The politicians in Canberra are probably as popular in Beijing at the moment as Gordon Ramsay is in Australian news studios. Having rebuffed the bid for Ozminerals’ Prominent Hill, they will also be held culpable in Chinese eyes for Rio’s (partially) commercially driven snub to Chinalco, which was then made much worse by the announcement of the Rio/BHP iron ore joint venture, neatly creating a duopoly from the prior three player market. The fig leaf covering this clear anti-competitive move is a commitment to keep marketing separate. We would not blame either the European competition authorities or their equivalent in China for hallucinating over squadrons of flying pigs before they took this commitment at face value. Yet the Chinese need minerals, and can’t afford to throw all the toys out of the pram and walk away. We expect the response to be a increase of interest in Africa and South America together with a focus on smaller Australian deals which fly under the political radar screen. One that particularly intrigues us is a 50% stake in Lynas being taken by China Non Ferrous Metals. Lynas has the only significant commercially viable rare earth deposit outside of China, which heretofore has had a virtual monopoly of these essential metals. You may never have heard of Neodymium or Praseodymium, but rest assured your PC, ipod or hybrid car wouldn’t function without them. Allowing the Chinese to keep their stranglehold on this market is clearly anti-competitive (although potentially very advantageous for Lynas shareholders), but will not be seen as a political liability in Australia, especially as it creates jobs. We also expect a wave of deals in junior iron ore miners as Chinese steel mills look to create some tension in price negotiations, and the fund has added to its exposure here as well.

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