The business media and brokers’ reports continue to gush over the virtues of the BHP Billiton deal with Rio Tinto, without delving into competition issues and the impact on the Australian economy and employment … not to mention the adequacy of the continuous disclosure compliance of both companies.
But the real sin so far has been to ignore a part of the agreement that would allow the iron ore venture to market ore into the spot market in competition with Rio and BHP; something that has been underplayed by the two companies.
In the copy of the agreement lodged with the ASX last year, a section allows the owners to jointly market iron ore through the joint venture and independent of the owners. That’s somewhat controversial given that the companies have said the joint venture will be production-based and they will handle the marketing.
But the agreement specifically allows the joint venture to establish a marketing company and put a minimum of 10% and up to 5% of the annual production on the spot market.
With annual iron ore production this year set to be around 320 million tonnes (worth almost $A25 billion at current exchange rates and at the Japanese steel mills average price around $US62 a dry tonne), the joint venture would emerge as a significant player in the Australian iron ore export market in its own right.
Production could range from around 32 million tonnes to a high of 15% of future production, which could put it as high as 60 million tonnes a year by 2012.
That would make it the third iron ore exporter in this country, bigger than Fortescue and most of the smaller players combined.
This hasn’t been highlighted or explained, but there are some parts of that clause which will raise questions with competition authorities.
Section 4.8 of the agreement specifies the rules:
“The Owners will agree to co-market certain of their respective volumes. When the Owners do so, the following principles will apply:
(a) the JV will establish a separate marketing company;
(b) 10% of production and not more than 15 percent (as approved by the Owners) will be sold jointly on the spot market or otherwise as agreed by the Owners;
All joint marketing undertaken by the JV will be appropriately ring fenced from the separate marketing activities of the Owners.”
Marketing into the spot market means it will be in competition with the owners, will help keep spot prices down. Having three groups selling iron ore into the global market from the two owners (all three independent of each other) could be seen as a way of keeping the lid on prices and assuaging concerns in the minds of steel mills in China and elsewhere. But if the joint venture stopped selling iron ore for a period of time, would that see prices on the spot market rise because of the contraction in supply?
Or it could be seen as a ploy to sell that idea, but to help control spot prices and maintain an orderly market? Shareholders in both companies might question this provision as potentially damaging the profits of the huge iron ore business.
Another point has emerged from all the coverage over the weekend. According to the reports, BHP’s chairman, Don Argus and CEO, Marius Kloppers put the iron ore merger deal and purchase of a small shareholding (for $US5.8 billion for the needy Rio) in April. It was revealed on June 5. Why was there absolutely no disclosure up until Friday?
For all intents and purposes BHP had abandoned any desire for Rio last November, and here it was in deep and confidential talks for two months, and not a shred of disclosure. Talk about the market trading uninformed.