BHP, Rio may face China sanctions on ore deal-paper

SYDNEY, June 12 (Reuters) - China may impose trade sanctions against BHP Billiton (BHP.AX) and Rio Tinto (RIO.AX) if the two miners merge their Australian iron ore operations without the approval of Chinese competition agencies, the Sydney Morning Herald newspaper said on Friday.

Last week, Rio (RIO.L) walked away from a planned $19.5 billion equity tie-up with China's state-owned Chinalco and instead proposed a $116 billion iron-ore joint venture with bigger rival BHP Billiton (BLT.L). Rio also launched a $15.2 billion rights issue.

"According to China's anti-trust law, we can veto such a merger agreement if the concentration of overseas business operations will affect domestic market competition," Ma Yu, the director of the foreign investment department at the Ministry of Commerce, was quoted as saying in the report from Beijing.

The paper also quoted Ma as saying that if the joint venture was set up ignoring China's opposition, then Beijing could also impose trade sanctions against BHP and Rio.

The proposed joint venture is a threat to China, the world's biggest making country, as it would further concentrate iron ore production, with the world's second and third largest producers, Rio and BHP Billiton, combining their main operations.

Rio/BHP and Brazil's Vale (VALE5.SA) control about 70 percent of global iron ore trade.

The paper said China's new anti-trust law empowers it to block offshore deals, but enforcement mechanisms remain unclear.

The BHP-Rio tie-up plan comes as annual negotiations over the price of iron ore between suppliers and Chinese customers stall over Chinese demands for a bigger cut than the 33 percent Rio has agreed with Japanese and Korean buyers.

On Thursday, the head of the China Iron and Steel Association (CISA), which is leading China's price negotiations, said the group was ready to cut steel output and drop annual iron ore talks if negotiations failed.

China consumes more than half of globally traded iron ore. (Reporting by Jonathan Standing; Editing by Mark Bendeich)