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Steelmakers Fight Iron-Ore Venture

11 december 2009

Steelmakers around the world are lining up to defeat a proposed joint venture of the iron ore operations of miners Rio Tinto PLC and BHP Billiton Ltd., charging that the proposal is a rehash of their 2008 failed merger and would allow the two companies to control supply and drive up ore prices, Wall Street Journal reported.
Rio Tinto and BHP Billiton say the joint venture, which would involving sharing production expenses at their adjacent mines in Western Australia, could generate combined savings of nearly $10 billion and that steelmakers may see cheaper iron ore as a result.
Steelmakers including Tata Steel of India, China's BaoSteel and Posco of South Korea said they oppose the venture.
The World Steel Association, which represents most every major steel maker, asked this week that the European Union reject the proposed joint venture.
The steel group says the venture "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."
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. 
This month, the European Union is expected to start investigating the proposed venture, and may decide whether to approve it as early as next summer.
European regulators were highly critical of the proposed $142 billion hostile takeover of Rio by BHP in 2008, which would have been the world's biggest merger. 
While European regulators didn't outright quash that deal, they outlined harsh conditions required to gain approval. The deal ultimately fell apart when the collapse in commodity prices made the purchase price unworkable. 
To gain regulatory approval for their proposed joint venture, BHP and Rio will have to convince regulators that they won't share pricing information or strategy when negotiating with steelmakers for ore purchases. The companies already have agreed to scrap a marketing plan that would have allowed them to market a portion of the iron ore jointly. 
"This is a production joint venture only," said Robin Walker, a spokesman for Rio Tinto. "It will enable BHP Billiton and Rio Tinto to deliver more ore to the market faster and at lower cost by unlocking the synergies between their two businesses. There will continue to be complete independence in their marketing and commercial strategies, as is the case today."
BHP says the joint venture will benefit steel makers because it will allow both miners to operate more efficiently and produce more iron ore. 
Steelmakers aren't buying that reasoning. 
"I find it inconceivable that the two parties when they are in negotiations to sell iron ore to steel companies would not know what the production was, what the capacity was or how much was going to market with whom they would market," said Gordon Moffat, director general of the European Confederation of Iron and Steel Industries. "Therefore it seems that it would be absurd to argue there is no joint commercial activity."
The venture – which would involve almost all the ore produced by the two companies—could reduce costs through shorter trips by railroad and better allocation of port capacity, combining adjacent mines into single operations and allowing the two to work together to develop expansion projects. 
Mining analysts say that while BHP and Rio face an uphill battle to gain approval, they could convince regulators that production and distribution would be improved and steelmakers would benefit. That would counter the charges that Rio and BHP were forming a cartel and disrupting free competition, according to mining analysts for the Royal Bank of Scotland.