Why Australia Should Sell BHP Billiton, Rio Tinto to China for $500 bn

Not even the holiday in America can stop Australia’s building boom. “Boom appears indestructible,” reads a headline in today’s Australian. “The boom in Australia’s construction industry looks unstoppable, with a survey of 100 of the nation’s construction companies predicting another two years of record growth, rising by 7.4 per cent to $82 billion in 2009, which is more than double the level of 2005.”

The whole place is starting to feel like a mini China. “Road projects are estimated to rise 15.4 per cent, rail projects are expected to jump 22.2 per cent, water supply projects by 24.8 per cent, electricity generation and supply by 19.3 per cent and telecommunications 15.1 per cent.”

You need heavy investment in infrastructure and fixed assets to grow an economy. But all that spending also creates tightness in labour markets and leads to higher prices as scarce resources are in demand. And that’s not even including the mining boom.

“Mining construction is another big area of growth,” the article continues, “with expectations of a 12.3 per cent annual growth rate. Other areas of growth include civil projects, such as the construction and upgrading of freight and port facilities, to ease export bottlenecks.” Mining services marches on.

Hey speaking of mining, we read in the Age this morning that Rio Tinto (ASX:RIO) may threaten to sell a chunk of itself to China’s Sovereign Wealth Fund. It’s not clear whether or not the move would be good for current shareholders (probably not). But it would probably kill any momentum for a merger with BHP (ASX:BHP).

BHP wants a deal because Rio is further ahead in its Pilbara expansion projects, according to Barry Fitzgerald. If BHP wants to capture the sizable price gains from a higher iron ore contract price next year, it may have to buy Rio to do it. Rio is not cooperating, or is cooperating with maximum resistance.

We continue to maintain that Australia ought to sell both companies to China for AU$500 billion cash up front. Then, China would pay an annual royalty on ore, the proceeds of which would be distributed directly to the Australian people (sort of how every native Alaskan gets a royalty from Alaska’s oil production).

Think about it. It makes sense for everyone (except maybe the people who currently own Rio and BHP). China trades its rapidly declining forex reserves (nearly US$1 trillion) for complete control of the Pilbara ore. That’s a real long-term solution.

And what do Australians get from the deal? How about AU$25,000 a piece for every single Australian, tax free! Granted, this windfall could lead to some inflationary pressure in the economy. So you’d have to make some dispensation that allows it to be contributed to super tax free, or applied to the purchase of a new home, or some other policy solution. Those Labor guys are clever. They’ll figure something out.

But really, if mineral and energy resources are to be managed as strategic national assets, why not monetise the Pilbara ore now? Do it while China has the money and has its wallet open, and before its dollars are worthless. Australian firms would get all the money spent on port and rail expansion. And we wouldn’t have to go through the tedious process of the political parties matching each other in free government giveaways to coveted constituencies. Just give everyone AU$25,000 and be done with it.

It’s not any more absurd than routing all your money through the government to be “invested” in education, health care, and other State managed incompetencies. But, we admit, our idea IS absurd. Private, for profit businesses tend to do better at allocating scarce resources than policy-driven national governments. Unfortunately, we live in a world where government management of resources seems to be increasing, not the other way around.

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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2 Comments on "Why Australia Should Sell BHP Billiton, Rio Tinto to China for $500 bn"

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Keith Trotter

You almost had me sucked in there. I was ready to start abusing you for suggesting we prostitute ourselves like that. It’s a pretty scary thought, allowing a country, with such a voracious appetite for raw materials, a country that builds from scratch, a city the size of Melbourne every 3 months; unrestricted access to our natural resources. Memories of Nauru’s demise are still fresh in my mind. Look how quickly they ran out of bird poop. Thank god you were only joking. Weren’t you?

shoufeng Yang

If they merge, their mines should be bombed in no time so they have to sell the mines for virtually nothing. I do not see any technical difficulty to do that, it only takes about 30 minutes for ICBM to reach Australia from mainland China!

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