Rio-BHP-China: Rio Tinto and BHP Billiton are entering unchartered territory. Senior Chinese officials say the Australian iron ore joint venture agreed earlier this month between the two miners, which helped scupper a tie-up with Chinese miner Chinalco, looks monopolistic and could be vetoed. But for all the rhetoric, China’s threats looks limited.
Regulatory authorities – not just in China – have a legitimate interest in scrutinising a deal which strengthens the relationship between two of the industry’s largest producers. Yet Rio and BHP’s proposed joint venture is, under the current terms, designed only to reduce production costs. The two miners will continue to operate separate marketing arms and compete against one another to sell iron ore. So there shouldn’t be a lessening of competition. If anything, greater production efficiencies between BHP and Rio could even bring down iron ore prices.
Of course, if BHP and Rio do collude to keep up prices, regulators all around the world would have ample reason to impose stiff fines. But otherwise, there would appear to be no real basis for action.
China is understandably under public pressure to try and block the deal after Chinalco lost out to BHP. But it must tread carefully. The iron ore market isn’t perfect. Power is concentrated on both the buy and the sell side. Rio and BHP, together with Brazil’s Vale control 70 per cent of global sea-borne iron ore production. But China accounts for over half of the consumption.
Even if Beijing wants to play tough, it might not be in its own interest. China is so dependent on BHP and Rio that it can’t shut them out. Meanwhile, fining them might not achieve much. For a start, it’s not obvious how Beijing would extract the money. Even if the miners paid, the extra cost might just be passed back to the consumer through iron ore prices. This row isn’t over yet but, at present, the risks to Rio and BHP don’t look too high.
