The Competition Issues in Iron Ore

SYDNEY — Mining giant BHP Billiton’s $128-billion (U.S.) bid for rival Rio Tinto could raise competition issues in iron ore, Australia’s antitrust regulator said on Friday.

With mines across Australia’s ore-rich Pilbara region, Rio Tinto and BHP are the world’s second- and third-largest iron ore producers, respectively, behind Brazil’s Vale, and analysts reckon a combined group would control about 35 per cent of the world’s seaborne traded iron ore.

In a nine-page “statement of issues” ahead of its October 1 ruling, the Australian Competition and Consumer Commission (ACCC), which can order companies to sell assets if it thinks they have too big a hold in one sector, highlighted the likely impact of a deal on the iron ore trade and, in particular, on Australian steelmakers, but saw no major competition issues in copper, gold, uranium, bauxite or alumina.

“I don’t think that’s a surprise to the two companies, particularly BHP … that iron ore would be the one area the regulators would be looking at very closely,” said Ken West, a partner at Perennial Growth Management.

“But the Pilbara is the one they don’t want to be tampered with. If the regulators don’t show flexibility, then the Pilbara could become a deal breaker,” Mr. West said.

The European Commission last month opened an in-depth investigation into BHP’s hostile 3.4 shares for each Rio share bid – which Rio insists is too low – with a list of sweeping price and competition concerns from iron ore to aluminum.

Regulators in the United States, where the proposed deal would have less market impact, cleared the bid last month. The EU has set a December 9 date for its ruling.

BHP has filed documents with competition authorities in China, where new anti-monopoly laws have been introduced.

A BHP spokeswoman said the company was “continuing to engage constructively with the commission on this matter.”

“The ACCC’s market inquiries indicated that the proposed acquisition may raise competition concerns in relation to the global seaborne supply of iron ore lump and iron ore fines,” the watchdog said in a statement posted on its website.

It warned that less competition would likely drive up global iron ore prices, pushing up costs for Australia’s steelmakers.

“In particular, Vale would be the only other supplier involved in annual benchmark price negotiations,” the ACCC noted.

This year, BHP and Rio won identical prices for their ore at prices higher than Vale after negotiations with customers from Asia steel mills.

The China Iron and Steel Association said this month it opposed BHP buying Rio, saying a combined entity would monopolize a large portion of the supply of much-needed ore and hurt consumers. BHP argues a combined group would control 27 per cent of global seaborne traded iron ore.

If BHP wins Rio, it would be the world’s second-biggest takeover after mobile phone giant Vodafone’s purchase of Mannesmann in 2000, and would create a $360-billion company – roughly the same size as Microsoft Corp.

By 0840 GMT, BHP shares traded in London were up 0.6 per cent at 16.80 pounds in a broader market up 0.9 per cent.