BHP and Rio Tinto have scrapped a major part of their proposed iron ore joint venture that was first revealed in early June.
The duo have ended planning to jointly market iron ore from the joint venture between their huge iron ore mines in the Pilbara region of Western Australia.
That will now be a production joint venture only.
The proposed marketing link up has drawn criticism as being anti-competitive, especially from steel groups around the world, and attracted the attention of the European Commission’s tough competition regulators.
The idea of the two giants joining forces has also upset Chinese steel mills, the world’s largest consumers of iron ore, who saw the alliance as anti-competitive.
At its annual meeting in Beijing this week the World Steel Association also revealed strong opposition to the proposed joint venture.
The latest change, which came as a surprise, is seen as trying to meet these concerns.
Under the terms of the agreement, up to 15% of the joint production was proposed to be sold jointly, but that could have been increased significantly.
Based on expected production of 320 million tonnes by the two groups, that 15% could have totalled 48 million tonnes, which would have made the joint venture marketing team the country’s third biggest exporter, just ahead of the expanding Fortescue Metals (around 38 million tonnes now).
Production sold by the joint venture could have been as high as 60 million tonnes a year by 2012.
Rio and BHP in a joint statement late yesterday said production now would be marketed separately
"The two companies believe that this change will clarify the nature of the JV for customers and emphasise its focus on realising significant production and development synergies," the statement said.
The final agreement on the joint venture is expected by December 5.
No mention was made of the $5.8 billion payment BHP was to make to Rio Tinto which was revealed in the June 5 agreement.
The joint venture emerged as an alternative for Rio to the Chinalco deal.
Rio had scrapped a proposed $US19.5-billion tie-up with Chinese metals group Chinalco two weeks prior to announcing the deal with BHP on June 5.
Coincidentally the announcement ending the marketing joint venture came a day after Rio revealed better than expected September quarter iron ore production and sales figures and lifted its 2009 iron ore production guidance by 5%-7.5% to between 210 million and 215 million tonnes.
The statement said "Following discussions between the two companies, Rio Tinto and BHP Billiton have decided not to proceed with the joint venture marketing activity.
"As a result, all production from the proposed joint venture would be marketed separately by Rio Tinto and BHP Billiton.
"The two companies believe that this change will clarify the nature of the JV for customers and emphasise its focus on realising significant production and development synergies.
"Rio Tinto and BHP Billiton are pleased with progress towards definitive JV agreements and expect to finalise these agreements on schedule".
In the copy of the agreement lodged with the ASX, a section allows the owners to jointly market iron ore through the joint venture and independent of the owners.
The agreement specifically allowed the joint venture to establish a marketing company and a minimum of 10% and up to 15% of the annual production on the spot market.
Section 4.8 of the agreement specified the rules.
"The Owners will agree to co-market certain of their respective volumes. When the Owners do so, the following principles will apply:
"(a) the JV will establish a separate marketing company;
"(b) 10% of production and not more than 15 percent (as approved by the Owners) will be sold jointly on the spot market or otherwise as agreed by the Owners;
"All joint marketing undertaken by the JV will be appropriately ring fenced from the separate marketing activities of the Owners."
Marketing into the spot market means it will be in competition with the BHP and Rio where the steel mills are not purchasing more and more of their iron ore, especially in China.
But selling that much iron ore into the spot market will help BHP and Rio indirectly to control spot prices (by varying their sales, they could have moved spot prices up or down).
Having three groups selling iron ore into the global market from the two owners (all three independent of each other) could be seen as a way of keeping the lid on prices and assuaging concerns in the minds of steel mills in China and elsewhere.
But if the Joint venture stopped selling iron ore for a period of time, would that see prices on the spot market rise because of the contraction in supply?
That potential has been recognised by BHP and Rio (no doubt with some nudging by regulators and major buyers).
BHP shares rose 50 cents yesterday to $37.90. Rio shares continued their solid run and were up $1.54 at $64.79
And reports from London last night suggest that BHP and Rio could be seeking price rises of 30% or more in iron ore contract talks that start today in China.
Vale of Brazil will be seeking similar rises.
Higher coking coal prices will also be sought: the reports say the likes of BHP could seek increases of 30%-40%.Higher prices for iron ore and coking coal would go someway to reversing the big price cuts for 2009.
Chinese mills will strongly resist any increase and have been claiming there’s too much steel and iron ore and prices should fall.
