ANALYSIS-BHP/Rio would face robust antitrust review

JOHANNESBURG (Reuters) - BHP Billiton, already the world's biggest mining group, faces tough scrutiny by regulators in iron ore, coal and aluminium if it succeeds in buying rival Rio Tinto, but it believes it can overcome the hurdles.

BHP failed to give any specifics about how it would satisfy antitrust watchdogs when it surprised markets on Thursday by announcing it had approached Rio with a bid worth $140 billion.

"In preparing its proposal, BHP Billiton has examined in detail the regulatory issues and other practicalities of a combination," its statement said.

Iron ore is the toughest obstacle since BHP and Rio are the second and third-biggest iron ore producers respectively and would together command a 30 to 35 percent of the seaborne market, analysts said.

"They would have definitely have thought of it and not gone ahead if they thought the competition authorities would put conditions on them that they weren't willing to comply with," said Henk Groenewald, portfolio manager at Coronation Fund Managers in Cape Town, South Africa.

Rio produces around 140 million tonnes of iron ore a year, and BHP is at around 100 million tonnes, with both of their major operations in Western Australia. Brazil's CVRD is the top-ranking producer of iron ore.

"On the face of it it sounds like the type of merger that would attract not only the attention of the Justice Department but also the European Union and Australia," said Bert Foer, head of the American Antitrust Institute in Washington.

CONSUMER WORRIES

Consumers, already worried about further price increases when contracts are due to be repriced from April, are likely to vehemently oppose a link-up of BHP and Rio.

But BHP might be able to squeeze by since most consumers are in Asia and the biggest regulator concerns are often in Europe and the United States, an analyst said.

Certain disposals in iron ore are a given, the question is how much would have to go.

"They could easily offload something to get them below 20-25 percent (market share), but both of their growth pipelines over the next four or five years are such that they could easily increase that tonnage again," a second analyst said.

In coking coal used for steel production, BHP already has around 30 percent of the seaborne market through an alliance with Mitsubishi Corp, and a takeover of Rio would add another 5 percent, analysts said.

Thermal coal is less of a concern, with each having around 5 to 6 percent of the seaborne market.

Rio Tinto's recent takeover of Canada's Alcan Inc vaulted it to the top ranking in the aluminium sector, and BHP Billiton is the world's sixth-biggest producer of primary aluminium. The tie-up of the two would give a merged firm around 15 percent of the total market.

John Kinney, a U.S. antitrust lawyer with Jenner and Block, said U.S. authoritities would look at the merger's effect on prices. "You can argue in a lot of cases, there's a lot of substitutes," he said, adding that for some producers there were no good substitutes for aluminium.

A Canadian official said a review of the merger in that country could prove to a "fairly involved process" taking up to five months.

"Certainly the number of markets and the complexities are very important but just the size alone isn't a reason to be concerned about a merger. It's also where are the competitive overlaps and, in particular, where are the competitive overlaps in Canada," said Terence Stechysin, a senior officer with the Competition Bureau of Canada.

"We take the regulatory environment into account because that is also part of the landscape," he said.

Analysts said concerns might be greater about dominance in the market for alumina, the raw material for aluminium, since the combined group would have a grip on around a fifth of world production.

In copper, the two already have joint ownership of Escondida in Chile, the world's largest copper mine, and a marriage would increase total share of mine output to around 13 percent. (Additional reporting by Diane Bartz in Washington and Louise Egan in Ottawa; Editing by Frank McGurty)