Bloomberg News

BHP, Rio Merger Should Be Blocked, Steel Group Says

November 21, 2007

(Corrects ranking of JFE Holdings Inc. (5411) to world's third- largest steelmaker in third paragraph in story moved Nov. 19.)

BHP Billiton Ltd. (BHP)'s proposed takeover of Rio Tinto Group would create a ``virtual'' monopoly in iron ore and should be blocked, the International Iron & Steel Institute said.

``It is vital that the competition authorities in the EU, USA, China, Australia and Japan also recognize the threat that this merger poses to the interests of steel consumers and the general public,'' the Brussels-based body, whose members include 19 of the world's 20 biggest steelmakers, said on its Web site today. The alliance ``should not be allowed to proceed.''

The statement came the same day as BHP Chief Executive Officer Marius Kloppers began a tour of Asian customers. Japan's JFE Holdings Inc., the world's third-largest steelmaker, and mills in China expressed opposition to BHP's $131 billion takeover plan today because the alliance would supply more than a third of the world's iron ore, a key part of steelmaking.

``The merger will be harmful to the fair trade of iron ore and high-grade coking coal,'' Hajime Bada, president of JFE's steel division, said before meeting Kloppers. The takeover would create an iron-ore ``monopoly,'' the China Iron & Steel Association said.

Combining BHP, the world's biggest mining company, with Rio would create a group that has 38 percent of the market in seaborne iron-ore trade, according to Australia & New Zealand Banking Group Ltd. Brazil's Cia. Vale do Rio Doce has a similar share. The alliance would also supply the most energy coal, aluminum and copper.

Getting Worse

``Iron-ore suppliers already have a structure that is pretty dominant, and moving from three to two major suppliers makes it worse,'' Rob Craigie, a senior analyst at FW Holst & Co. in Melbourne, said by phone.

Bada, who chairs the Japan Iron & Steel Federation, told reporters the potential acquisition would also harm the copper and aluminum trade. BHP proposed a three-for-one stock offer for Rio Tinto earlier this month. Kloppers has said if he wins Rio there would be ``no economic harm.''

The China Iron & Steel Association said today that ``over- concentration of iron-ore producers is unfair to the steelmakers and will harm a long-term development in trade,'' according to a statement on its Web site. The association represents most of China's large state-owned steel mills, including Baosteel Group Corp., the largest producer.

Price Rises

Iron-ore prices have tripled in the past five years on Chinese demand. Next year, contract iron-ore prices may rise 50 percent, Macquarie Group Ltd. said last month.

Rio Tinto (RIO), based in London, closed 3.7 percent higher at A$136 on the Australian Stock Exchange in Sydney. BHP rose 44 cents, or 1.1 percent, to A$41.59. The companies fell as much as 3.1 percent and 3.6 percent respectively in London trading.

Chinese customers, including Aluminum Corp. of China Ltd. and China Shenhua Energy Co., have also raised concerns a BHP- Rio combination would wield too much pricing power. Shougang Corp., China's ninth-biggest steelmaker, said Nov. 9 that a merger of the two mining companies may boost iron-ore prices.

Still, JFE's Bada said Japanese steelmakers are unable to pursue objections to the takeover through the country's Fair Trade Commission, which doesn't cover the impact from changes of control to overseas companies that do business in Japan.

``The situation is different in other countries, especially the European Union,'' Bada said. ``Japan needs that sort of system to complement the FTC rules.''

More Meetings

Kloppers was also scheduled to meet Japan's largest trading houses and blast-furnace makers during his visit to Tokyo, Bada said. BHP's Samantha Evans, a spokeswoman, declined to confirm the meetings or the rest of Kloppers's itinerary.

``I don't see it having a short-term effect on iron-ore prices,'' said David Radclyffe, an analyst at Southern Cross Equities Ltd., referring to the merger. Radclyffe is predicting a 35 percent increase in iron-ore prices next year.

The combination of BHP and Rio would allow the new company to produce more iron ore at a lower cost, Kloppers said Nov. 17. The proposed union was ``a powerful proposition for customers,'' he said.

To contact the reporters for this story: Yoshifumi Takemoto in Tokyo at ytakemoto@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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