Of all the things that will or could happen in Australian business this year, the $US116 billion tie-up between BHP Billiton’s and Rio Tinto’s iron ore operations in Western Australia looms as the most important one that we know of, so far.
BHP will pay Rio $US5.8 billion to equalise its interests at 50%, once approvals are given.
Then the two claim they will be able to generate $US10 billion in cost and capital savings over the next few years.
The proposed link up will, if approved, increase Australia’s role in the rapidly growing world steel sector where China (and soon India) are emerging as the major forces and in need of huge amounts of iron ore.
The savings seen by the two groups are equal to around 1% of annual GDP in Australia, a significant saving, if they can be achieved.
Much of it will come in lower capital charges for money that doesn’t have to be spent duplicating assets, so the savings are not actually greater efficiencies, more lower capital spending in future years.
It’s a production joint venture; the sales side was dropped late last year when it became apparent it wouldn’t fly through the various hoops being erected by opponents and regulators.
But it still is significant: in fact it has immense global significance because it could pioneer similar arrangements in industries where there are two or three closely located competitors.
But first it has to win approval from regulators and convince buyers that it is in everyone’s interests
That’s why the European Commission probe, announced on Monday, was expected.
BHP and Rio sent submissions to the European Commission and the Australian Competition and Consumer Commission and are making filings in other relevant jurisdictions.
According to BHP and Rio, the European Commission will review the production joint venture under Article 101 (formerly Article 81).
EC regulators will probe whether the deal between the world’s second and third largest iron-ore producers is a restrictive business agreement.
Competition officials at the EC said they would look at the tie-up’s effect on the market for seaborne iron ore.
The commission did not say how long the probe might take, although it did say that it was a “matter of high priority”.
The Brussels-based EC raised objections to the BHP takeover bid for Rio, a major reason why the two companies decided to combine the iron ore businesses, and then drop the joint marketing capability for the JV.
Leading global steel industry bodies will lodge formal objections with the Commission.
World Steel (the industry group for around 85% of the world’s steel makers) has already signalled its opposition to the joint venture saying:
"It still carries a great danger of restricting competition thus reducing consumers’ choice as it would create an entity whose controlling position in the world’s seaborne iron ore market would become even less fair than the unsatisfactory position that exists today.
"The proposed JV would simply turn an oligopoly of three players into a duopoly.”
Individual steelmakers in China, Japan and Europe have all opposed the tie-up between the mining giants, saying the venture will tilt the global iron ore market further in favour of three producers who already dominate the seaborne iron ore trade, BHP, Rio, and the biggest, Vale of Brazil.
BHP and Rio have argued strongly that the deal is a “production-only joint venture” that will bring together overlapping operations, while keeping the marketing of iron ore separate.
Lawyers for Rio and BHP argue the joint venture proposal is fundamentally different from the merger proposal which the commission raised objections to in 2008.
Germany’s Bundeskartellamt, the country’s domestic competition regulator, will also consider whether the Rio-BHP transaction raises competition issues under German merger rules after being formally notified of the proposal by the two companies.
The investigation comes as price talks continue on new contracts for 2010-11 with Japanese and South Korean steel mills and BHP, Rio and Vale.
After last year’s bitter dust up with the Chinese steel industry and the detention of four Rio executives, the big three have sidelined China and will strike a deal with Japanese and South Korean mills (as they did last year).
Chinese buyers will have to take the new contract price, or continue buying in the spot market where prices are now more than $US120 a tonne plus freight, double the $US61-$US62 current contract price.
The new contract price could end up around $US100 a tonne plus freight, which would see a huge surge in our export income and a jump in our terms of trade back to 2008 levels and perhaps beyond.
All these strands in the steel industry are interlinked: there’s considerable national good in the joint venture arrangement for Australia.
