Home > Market change > Rio concedes BHP ore merger faces hurdles

Rio concedes BHP ore merger faces hurdles

October 6, 2010

“Rio Tinto has conceded that regulatory obstacles are mounting against its ambitious plans to merge its Australian iron ore operations with those of BHP Billiton, its competitor.

The admission came amid growing speculation that the proposed joint venture was being stymied by regulators amid strong opposition from the global steel industry, which fears the plan would give the two multinational miners increased pricing power.

Competition regulators around the world have expanded their scrutiny of the joint venture and pushed back deadlines on their rulings. One Australian media report has claimed the joint venture, first proposed in June 2009, was ‘dead’.”

Source: Financial Times, October 5 2010

Observations:

  • The JV for Pilbara was planned in order to produce more tonnes of iron ore faster, giving both Rio Tinto and BHP Billiton a competitive advantage over competitor Vale.
  • Australian iron ore accounted for 42% of the total iron ore imports of China in 2009. Rio Tinto ships ore from the Western Australian complex via various ports in Dampier and Port Walcott, while BHP uses a port facility in Port Hedland.

Implications:

  • Regulatory approval is unlikely to be given as the production JV would give the companies too much power in the iron ore market in the region. The dominant position of the big 3 and the strong ties the JV would give BHPB and Rio Tinto would increase the risk of price fixing.
  • European regulators typically approve a merger if the new company does not exceed a market share of 40%, and set conditions in case the share is between 40% and 50% depending on the synergies the companies can achieve. American regulators evaluate the level of consolidation in the industry, using the so-called HHI-index. In both systems the JV would certainly exceed the allowable thresholds for parts of the iron ore market. Apparently the Australian regulators agree with this view.

©2010 | Wilfred Visser | thebusinessofmining.com

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