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| BHP Billiton, Rio JV could curb China's control on ore prices |
| Kunal Bose / Dec 15, 2009, 00:08 IST |
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India, with exports of over 100 million tonnes of iron ore, must be keenly watching as to how soon the recently sealed joint venture (JV) between BHP Billiton and Rio Tinto to combine their mining operations in the Pilbara region of Western Australia will cross the regulatory hurdles at European Union Competition Commission and also China’s competition regulator. However, sweetly the JV is now framed to placate raising of market dominance questions, iron ore buyers fear that pooling of knowledge about production volumes and demand by the pair in JV will put them at a distinct disadvantage.
That China accounting for over 90 million tonnes of our ore exports will loathe a $116-billion JV that combines the might of the world’s second and third largest miners is understandable. If the normally vocal director general of Federation of Indian Mineral Industries (FIMI) RK Sharma avoids making a comment on the likely fall out of the JV becoming operational, the obvious conclusion is that he has started smelling better ore prices. And it is precisely for this reason that the joint BHP and Rio Pilbara outing has raised the ire of ore import dependent steelmakers of Asia and Europe.
Combining the Pilbara iron ore assets, the world’s second largest, have been engaging the attention of the two miners for nearly a decade. In fact, the reason why BHP, earlier to cementing the JV, first made a bid for the whole of Rio, which also has other interests including a large aluminium and bauxite profile, and then abandoned it citing the debt burden that would befall it was largely to get control of the combined Pilbara ore deposits.
Incidentally, since Rio has a bigger ore asset base than BHP at Pilbara, it has claim to a one-off payment of $5.8 billion from the JV partner and the money will be used to pay down its debts. The compensation designed to make it an equal partnership JV could, however, be down by up to $1 billion since BHP has a bigger capital expenditure programme for Pilbara than Rio.
At the outset of JV negotiations, joint marketing of up to 15 per cent of the ore to be mined at Pilbara was very much part of the scheme. But as the idea of combined marketing raised ire of ore importers and the partners themselves realised that the JV might very well get scuppered by EU and Chinese regulators, they dropped it in October. Attempts like these are designed to make the regulatory tests less stringent.
Much to the relief of JV partners, the EU Competition Commission will not be conducting a comprehensive merger enquiry where the highly sensitive market share issue figures prominently. The Commission’s review of the JV proposal will now be done under the less stringent Article 101 allowing avoidance of deadline defined European merger control regulation.
The dropping of joint marketing clause has not, however, stopped major importers from heaping scorn on BHP-Rio Pilbara initiative. Eurofer representing EU’s leading steelmakers, including ArcelorMittal and Corus has not lost any time to wave the red flag at the JV saying that BHP and Rio could keep “separate commercial entities” post commissioning of Pilbara venture is mere “fantasy.”
Ahead of the signing of binding agreements for the JV, Eurofer told the Commission why the deal should not pass its muster. What is particularly ominous for BHP and Rio is that Eurofer is holding discussions with China Iron and Steel Association (CISA) in an attempt to build a formidable opposition to the union of two giants whose combined production capacity of ore is about 350 million tonnes. Eurofer has also reached out to the Chinese competition authority where the JV will come for review.
That there is no love lost between China and Anglo-Australian ore producers became evident earlier this year when in the midst of protracted ore price negotiations, Beijing got some Rio officials arrested on charges of industrial espionage. Foreign miners signing deals with individual Chinese steelmakers bypassing CISA, the designated body to conduct negotiations, also angered China.
China started nursing grievances against Rio when in June it cancelled a $19.5-billion deal with Chinalco, which would have made it the single largest owner of the miner with 9 per cent equity holding. For the JV partners, the Chinese air is filled with suspicion and the deal will no doubt be seen as an attempt to curb competition.
China has too much at stake while the two mining giants join forces in a commodity in which it is hugely import-dependent. The country’s import of 444 million tonnes of ore last year constituted half the world seaborne trade in the commodity. This year will end with China importing around 600 million tonnes of ore. The JV could well curb the bargaining power of China in future ore price negotiations.
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