RBC proposes BHP-Rio Tinto iron ore joint venture in the Pilbara to curb China’s growing purchasing power

WA’s two most prolific iron ore miners should join forces to prevent China’s emboldened commodities buyer from squeezing them on price, according to a major global investment bank. RBC Capital Markets believes it would be in the best interests of BHP and Rio Tinto to form a cartel-like alliance in the Pilbara to stop China’s growing push to consolidate its iron ore purchasing power. China Mineral Resources Group has reportedly banned shipments of BHP’s WA iron ore until the mining giant caves in to demands for spot cargo discounts and more sales to be settled in Chinese yuan instead of the US dollar. “While a ‘full’ Rio/BHP Pilbara merger remains out of reach, we think a ‘joint venture-light’ approach focused on logistics, blending, and decarbonisation alliances could dilute the CMRG’s influence, defend the Pilbara premium and maintain control over benchmark price formation, as well as capturing margin and capex benefits,” RBC stated. BHP and Rio tried to merge in 2010 — a move blocked by competition regulators across the globe. “A ‘joint-venture light’ approach would aim to recreate the industrial logic of the 2010 BHP/Rio JV (like) shared infrastructure, cost leverage (and) disciplined pricing, but would likely be based on a networked alliance model, not a merger, that aligns Pilbara producers on infrastructure, decarbonisation, and logistics,” RBC stated. The proposed JV framework would stay within competition law, according to RBC, and unlike in 2010 the iron ore market concentration is much lower which would potentially ease lingering “antitrust concerns”. Fortescue, Gina Rinehart’s Roy Hill and Hancock, and Mineral Resources have all muscled in on BHP and Rio’s Pilbara iron ore dominance in recent years. China, the world’s largest iron ore consumer, buys about 75 per cent of global seaborne iron ore. Beijing established CMRG three years ago to buy ore on behalf of its steelmakers in a bid to gain more pricing leverage as a monopolistic buyer. “In short, CMRG’s creation may have unintentionally reopened the strategic logic for limited Pilbara co-operation between Rio and BHP — once unthinkable, now potentially pragmatic,” RBC stated. Many Australians are concerned that the BHP-CMRG dispute could be a canary in the coal mine for the country’s lucrative iron ore export relationship with China, which could see lower sale prices for the steel input flow through to lower investor returns and government royalties. BHP Australia president Geraldine Slattery told a Leadership Matters breakfast hosted by The West Australian last week that her company’s relationship with its Chinese customers remained “strong” and the reportedly tense negotiations were a “normal” annual event. “I wouldn’t necessarily speak to commercial negotiations, I think what I can and will say is that our relationship with China in the iron ore sector is one that goes back decades and decades,” she said. “And indeed, we’ve got decades of strong business in front of us. Commercial negotiations are a normal part of that. “They happen every year, and yes, there’s decent speculation in the press and often conflicting speculation, but I think the takeaway is we’ve got strong relationships with customers in China.”