Steelmakers Threaten To Block BHP-Rio Deal

by Philip Morton, Investors Offshore.com

15 June 2009

Steelmakers in Europe, China and Japan oppose a plan to combine the Western Australian iron ore operations of the world's No. 2 and No. 3 iron ore miners, BHP Billiton Ltd and Rio Tinto PLC, into a 50-50 joint venture. EU opposition to BHP Billiton's hostile USD68bn bid for Anglo-Australian rival Rio Tinto forced it to abandon the takeover attempt last year. China has threatened trade sanctions.

The European steel industry federation (Eurofer) said that the effects of the joint venture would be not much different from those that would have resulted from last year's takeover bid and are calling on the European Commission to use its regulatory powers to ensure that competition concerns are addressed. The earlier take-over attempt was referred to the Commission competition authorities at Eurofer’s insistence and BHP withdrew its request for regulatory approval shortly after the Commission made a statement of objections.

BHP and Rio Tinto are estimating savings of at least USD10bn as iron ore prices slide and, in addition, BHP will pay Rio Tinto USD5.8bn to equalize its contribution to the joint venture. Rio Tinto has withdrawn recently from a USD19.5bn deal with China's Chinalco amid vociferous shareholder opposition and Australian concerns about foreign domination of its mineral resources. Rio Tinto is highly leveraged with USD38.7bn of debt and needs to address the issue urgently. BHP and Rio Tinto maintain that the joint venture is for production only and BHP Chief Executive Officer Marius Kloppers said the separate and highly competitive sales and marketing operations would make the deal less “onerous” than a takeover.

The Japan Iron & Steel Federation, in a statement on its website, doubted this contention about marketing competition between the two joint venture partners and objected strongly. Japanese Fair Trade Commission head, Takahide Matsuyama, said, 'If necessary, we will conduct an investigation that could also include legal action.'

The China Iron & Steel Association in a statement on its website stated that, with China's Ministry of Commerce backing, the BHP-Rio joint venture would be reviewed by China's competition regulators and, if the strong opposition from the Chinese side is disregarded, trade sanctions may be imposed by the government on the joint venture's future dealings in China. Press commentaries in China accused Australia of encouraging the joint venture as a way of warding off the threat of a Chinese takeover. Australian Resources Minister, Martin Ferguson, said in an Australian radio interview, 'I actually think the joint venture has synergies of benefit to Australia, in terms of improving productivity, which represents a better return on our natural resources to the Australian community.'

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