Miners throw down antitrust gauntlet: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Consolidation of the global mining industry is nearing its logical conclusion. For years, senior executives have predicted that the sector would in future be dominated by five or six large diversified companies.

The proposed "production joint venture" between BHP Billiton (BLT.L) and Rio Tinto (RIO.L), and Xstrata's (XTA.L) mooted "merger of equals" with Anglo American AA.L would, if consummated, make that a reality.

BHP, Rio and Anglo-Xstrata, together with a handful of other strategic players -- Brazil's Vale (VALE5.SA), Chile's Codelco, Russia's Norilsk Nickel (GMKN.MM) and U.S. Freeport McMoran (FCX.N) -- would dominate production and trading of bulk commodities (iron ore) as well as a host of other strategic materials (copper, ferro-alloys and platinum group metals).

For steelmakers, manufacturers and consumers, consolidation raises legitimate concerns about lessening competition and its impact on investment and pricing. Competition authorities in the European Union and elsewhere will subject the deals to intense scrutiny. The question is whether they can find legal grounds to block them.

SALAMI SLICING PROBLEM

Taken in isolation, none of the deals is objectionable, though the production joint venture between BHP and Rio comes close to the line and should be subject to especially close and ongoing surveillance. Regulators may struggle to find adequate legal grounds to block them. But the cumulative effect of a whole wave of consolidations is to make the industry significantly less competitive.

The issue is the familiar one of "salami tactics," first used to describe stealth takeovers by totalitarian parties in central and eastern Europe and later popularized in the British political satire "Yes, Prime Minister." Fictional Prime Minister Jim Hacker's chief scientific adviser shows that his boss will never reach a point at which he is prepared to press the nuclear button if the Soviets take over western Europe in a series of piecemeal moves rather than launching one brazen frontal assault. (here)

The salami problem explains why the accounting profession was able to consolidate into just five major partnerships, reduced to four by the collapse of Andersen. Most observers agree this degree of concentration is unhealthy (at least from a public policy perspective) because it means that many large companies have little or no scope to change their auditor. It is also now impossible to contemplate the failure of one of the remaining four firms.

But regulators found it impossible to object to any of the long series of mergers and takeovers that brought us to this point because each deal was not objectionable on its own, even if the cumulative result produced a sub-optimal outcome. There is a risk this will now be replicated in the mining sector with similar results.

CONSOLIDATION DANGERS

When asked to justify consolidation, mining leaders cite synergies in administration and operations; the need for diversification to ride out the business cycle; and the need to attain a minimum efficient scale to finance huge multi-decadal investment projects costing billions of dollars. Similar arguments were used during the wave of oil industry mergers in the late 1990s and early 2000s that produced BP-Amoco-Arco, Total-Fina-Elf, and Chevron-Texaco.

But it is not obvious that mergers and greater corporate scale have produced benefits for consumers in the form of greater willingness to undertake risky investments.

Both the oil industry and the major mining companies have been criticized precisely for the lack of investment and failure to raise output more quickly during the first part of this decade in response to rising prices. Larger scale has not increased the oil majors' appetite for higher risk and higher cost projects; instead the industry is locked in a stand off with sovereign states over the terms of access to low-risk, cheap oil reserves in the Middle East.

It is, of course, possible to argue that the oil industry would have invested even less over the past eight years if the mergers had not gone ahead, but that is a difficult counter-factual to sustain, and evidence is sparse.