BHP and Rio Tinto announced last week that they had dropped plans to create a joint marketing company that could have sold as much of 15% of the iron ore production from their Pilbara 50/50 joint venture in Western Australia. For now the companies say they will continue to market the ore separately and seek operational cost savings via their joint venture holdings. The reason appears to be quite simply market resistance. Buyers particularly in China reacted negatively to what they saw as a further erosion of competition among the supply base. BHP and Rio are numbers two and three among global iron ore suppliers behind Brazil’s Vale. Estimates of their combined value in the JV have been put at $116-126bn and production is expected to reach 325mn tons next year.
Although the JV was facing opposition in Europe and Japan, it was China that was the most adamant that they would use their new competition law to block it. According to a Reuters report in the Economic Times, China’s law, modeled on similar laws in the US and Europe was passed in 2008. It includes a provision for jurisdiction over “any monopolistic behavior outside the borders of the People’s Republic of China that leads to the elimination of competition or has a restrictive influence on the domestic market”.
Anyone that believes Rio and BHP won’t be talking to each about pricing behind the scenes is probably living in cloud cuckoo land. When you are sitting on an asset worth over $100bn why wouldn’t you talk to your partners about maximizing revenues? This year’s negotiations have been a farce, and next years aren’t shaping up to be any better.