Why China fears the BHP Billiton / Rio Tinto Merger

BANGKOK -- BHP Billiton's bid for rival resources giant Rio Tinto shows how Western mining companies are increasing their clout as the world's commodity boom marches on, a trend that is in stark contrast to developments in the global oil business and one that could put China -- Asia's biggest and fastest-growing minerals consumer -- in a bind.

For all of their big profits, Western oil companies have seen their long-term prospects dim in recent years. That's because much of the world's remaining oil is controlled by foreign governments, which are tightening their grip on supplies even as it gets harder to find new deposits. The national oil companies and governments of countries such as Saudi Arabia and Venezuela have seen their influence grow, often at the expense of the West, as oil prices soar.

The opposite is true in mining, which increasingly is dominated by a handful of Western, publicly traded companies that are consolidating to create global supply juggernauts. BHP Billiton, Rio Tinto, Companhia Vale do Rio Doce of Brazil and Anglo American PLC of the U.K. control many of the world's biggest mines -- notably in Australia, Chile and Canada. And Western capital is funding much of the exploration needed to add supplies in the years ahead.

The trend enhances the earnings potential of Western mining companies. But it also complicates the economic outlook for resource-hungry economies, particularly China's, where high demand has helped drive the global commodity boom.

"A BHP-Rio Tinto merger could cause commodity prices to remain stronger through greater supply discipline and reduced competition for market share amongst the major mining houses," John Meyer, a resources analyst at investment bank Fairfax IS in London, wrote in a note to clients on Friday. If these Western companies move slowly to expand output -- as they have to date during the current commodity boom -- it could put China and other big metals consumers at a disadvantage.

Western market dominance is most pronounced in iron ore, with three companies -- BHP, Rio and CVRD -- controlling roughly 75% of international trade. The companies are also strong players in copper, coal and some other commodities. BHP and Rio already own more than 85% of the world's largest copper mine, the Escondida deposit in Chile, and Western companies are behind the development of many of the largest new sources of nickel, copper and iron ore.

(This is the driving force behind China's hydroelectric project in Gabon, Africa: Chinese 3.5 Billion “Hydroelectric – Iron Mine” complex slated for Africa’s Gabon National Park )

China is especially vulnerable in the case of coal. Although domestic mining companies produce enormous quantities of the commodity, they haven't always kept pace with China's rocketing demand. Earlier this year, the country became a net coal importer, helping push prices to record highs. Unlike oil supplies, much of the coal that China could tap is produced by Western outfits, including BHP.

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