European regulators may object to BHP-Rio merger

The European Commission is said to be frowning on a prospective merger of mining giants BHP Billiton and Rio Tinto as it thinks a combined entity would wield an expanded pricing power over the global iron ore market.

If approved, BHP Billiton's $69 billion acquisition of Rio Tinto would create the world's largest iron producer, supplying more than one-third of the world's iron ore.

The BHP-Rio merger proposal, which has already received approval from Australian and US regulators, was expecting to receive EU approval despite objections from European and Chinese steel makers.

In fact, BHP Billiton and Rio Tinto had, earlier this year, secured an agreement from Chinese steel producers to nearly double the contract price of iron ore. The EU may be keen on shielding European steel makers from further price hikes.

Alternatively, EC may ask BHP Billiton to divest some of its assets in order to clear the regulatory hurdle.

While mining companies are trying to consolidate business to shore up bargaining power, steel producers are also following a strategy of increased backward integration through mining acquisitions.

The BHP-Rio merger proposal has been pushed to the end of a commodity boom cycle that saw a decline in the prices of basic raw materials, including iron ore and crude oil. Demand, however, has been held somewhat steady by the demand for basic building materials from emerging economies like China and India.