Midwest Rejects Murchison Bid; US Dollar Woes Hit China Boom

What about iron ore? The proxy battle between Japanese and Chinese companies continues to play out in the Mid West of Western Australia. With the Pilbara all locked up between BHP (ASX:BHP), Rio (ASX:RIO), and Fortescue (ASX:FMG), the Mid West is “in play”. Or is it?

London’s Financial Times reports that, “Midwest Corporation (ASX:MIS), the Australian iron ore explorer backed by China’s Sinosteel, has formally rejected a hostile takeover bid from Murchison Metals (ASX:MMX), saying the AU$1bn offer undervalued its potential. Australia-listed Murchison is backed by Mitsubishi Corp of Japan and the takeover battle underlines the strategic rivalry between Japan and China to secure supplies of Australian iron ore.”

For years, the Pilbara’s been dominated by a few companies and the West Australian government. There simply wasn’t enough global demand for steel-making ingredients for other companies to make a viable business of competing with the giants. That seems to have changed today, as evidenced by the wild success (at least of the stock) by Andrew Forrest’s Foretescue Metals.

But has it really changed? Are the pieces finally in place for a structural expansion of Australia’s ore business? We think the answer is yes. But yesterday’s news that China has “frozen” all bank lending for the remainder of the year suggests that China’s spectacular boom is subject to the same kind of volatility that characterises fast economic growth.

In other words, in the long-term, the rise of the Far East as the world’s engine of growth seems pretty certain. In the short term, junior iron ore outfits in Western Australia could be buffeted about pretty good. Hang on for the ride.

Speaking of China, its dollar woes are more pronounced. “We have never been experiencing such big pressure,” Wen Jiabo told reporters. He was voicing concern over the decline of the US dollar, a currency China happens to own a lot of (US$1.4 trillion or so). “We are worried about how to preserve the value of our reserves.”

Yes, that would be a worry. It’s a worry for a lot of people. Is there a good answer? It’s not as simple as switching to something else. You don’t move that much money that quickly (by selling dollars) without causing just the thing you’re worried about: a further decline.

Still, suits and bureaucrats all over the world are trying to talk the dollar up. “What we are witnessing is uncoordinated verbal intervention,” says Stephen Jen of Morgan Stanley. “This is useful as in the absence of it, investors and speculators would have interpreted it as the authorities condoning what was going on in the currency market,” he adds.

If people really thought the dollar was undervalued, they’d buy it, instead of talking about why it should be strong. But it’s not strong. And no one is buying it.

“Soon we will not talk about dollars because the dollar is falling in value and the empire of the dollar is crashing,” says the talkative Hugo Chavez. He and his wonder-twin sidekick Mahmoud Ahmadinejad were telling the press war stories about their guerilla war for the heart of OPEC.

“Naturally, by the crash of the dollar, America’s empire will crash,” Chavez added. He’s probably not wrong, although not everyone agrees.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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