supply constraints and limited port access have kept the rates stable.

Mr Mittal’s steel mills produce 60 million tonnes (mt) products and output is likely to increase to 120 mt by 2012. Arcelor Mittal is Macarthur’s biggest client in buying PCI coal. Macarthur, which has said it could end up with a profit of $75 million this fiscal (July 2007-June 2008), produces 3.6 mt of coal every year and is seen increasing it to five mt by 2012.

Diversification

Macarthur could also help Mr Mittal in diversifying his steel production into ferro alloys and molybdenum.

The stake purchase is also seen as one to nip in the bud the efforts of the big four coal companies – BHP Billiton, Rio Tinto, Xstrata and Anglo American – to take a strangle hold of supply.

If he wants to buy the company, it is possible that Mr Mittal may have to pay a little more for the extra port capacity that is available to Macarthur. But there could be a stumbling block in China’s CITIC, which holds 17.6 per cent stake in the company. The Chinese firm could retain its stake to prevent the Indian takeover but it is also seen as a non-strategic investment that may, on behalf of the Chinese Government, block the dominance of the big four coal firms. On the other hand, it has totally stopped Xstrata’s takeover bid of Macarthur.

“Finally, the buying of Macarthur by Arcelor Mittal will have to be seen whether it is in commercial interest or supply security,” said an industry expert.

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