Battle shows China's will to block BHP-Rio

BEIJING (Reuters) - The detention this month of four Rio Tinto employees in China, in the midst of bruising iron ore prices negotiations, could be just a sign of things to come as BHP Billiton and Rio seek regulatory clearance for their iron ore joint venture, Chinese lawyers and officials said.

BHP and Rio proposed in June to merge their iron ore operations in Western Australia's Pilbara region. That joint venture needs to be cleared by regulators in Europe and in China, where the case offers Beijing an opportunity to wield its new anti-monopoly law.

"If the government is prepared to use security services in support of its own companies, then we cannot preclude that they will use the laws on their books to block the joint venture," said Michael Komesaroff, a consultant on Chinese industry at Urandaline Investments in Australia, referring to the detention of four Rio employees.

Early this month, Shanghai's state securities bureau detained Rio's top salesman in China, Australian Stern Hu and three Chinese colleagues on allegations of "stealing state secrets." At least one Chinese steel executive has also been detained, for allegedly leaking the China Iron and Steel Association's negotiating position in the annual iron ore talks.

The Chinese steel industry is adamantly opposed to the BHP-Rio joint venture, as are their counterparts in Europe and Japan, because they fear giving more pricing power to the two mining giants.

"We are against price stirring and market monopoly," said Luo Bingsheng, vice chairman of China Steel and Iron Association, which has tried to prove this year that it could wrest a better price from global miners.

BHP and Rio argue that the production joint venture will allow them to mine and transport ore more efficiently.

They propose keeping their marketing arms separate, in an attempt to assuage European regulators' concerns. The likelihood that European regulators would not sign off last year scuttled BHP's attempt to take over all of Rio Tinto.

But in China, the question of monopoly has a personal edge. Rio turned to Chinese state aluminium giant Chinalco after its fight with BHP left it saddled with debt in a falling market; but Chinalco's bid to raise its stake in Rio collapsed last month, as the Australian government delayed approval, and Rio and BHP inked the Pilbara joint venture.

ANTI-MONOPOLY LAW

Foreigners ignore China's will to use its clout at their peril, said Mei Xinyu, researcher at the Chinese Academy of International Trade and Economic Cooperation, under the Ministry of Commerce.

"An Australian official said that he wasn't sure if it would pass in Europe and the United States. He didn't mention China," Mei said.

"I think after this July, he would think about China too."

China's law, modelled on similar laws in the U.S. and Europe was passed in 2008. It includes a provision for jurisdiction over "any monopolistic behaviour outside the borders of the People's Republic of China that leads to the elimination of competition or has a restrictive influence on the domestic market."

Regulations are issued by the State Council, or cabinet, but the Ministry of Commerce has the authority to make and carry out the ruling.

Clarifying rules released in August 2008 said that China had jurisdiction if a proposed overseas merger involved an annual trading volume in China of 400 million yuan (35.4 million pounds) or more.

Sales in China by the two mining giants are more than enough to trigger the clause, but neither company has substantial investment in China, reducing China's leverage.

And China can hardly forbid the import of the reliable, high quality ore that its best steel mills rely on. Despite brave talk of domestic mines and diversifying sources, the quality is poorer and volumes insufficient.

"If they don't accept China's authority, for example, that could hurt their sales in China. They could be hit with a proportional fine on sales," Mei said, adding that a halt in imports would be "the most extreme case."

London-based spokesmen for BHP and Rio said that the companies would go through the regulatory processes, including in China, after the details of the joint venture are ironed out.

The untested state of China's anti-monopoly law means that lawyers and officials may be somewhat relieved if the EU regulator fails to approve the joint venture, removing the need for China to wield its new weapon.

"The situation isn't ideal," said Dong Zhengwei, a lawyer with Beijing Zhongyin Law Office, and the first person to launch private lawsuits against monopoly practices by Chinese entities.

"From a legal point of view, there are grounds to use the law, but it seems that China's law enforcement bodies haven't yet prepared any sort of measures to use against monopolistic practices beyond its borders."

The two companies must not underestimate China's clout on the international market, said Wang Xiaoye, director of the economic law office of the China Academy of Sciences, referring to concerns that the untested anti-monopoly law may not be up to the task and that China's regulators lack experience.

"Even though a ban by China's anti-monopoly bodies will not be a deterrent now, that doesn't mean it will never be a deterrent," Wang wrote in China Weekly magazine this week.

(Additional reporting by Eric Onstad in London; Editing by Sanjeev Miglani)