From The Sunday TimesNovember 2, 2008EU threat to Rio Tinto...

From The Sunday Times
November 2, 2008
EU threat to Rio Tinto takeover
Dominic O’Connell

EUROPEAN regulators are this week expected to threaten to stop the proposed takeover of Rio Tinto by BHP Billiton because of the dominance the pair have over the world’s supply of iron ore.

The warning will come in a long-awaited “statement of objections” from Brussels. It will be of crucial importance in deciding whether the BHP-Rio deal, the second-largest corporate takeover ever, can go ahead.

Analysts expect the European Commission’s competition regulators to highlight the companies’ iron-ore businesses as their main source of concern. A merged BHP-Rio would control about a third of the seaborne iron-ore trade, thanks to the pair’s huge mines in the Pilbara region of northwest Australia. The Pilbara operations are the main suppliers of iron ore to steel mills across Asia.

Some commentators think the commission may tell BHP it will have to cut its share of production from Pilbara by a specified tonnage.
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BHP, which launched its bid for Rio a year ago, will have four weeks in which to tell the commission how it plans to overcome its objections. The company is likely to say it would sell some Pilbara assets – insiders think the Robe River mine and railway, which is controlled by Rio Tinto, is the most likely choice – to meet the dominance concerns.

The commission is expected to release its final ruling early next year.

BHP has offered Rio Tinto shareholders 3.4 of its shares for every one in Rio Tinto. The Rio board has steadfastly rejected the offer, and refused to enter talks with BHP.

BHP launched its bid in the middle of a boom in commodity prices. In recent months, however, prices have slumped, taking the two companies’s share prices with them. Rio Tinto closed on Friday at £28.64, down 43% over the past three months, and BHP at £10.53, down by the same amount.

Meanwhile, Arcelor Mittal, the world’s largest steelmaker, is expected to outline plans for production cuts when it releases quarterly results this week. After years of steady increases, steel prices have declined this year as demand from western economies and China has fallen.

Last week the company, run by steel-industry tycoon Lakshmi Mittal, said it would close up to six blastfurnaces in Europe because of falling demand from carmakers.

Steel producers are also having to deal with a big jump in energy costs and a sharp leap in the price of iron ore. Chinese steelmakers agreed to an 81% increase in prices earlier this year.

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