BRUSSELS (Commodity Online): European Union regulators say a plan by the world's No. 2 and No. 3 iron ore miners, Rio Tinto PLC (NYSE:RTP) and BHP Billiton Ltd. (NYSE:BHP), to combine some operations could damage competition.

A statement from the European Commission says it would investigate whether the companies' plan to pool iron ore mining in western Australia would affect the global prices or supply for iron ore transported by sea.

European steel makers complained last November that the mining combination could hike prices for iron ore, the key ingredient for the steel used to make cars, buildings and machinery. The EU executive set no deadline for the probe into whether the deal breaks EU antitrust rules forbidding restrictive business practices.

According to Suzanne Rab, Counsel in the Competition/Antitrust practice at Hogan & Hartson, the Commission's opening of proceedings is an investigation under the EU rules on restrictive practices.

“Although the opening of this probe does not signify that the Commission has evidence of an infringement of competition law, it signals that this arrangement is considered a priority area for inquiry by the Commission,” she said.

Rab has further informed that the Commission is examining an agreement signed in December 2009 between BHP Billiton and Rio to set up a production JV covering the two companies' entire Western Australia iron ore assets.

The Commission will examine the competitive impact on the market for iron ore transported by sea. Iron ore is the main component of steel and steel is itself a key input for the consumer goods, construction and automotive industries. Worldwide iron ore consumption is now on the rise, following a slump resulting from the economic downturn and is expected to increase in the short to medium term.

Against this background and where Rio and BHP are the second and third largest producers of iron ore in the world behind Vale of Brazil, the Commission can be expected to scrutinise in detail the effect of the JV on competition and future pricing.

So is this another in the series of competition series that has put question marks over big giants like Microsoft etc?

Rab says this is not the first deal between BHP Billiton and Rio that has raised red flags with the antitrust regulators. In 2008, the European Commission examined under the EU Merger Regulation a full merger between the parties. The transaction was abandoned in November 2008, against continued deterioration of global economic conditions. The European Commission said at the time that it had serious concerns about the competitive effect of the deal in the markets for compounds used to manufacture steel.

The present inquiry, however, concerns a different operation as the agreement combines only the iron ore production activities of the parties, leaving their marketing functions apart. The companies have said that the deal would increase efficiencies and that deliveries of iron ore would be sold independently through the respective companies’ marketing groups.

Both the companies have said they will co-operate with the Commission. The companies have maintained that both will remain different entities and will always be competitors. Synergy between the companies will be limited to production only, something many analysts feel is nothing but a strategy to avoid legal actions.

The JV takes place against a background where three companies, Vale of Brazil, Rio Tinto and BHP Billiton account for most of the iron ore sold worldwide and transported by sea. The Commission will examine whether the combination of the parties' production activities is the least restrictive means of achieving the benefits they claim in terms of synergies and efficiencies and whether these benefits will outweigh any harm to competition.

Doing business in the mining sector is risky and the Commission will have put to it arguments seeking to justify why the JV does not present a problem for competition.

The fact that there is no guarantee of finding ore, that ores can be located in difficult geographic regions, that commodity prices are fluctuating and that capital or debt come with strings attached will all weigh in to the assessment.

“This must be counter-balanced by concerns that have been raised by third parties fearing increased pricing power, particularly companies active in the steel industry where iron ore is a key input,” said Rab.

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