More Iron Ore: Rio/BHP JV Under Tough Scrutiny

MORE IRON ORE:

RIO/BHP JV UNDER TOUGH SCRUTINY

by Gail Rosenquist

Rio Tinto and BHP Billiton have just signed binding agreements to establish an iron ore production and shipping joint venture (JV) in the Pilbara region of Western Australia. The companies have told regulatory institutions that the deal would not cause further monopoly in the industry or lead to higher iron ore prices. They say it would merely bring more iron ore into the world market, at a lower cost.

In their announcement, Rio and BHP said that the JV encompasses all current and future Western Australian iron ore assets and liabilities and will be owned 50/50 by the two companies. It will deliver substantial synergies, they said. BHP Billiton and Rio Tinto placed the current net value of the production and development synergies at more than US$10 billion (100% basis).

The JV

The synergies are expected to come from: combining adjacent mines into single operations;reducingcoststhroughshorterrailhauls and more .efficient .allocations of port capacity; blending opportunities that will maximize product recovery and provide further operating .efficiencies; . optimizing future growth opportunities through the development of consolidated, larger and more capital .efficient . expansion projects, and combiningmanagement, procurement and general overhead activities into .a .single entity .

The .JV .plan originally was announced June 5 .in the form of .a .nonbinding .agreement; .on October 15, the marketing aspect of the proposal was eliminated . .This elimination was the onlymaterialchangetothebinding .agreement, . which was announced on .December .5 .

Under the .agreement, . up to .15% . of production was proposed to be sold by the joint venture, .independent .of Rio Tinto and BHP Billiton .

After discussing it further, the two decided not to proceed with the joint venture marketing . .As .a .result, all production from the proposed joint venture would be marketed .separately by Rio Tinto and BHP Billiton .

The two companies said that the change should clarify the nature of the .JV .for customersand .emphasize .itsfocusonrealizingsignificant production and development synergies .

The companies have filed submissions with the European Commission and the Australian Competition and Consumer Commission (ACCC) . .They expect to submit filings in other relevant jurisdictions shortly .

The .ACCC .said it hoped to announce .a .decision on the deal on Feb . .24, .2010; submissions can be made until Jan . .15 . .In .2008, .the .ACCC . approved the unfriendly takeover of Rio Tinto by BHP, making it unlikely that the body will rule against the new JV, said Warren Edney, .a . resourceanalystwith .RBS .Morgans,anAustralian stockbroker .

InFebruary .2008, .BHPBillitonhadlaunched an .all-out, .hostile bid for Rio Tinto, which rejected the .$147 .billion offer from BHP because it was “significantly” below value . .BHP finally abandoned its bid, saying turmoil in financial markets, .uncertaintyabouttheglobaleconomic outlook and regulatory concerns in Europe meant the deal was no longer in its shareholders’bestinterest . .BHPhadtowait .12 .monthsto make another offer . .

Although it is speculated thatACCC approval is likely, the JV faces significant opposition from steelmakers the European Union (EU), China, Japan, and South Korea, which fear the JV would give the second- and third-largest iron ore producers too much market power . Eurofer, the main lobby group for European steelmakers, said the JV would pose a pricing threat,according to Exec Digital . .Gordon Moffat, director general of Eurofer, said, “The JV will unavoidably lead to market concentration and an increase in pricing power of the combined company, which is unacceptable in competition terms .

“The joint venture which has been agreed upon . . . .will combine their production and infrastructure facilities and will unavoidably lead to market concentration and an increase in pricing power of the combined company, which is unacceptable in competition terms,”Moffat said .

The European Commission will review the JV under EU antitrust rules, which prohibit companies from fixing prices and sharing markets . With this new proposal, Marius Kloppers, BHP’s CEO, has stated publicly that the JV is structured with antitrust issues in mind and intimated confidence about approval . ThetwocompaniessaythataJVisfardifferent fromamergerbecauseitinvolvesonlyironore . The companies are busy divesting operations and making the deal as palatable as possible for regulators .

But Ian Christmas, director general of the World Steel Association, had this to say about the JV: “The recently signed binding agreement between Rio Tinto and BHP Billiton is not materially different from the proposal issued earlier this year . . . It still carries a great danger of restricting competition, thus reducing consumers’ choice . . . The proposed joint venture would simply turn an oligopoly of three players into a duopoly . “Competition makes a market strong and brings efficiency . Competition between steel companies has made the global steel market healthier and brought benefits for steel customers . .As a result, this has promoted growth in steel use, which serves society as a whole,” Christmassaid . “Weviewthisrevisedproposed joint venture as extremely harmful to the market,and we call for a very careful review . . . ”

A United Nations Conference on Trade and Development (UNCTAD) report said that last year, Vale,based in Rio de Janeiro,Brazil,and the world’s largest iron ore producer, shipped 32 .8% of the world’s iron ore; Rio Tinto shipped 18 .6%, while BHP Billiton’s share was 17 .1%, giving the thee major producers control of 68 .5% of the world market .Worldsteel, formerly known as the International Iron and Steel Institute, said the combination of BHP and Rio essentially would result in two producers controlling nearly 70% of the global market, bypassing Vale as the leading iron ore producer, ad making an already uncompetitive situation even more difficult for iron ore customers . According to The Wall Street Journal, steelmakers say that if the EU regulatory body fails to stop the proposal, they will try to halt it, using German and Austrian regulatory bodies . The China Iron and Steel Association (CISA) added its voice, saying that every country should unite in opposition to the “monopolistic”productionjointventure . “China, the world’s largest iron ore consumer and the world’s largest steelmaker,will,therefore,be left . . .between arockandahardplaceforbenchmarkironore price talks in the future,” a CISA official said, according to American Metal Market .

The association said, in an announcement published in the official China Metallurgical News, that the planned JV would harm competition and drive up global iron ore prices and that “customers across the whole world should oppose it as one,” according to Creamer Media’s Mining Weekly. China Daily News said that the move was conveying“ severe price pressure to domestic iron ore and steel companies”and plans were being made to respond .

“Chinesecompanieshavetoconcentrateand strengthenthebargainingpowerinpricenegotiationsbyintegratingnumeroussmallcompanies into several big strong players,” the news agency said . “Chinese industry has been considering the integrations,but must speed up . ”

Chinese Delegation to Brazil

China’s steel industry sent a high-level delegation to Brazil to gather support for a campaign to oppose the JV .The Financial Review newspaper said officials from CISA flew to Brazil seeking closer ties to Vale . “They have a common concern about the competition between Australia and Brazil,”an unnamed Chinese steel official was quoted by Capital Business as saying .“ForVale,the big market now is China because of what’s happened in Europe,” he added,referring to the impact of the global financial crisis . .Vale is concerned that the JV would corner the market .

China and Vale were said to be discussing ways to lobby the European Commission competition regulators .

“The recently signed binding agreement between Rio Tinto and BHP Billiton is not materially different from the proposal issued earlier this year... It still carries a great danger of restricting competition, thus reducing consumers’ choice... The proposed joint venture would simply turn an oligopoly of three players into a duopoly.”

Vale shoring up its customer base

According to Reuters, Vale is making efforts toimproveitsmarketshareinChina . .Itis planning to set up a regional distribution center in

China and will cut costs further by building 16 dedicatedore carriers,China Dailysaid .Italsois intalkstoestablishlong-termsupplycontracts with smaller Chinese steelmakers,China’s 21st

Century Business Herald was quoted as saying . More Iron Ore continued on page 9 Vale 32.8% Rio Tinto 18.6% BHP 17.1%

Shares of Seaborne Iron Ore Market 2008 %

Rio Tinto + BHP Other 35.7% 31.5% Source: Raw Materials Group quoted in UNCTAD Trust Fund on Iron Ore Information “Iron Ore Market 2008-2010”, Geneva June 2009