Japan hopes EU will heed its fears over BHP/Rio

TOKYO (Reuters) - Japan's antitrust watchdog is expected to raise objections soon to BHP Billiton's (BHP.AX) $78 billion offer for Rio Tinto (RIO.AX), hoping to sway European regulators vetting the global mining sector's biggest takeover.

Japan does not want to see its $200 billion steel industry at the mercy of a single resources giant that would control well over half the country's iron ore imports and could use its muscle to increase prices for the raw material.

While Japan's Fair Trade Commission (FTC) lacks the legal clout to stop a takeover, it hopes its objections, which could be aired as early as next week, will influence the debate in Europe.

BHP (BLT.L) has already won approval from the United States and Australia for its all-share offer, rejected by Rio (RIO.L), as too low, but it needs the blessing of Europe, which is concerned the deal may lead to higher prices.

"The fact the EU has raised concerns means Japan has already been successful in influencing the debate," said Akinori Uesugi, a consultant to law firm Freshfields Bruckhaus Deringer.

"BHP initially didn't care about Japan, but has recently changed its stance and, I think, will come to the table with Japan to negotiate remedies next month ..." said Uesugi, a former senior FTC official.

BHP has cooperated with the Japanese regulator, a spokeswoman for the miner said.

"The FTC requested information. We supplied that and we are in full compliance with our legal obligations," she said, declining comment on what Japan could do to stymie a deal.

An industry analyst, who asked not to be named because of company policy, said there was very little Japan could do legally to prevent a merger, but given the importance if its market, BHP would probably try and meet some of Tokyo's concerns.

WEAK DEMAND, OUTPUT CUTS

BHP says a merger with Rio would help consumers by allowing the combined group to accelerate expansion of iron ore projects and boost output.

But Asian steelmakers, including world No.2 Nippon Steel Corp (5401.T) and third-ranked JFE Holdings (5411.T), fear a mega-merger that would control more than a third of the world's seaborne trade in iron ore, the main raw component in steel.

They have been hard hit this year as iron ore costs nearly doubled, but their steel prices rose only 40 percent. The sector is bracing for production cuts as car makers and builders face weaker demand with Japan in recession.

JFE is cutting output by almost a tenth, or 1.5 million tonnes, in October-March.

BHP has not made it a pre-condition of its Rio offer to win approval from Japan, China or South Korea, even though these markets are home to four of the world's top-5 steelmakers and buy about 90 percent of the iron ore exported from Australian mines.

Japan accounts for 20 percent of BHP's global turnover, and its steelmakers are particularly vulnerable to a mega-merger, they say, because of their reliance on high grade ore and coking coal produced by BHP and Rio.

Kozo Kawai, a lawyer at law firm Nishimura and Asahi and who represents Japanese steelmakers, said BHP and Rio account for more than 70 percent of Japan's imports of top-grade coking coal, and 65 percent of lump ore imports.

BHP/Rio account for 60 percent of Japan's total iron ore imports, compared to just 10 percent in the EU.

"Once they merge, they'll soon abandon costly expansion plans on infrastructure, tighten supplies and raise prices," said an executive at a big Japanese steelmaker, who talked on condition of anonymity because of the sensitivity of the issue.

PRICE WARNING

Japan's strategy may be to stress that high iron ore prices in Asia also mean high prices for EU steelmakers, too.

Global steelmakers and miners accept the same prices for iron ore and coking coal in annual contracts, so BHP and Rio's price deals are likely to be matched by Brazil's Vale (VALE5.SA), a major EU supplier.

"There's a chance EU regulators will share Japan's concerns if Japan stresses that point effectively in its ruling," said Kimitoshi Yabuki, a lawyer at Yabuki Law Offices.

But, as regulators tend to focus specifically on the impact in their own market, the EU and Asia may disagree on what BHP must do to get its deal through.

"Even if the EU is happy to accept certain (BHP) remedies, Japan may not be, and could demand BHP commit to further divestments," said Uesugi.

Regulators are expected to discuss in early January what concessions BHP should offer.

The Australian Financial Review reported on Thursday that the EU's ruling on the BHP/Rio deal, expected on January 15, could slip by three weeks as BHP missed a deadline to offer asset divestments.

(Additional reporting by Nick Trevethan in SINGAPORE; Editing by Ian Geoghegan)