BHP, Rio JV hopes to sidestep antitrust concerns

LONDON (Reuters) - Mining heavyweights Rio Tinto and BHP Billiton face tough anti-trust scrutiny on plans to link up their Australian iron ore mines, but a shrewd structure to the joint venture could sidestep some concerns.

Rio and BHP announced on Friday a deal to forge a 50-50 joint venture to produce the raw material to make steel.

Analysts said lessons were gleaned last year from BHP's failed hostile takeover bid for Rio, during which European regulators said a merger may result in too much concentration in the iron ore sector.

"BHP Billiton has no doubt learned from last year's regulatory process and they must be aware of the remedies requested by the EU so I suspect that the structure which was outlined this morning is aimed at overcoming these potential remedies," said analyst Luc Pez at Oddo Securities in Paris.

Rio and BHP have split off their sales organizations from the joint venture, arguing that will lessen worries about an impact on pricing.

The rising importance of spot sales and an eroding of the traditional benchmark system, in which the three biggest iron ore producers negotiate yearly contract prices, could also bolster their case, analysts said.

STEELMAKERS TO FIGHT

On the face of it, a combination by world's second and third largest suppliers of would set anti-trust bells ringing, since together with No. 1 Vale they account for nearly 70 percent of traded iron ore.

BHP and Rio also account for nearly 80 percent of output from Australia's key Pilbara region. The whole of Australia accounts for nearly a fifth of global iron ore output.

Steelmakers opposed a proposed BHP takeover of Rio last year and vowed on Friday to renew the fight against BHP and Rio linking up their iron ore.

"We are again calling on competition authorities to seriously examine the obvious implications for future pricing and the competitive environment for iron ore," said Ian Christmas, the director general of the World Steel Association, whose members account for 85 percent of global steel output.

The proposed separation of marketing departments did not dampen their concerns, said association official Nicholas Walters.

"A key mechanism for price decisions is cost of production and both of them would have exactly the same information. I think we would need substantial assurances on genuine separation of marketing and pricing negotiations."

Analysts said that the deal would not escape thorough inspection by regulators.

"Regulators in China, Japan and the EU in particular, will take a long, hard look at the deal as it should increase Australian miners' ability to dictate the structure of the iron ore market," said analyst Nick Hatch at ING.

The European Commission is expected to be the strongest anti-trust hurdle for the JV after saying last year it had sweeping concerns that BHP's hostile takeover bid for Rio would result in higher prices and reduce choice for customers.

"VERY ACHIEVABLE"

But BHP struck a confident note.

BHP Chief Executive Marius Kloppers said the JV structure, leaving two separate marketing units, addressed the main concern brought up by the EU when a full merger was discussed.

"Given that we, in looking in how we can design a joint venture, knew what the concerns were, gives me a lot of comfort that this deal is very achievable," he told a conference call.

"I do want to point to the fact that the EU is sitting on a relatively fresh data base. In the processes for the EU, one would hope that there would be slightly less time before we get an answer this time around," Kloppers added.

BHP waited 10 months for EU approval of the Rio bid, before ditching the takeover due to the global downturn last November.

The EU would also have to take into account the evolving structure of the market, which is moving away from the traditional benchmark system in which the big three producers hammer out annual prices each year with steelmakers.

Rio Tinto sold half of its output in the first quarter on the spot market, in which supply and demand forces set prices.

"We think regulators would view favourably the shift in market pricing dynamics. An ever increasing portion of iron ore traded on spot markets... suggests individual producers have less influence over pricing," said analyst Michael Rawlinson at Liberum Capital.

(Reporting by Eric Onstad, Editing by Sitaraman Shankar)