FT reported that by combining their iron ore operations in north western Australia, Rio Tinto and BHP Billiton have crafted a deal that could potentially become one of the most lucrative seen in the mining industry. But rising opposition from steel producers promises to sharpen regulatory scrutiny this year, making the agreement’s approval anything but certain.
The move, first agreed last year is key to Rio efforts to reduce its heavy debt burden estimated to be about USD 18 billion as it involves a USD 5.8 billion equalisation payment from BHP. Some USD 10 billion in projected cost savings for Rio and BHP are riding on how persuasively the two companies and their lawyers define the production only joint venture.
They propose to combine their adjacent iron ore operations in the Pilbara region of Western Australia. The companies’ duopolistic control of the Pilbara, the world’s most important iron ore source, make Rio and BHP the second and third biggest global suppliers respectively of the ore that makes steel.
Therein lies the controversy. The Japan Iron and Steel Federation said in a statement on December 7th echoing the sentiments of several steel industry bodies “The Japanese steel industry continues to view the joint venture as a move that would restrict competition just as last year’s proposed acquisition of Rio Tinto by BHP Billiton would have.”
Rio and BHP claim their joint venture is limited to mining and transport operations and will not affect how they price and sell iron ore to steelmakers. They would remain fully independent competitors and would sell separately the ore produced by their 50-50 joint venture.
They say the benefit, they claim, comes from making the companies’ overlapping operations in the Pilbara work as one system. Simply rationalising their railways, ports, equipment, workers and expansion programmes would save them billions of dollars. But in the mining and steel industries the idea of a production only joint venture elicits the same cynical guffaws that followed Xstrata announcement last year that it sought a merger of equals with Anglo American.
Mr Ian Christmas director general of the World Steel Association said a debate has emerged about whether such a powerful joint venture could possibly have no effect on pricing or competition, whether intended or not. Rio and BHP already control 19% and 17% respectively of the seaborne iron ore market. Even routine decisions by the joint venture to delay expansion programmes could affect iron ore supply and prices.
Mr Gordon Moffat director general of the European Federation of Iron and Steel Industries said “Officially there will be no marketing activity jointly. But this is a situation where there are combined production facilities, where you know what production levels will be for a certain year, and where you are both negotiating with the steel companies. Of course they will co-ordinate information on what prices they can get what volumes particular steelmakers want. I simply cannot believe they can provide guarantees that they will not.”