So why did BHP Billiton and Rio Tinto scrap a major part of their proposed West Australian iron ore joint venture, which was first revealed in early June? Did contract negotiations for 2010 between the Chinese steel mills and major suppliers due to start in China later today, have anything to do with the abrupt and surprising change?

It seems it was a big factor, along with concerns about the anti-competitive nature of the very odd marketing proposal.

The two companies yesterday announced that they had ended planning to jointly market iron ore from the joint venture between their huge iron ore mines in the Pilbara region of Western Australia. It will now be a production JV only.

In the copy of the agreement lodged with the ASX in early June , a section allows the two owners to jointly market iron ore through the joint venture and independent of the Rio and BHP.

The agreement specifically allowed the joint venture to establish a marketing company and a minimum of 10% and up to 15% of the annual production on the spot market. The marketing business was to be “ring fenced” from BHP and Rio’s marketing businesses. But it would have been the third or fourth largest iron ore seller from Australia and therefore a major factor, especially in the increasingly important spot market where all its sales were targeted.

The proposed marketing link-up has drawn criticism as being anti-competitive, especially from steel groups around the world, and attracted the attention of the European Commission’s tough competition regulators.

The idea of the two giants joining forces has upset Chinese steel mills, the world’s largest consumers of iron ore, who saw the alliance as anti-competitive. At its annual meeting in Beijing this week, the World Steel Association revealed strong opposition to the proposed joint venture.

Under the terms of the agreement, up to 15% of the joint production was proposed to be sold jointly, but that could have been increased. And, based on expected production of 320 million-340 million tonnes by the two groups, that 15% could have totalled 48 million-50 million tonnes, which would have made the joint venture marketing team the country’s third biggest exporter, just ahead of the expanding Fortescue Metals (about 38 million tonnes now).

Production sold by the joint venture could have been as high as 60 million tonnes a year by 2012, as Crikey pointed out in June, thanks to rising demand and output. That could have generated sales of $5 billion a year or more and made the JV a significant global force in iron ore.

There were worries that by focusing on the spot market, the joint venture might become a major price influence by simply varying output levels, which would have been controlled indirectly by BHP and Rio.

But it also seems that the 2010 contract talks starting in China today had become a factor, as was Rio’s upgrading this week of its 2009 iron ore sales target by between 5% and 7.5%.

Demand, especially in the spot market, is booming. China last month imported a record 64.5 million tonnes of iron ore. Rio this week said that its WA mines are operating above rated capacity. There’s a growing belief that the strength in the steel sector outside China is recovering (The World Steel Association forecast a 9.2% rise in apparent steel use next year, up from now increase forecast in April).

The association said Chinese steel use will rise by nearly 19% this year, falling to a forecast 5% rise in 2010, but higher demand in South Korea, Japan, the US and Europe was also forecast, which put upward pressure on current prices.

Now there are industry reports that BHP and Rio could be seeking price rises of 30% or more in iron ore contract prices next year. And the major rival, Vale of Brazil, is said to be seeking similar rises.

Higher coking coal prices will also be sought: the reports say the likes of BHP could seek increases of 30%-40% (BHP operates in both markets).

Higher prices for iron ore and coking coal would go some way to reversing the big price cuts for 2009. The Chinese mills will strongly resist any increase and have been claiming there’s too much steel and iron ore and prices should fall. Chinese finished-steel prices are now falling because of over capacity.

So it’s no wonder Rio and BHP took the very pragmatic decision to remove what could have been a major irritant from the negotiations with Chinese mills. That decision could improve their prospects for price rises.

Peter Fray

Don't just sign a petition, buy a subscription.

You’ve probably read about Kevin Rudd’s petition for a royal commission into media diversity. He’s very angry about Rupert Murdoch’s media dominance – and rightfully so. We invite you to sign it yourself. But royal commissions take time. There is another way to stand up to Murdoch.

Support truly independent, Australian-owned journalism – and do it today. Subscribe to Crikey and get your first 12 weeks for just $12. Cancel anytime.

Peter Fray
Editor-in-chief of Crikey

Support us today