In fact, rumors that BHP may increase its bid have brought about even more speculation that China’s largest steelmakers will further enter the fray.

Rio Tinto Group, the world’s third-largest mining company, rose in London trading yesterday (Tuesday) on speculation BHP Billiton Ltd. will increase its $179 billion hostile bid for the company.

“The rumor doing the rounds is that BHP will increase its bid to 3.8 shares for each Rio share,” Manoj Ladwa, a derivatives broker at TradIndex in London, told Bloomberg News.

Rio Chief Executive Officer Tom Albanese rejected BHP’s initial $127 billion offer saying it “significantly undervalued Rio Tinto and its prospects.” Albanese also said the bid, which offered three shares of BHP for every one share of Rio, was not just out of the ballpark, but “several ballparks away” from being an accurate appraisal. A second offer of 3.4 BHP shares per share of Rio Tinto was also rejected.

BHP has refused to comment on the rumors, but it’s not too great a stretch to imagine another bid might be on its way. That’s because the one thing the world’s second and third largest mining companies can agree on is that Asian markets should be paying more for their iron ore.

Both Rio and rival BHP Billiton are believed to be pushing for an 85% increase in 2008-2009 benchmark iron ore prices, despite the 65% to 71% rise agreed to by Brazilian mining rival Vale (RIO).

The two Aussie juggernauts believe their proximity to Asian markets gives them greater leverage to charge higher prices.

“Rio Tinto will continue to negotiate to obtain a freight premium, to reflect its proximity to Asia and its major customers,” Sam Walsh, Rio’s chief executive of iron ore projects said in February.

Freight accounts for 30% of the landed cost of Australian iron ore in China, but close to 50% of Brazilin iron ore. China, the world’s largest steel producer and consumer, imported 383 million metric tons of iron ore in 2007, up 56.8 million tons, or 17.4%, from the previous year, the China Iron and Steel Association reported.

China’s Chess Game

China is perhaps most affected by the increase in iron ore prices. The country produces about a third of the world’s steel and the vast majority of that output is being used to build the foundation of what will one day become the world’s premier economic power. A boom in commodities prices that has caused the spot price of iron ore to triple in the past five years threatens to derail the country’s fast track development.

However, the only thing that scares Beijing more than soaring ore prices is the prospect that BHP and Rio will team up to ensure that high metal prices are supported well into the future, and perhaps through the duration of China’s economic and industrial expansion.

So far, Xiao Yaqing, chief executive of Aluminum Corp. of China (ACH), otherwise known as Chalco, has given the strongest indication that the state-backed Chinese company is uneasy about the prospect of BHP and Rio forming an ironclad alliance.

“A firm that owns too many resources is not good for the world,” he said in an interview with Hong Kong’s South China Morning Post. “People do not want to see a company dominate the market in any industry.”

Earlier this year, Chalco and Alcoa Inc. (AA), the U.S. aluminum company, bought a 9% stake in Rio Tinto Group for $14 billion. The move turned the duo into Rio’s single largest shareholder, ensuring BHP would have to obtain a 50.1% stake in the company to complete its takeover.

Last month, Sinosteel Corp., China’s second-largest iron ore trader, won over Midwest Corp. by raising its takeover bid to $1.3 billion. Sinosteel has also acquired a 2.4% stake in Murchison Metals Ltd., a rival iron ore producer to Midwest.

Few believe that Chinese companies will stop there, however. The Australian newspaper reported Monday that China’s three largest steel firms – Sinosteel, Chinalco and Baosteel Group Corp.- were looking at a 16% stake in Fortescue Metals Group Ltd., that Harbinger Capital Partners is considering selling. Fortescue is Australia’s third largest iron ore producer behind BHP and Rio Tinto.

“Harbinger chief executive Philip Falcone has been regularly contacted by many Chinese and European companies, particularly in recent weeks,” the paper said. “But because of federal Government concerns about the level of foreign investment, any sale to the Chinese will probably be for only about half of the Harbinger stake.”

Even Marius Kloppers, chief executive of embattled BHP Billiton, thinks a stake in his company will soon fall into Chinese hands.

“Various parts of China that have got surplus funds, capital to deploy, are deploying that across a wide range of things in the world,” he said at an investor briefing. “I have no doubt that one day we will see them show up on our register.”

Source: Iron Ore Proves to be the Most Coveted Commodity in the Pacific 

Nickel pushed above the $13 mark early, and held there, poking above $13.50 just before the open and easing later to close at $13.4203/lb., up 45 1/3 cents. Zinc rallied sharply but came well off its intraday highs, ending at $1.0379/lb., a penny and a third. Aluminum had a very strong day, adding just short of 3 cents, to $1.368/lb., while lead tacked on a penny, to $1.2933/lb.

Copper vaulted to within spitting distance of its all time high on renewed evidence that China’s economic growth isn’t slowing much, raising the possibility that supply will not be able to keep up with demand. China’s first-quarter 2008 gross domestic product, the broadest measure of economic activity, climbed 10.6%, the national statistics bureau said yesterday.

“Chinese investment in new cities, urbanization and in infrastructure is dominating metals demand and driving prices higher,” said Tom Albanese, Rio Tinto’s CEO. “The demand for metals, materials and minerals is continuing to grow and the outlook, notwithstanding the U.S. slowdown, is very favorable.”

At the same time, supply worries loomed. Albanese’s own company reported that its first-quarter copper output fell 6%, year over year. Rio cited lower grades of ore from its Kennecott Utah Copper and Northparkes mines.

In addition, labor unrest in Chile, the world’s biggest source of the metal, threatens to disrupt mine output. Chile’s state-owned Codelco, the world’s largest copper producer, halted work at its Andina site after striking contract workers blocked the entrances of at least three mines.

The subcontractor’s strike will prevent Codelco union members from entering job sites, says the Confederation of Copper Workers, which represents some 30,000 workers, including the protesters.

The subcontract workers started a new strike on Wednesday at all of Codelco’s operations, over work conditions and pay. Fighting with police broke out, and Codelco was forced to close its Andina division.

Codelco reacted by releasing a statement saying that the company “is sorry that a small group of people, who lend their services through some subcontracted companies, are trying to affect its production activities through the use of violence and threats.”

There may be no quick solution. “We are calling for the intervention of the government, because Codelco has lied to the country, to the church and to the workers,” a union spokesperson said. “Our patience has run out [and we] will not lift this strike until there is an immediate solution.”