ACCC decision on Rio-BHP JV due July 22

The Business of Mining - thebusinessofmining.com | June 22, 2010 | 8:46 am

“Australia’s competition watchdog has set a July 22 deadline to review a proposed $US116 billion ($A132.8 billion) iron ore joint venture between BHP Billiton Ltd and Rio Tinto Ltd.

The Australian Competition and Consumer Commission, which began its probe in December, had been due to rule on the joint venture on May 27 but postponed its decision to seek more information from the miners without giving a timeframe for a ruling.

The commission’s website said on Monday that July 22 was now a ‘proposed date’ for an announcement on its findings.”

Source: Business Spectator, June 20 2010

Observations:

  • The Joint Venture is planned to achieve $10 bln in synergies (NPV, thus spread over a long period), a large part of which is achieved by combining transportation infrastructure from the remote Pilbara mines to the iron ore port.
  • Although the Australian watchdog will come with a decision this summer, the European Commission will take much more time to decide on the effects of the JV for the European market.
  • The most likely result from the negotiations of the miners with the government will be an approval of the JV with the condition of a royalty increase.

Implications:

  • Both of the miners are strongly committed to getting the joint venture operational quickly, as they need the additional capacity from the mines in order to retain their market share in the coming years. The proposed increase in resource tax has further increased the necessity of reducing fixed costs in a joint venture agreement.
  • The joint venture between Rio Tinto and BHP Billiton would further increase the risk of implicit pricing arrangements in the iron ore industry. In order to please the regulators, the miners have decided on individually marketing the iron ore. However, organizational ties among the oligopolic producers reduce the transparency of the market. This might be a reason for the European watchdog to impose stricter constraints on the deal.