From Reuters:
How times have changed. In 2008, when top global miner BHP Billiton tried to take over iron ore rival Rio Tinto, China raced to snap up a US$14 billion stake in Rio, to block the deal and thwart any tightening of iron ore supplies.
Two years later, Chinese regulators helped nix a US$116 billion iron ore joint venture between the two giants.
Now, faced with an iron ore glut and a struggling steel industry, Beijing is expected to take a kinder view of a proposed tie-up involving the world’s largest iron ore miner, sources say.
Brazil’s Vale and Australia’s Fortescue Metals Group this week announced they are in talks over a joint venture to blend up to 100 million tonnes of their iron ore – about 10% of China’s imports of the steel-making ingredient.
“It is quite likely that this will go through without conditions. The industry is much less sensitive right now,” an antitrust expert with knowledge of the Ministry of Commerce’s merger review process said.
The person, who declined to be named while speaking on a government matter, said the slump in iron ore prices had made it less controversial for China, which consumes about half the world’s seaborne iron ore. Iron ore prices, while off their lows, are still down some 70% from highs touched in 2011.
The ministry, contacted by Reuters, said it had not received any application from Vale or Fortescue. It did not comment further.
The more I think about this tie-up the less threatening it is to the Chinese. The way things are, before too long FMG tonnages from its least competitive Cloudbreak operations will be forced to shut. Blending those tonnes with Vale ore to get a higher price will keep them in the market for longer, from Macquarie:
Improving realised pricing key to the agreement: We believe the move by FMG and Vale to form an operating joint venture is aimed at improving realised pricing for the respective products. Blending FMG’s lowest quality product, Cloudbreak Super Special Fines, with Vale’s highest grade and quality fines product from Carajás could be combined to produce a similar to Rio Tinto’s Pilbara Blend. This would likely see FMG’s quality discount on its Super Special Fines product removed.
If Vale and FMG can mix material more cheaply than the Pilbara majors and win market share (which seems unlikely to me given the cost of blending) then it’s no skin off China’s nose to let them try given it intensifies competition in the major’s cartel and will lower prices further.
If China is concerned about collusion between the partners it should consider that with the two miners effectively fighting it out at the marginal cost of production already, any tonnes removed from the market would have been cut anyway as prices fall.
If it is worried about the alliance growing further it could always block it later.
What baffles me is why Vale wants to do it!
