Proposed Joint Venture Between BHP Billion and Rio Tinto is Against European Interests, Says Eurofer

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Researched by Industrial Info Resources (Sugar Land, Texas)--The European Confederation of Iron and Steel Industries (Eurofer) (Brussels, Belgium) has come out strongly against a proposed joint venture of BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) and Rio Tinto plc (NYSE:RTP) (London, England), claiming it will lead to decreased competition and additional mining developments.

Under the proposed joint venture, the two companies will assess the supply and demand balance for iron ore and allow full access to each other's output. Additionally, the two companies plan not to restrain each other in negotiations in which prices and volumes are fixed.

Eurofer is concerned because the steel industry is already dominated by Brazilian miner Vale SA (NYSE:VALE) (Rio de Janeiro, Brazil), with BHP and Rio Tinto running second and third in terms of iron ore production. Eurofer Director General Gordon Moffat said in a statement that "the joint venture will restrict competition in relation to the fundamental competitive parameters in the seaborne iron ore markets: price, volume and quality."

Causing further concern to Eurofer is the historically high price of iron ore in the marketplace, which reached an all-time high in 2008 and which has seen China paying more than $100 per ton for ore, with spot ore prices rising over a consecutive five-week period. Further price increases could weaken China's position in negotiations.

The proposed joint venture comes just 12 months after BHP launched a hostile bid for Rio Tinto. BHP eventually dropped the bid in November last year, supposedly because of Rio's debt position and regulatory hurdles. At the time, however, the European Commission had said that it had "serious doubts" about the effects of the takeover bid, as this would give the company control of more than one-third of seaborne iron ore exports.

Mr. Moffat said that "the proposal to create this joint venture will have the same impact on the iron ore market as would have had the original full merger proposal comprehensively objected to by the Commission last year." Eurofer would prefer that the Commission review the proposed joint venture under regulations relating to mergers rather than antitrust regulations, as there is a strict timeframe for merger investigations, while antitrust investigations have no time limits.

In August this year, BHP indicated that a binding joint venture between the two companies could be expected to be realized by the middle of 2010. There is speculation that an agreement may be reached as early as December 5 this year.

On June 5, BHP and Rio Tinto signed a non-binding agreement to establish a production joint venture that covered both companies' iron ore assets in Western Australia. Initially, up to 15% of production in Western Australia was scheduled to be sold by the joint venture, independent of BHP and Rio Tinto. However, after further discussions, the two companies have decided not to proceed with the marketing scheme and that all production under the joint venture will be sold separately by BHP and Rio Tinto.

Eurofer was founded in 1976 and represents 100% of the steel production in Europe. The members report an annual turnover of 190 billion euros ($282.4 billion), producing 200 million tons of steel per year. Members include companies such as ArcelorMittal (NYSE:MT) (Luxembourg) and ThyssenKrupp AG (ETR:TKA) (Dusseldorf, Germany).

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