THE first potential divestment arising from BHP Billiton’s bid for Rio Tinto could be in aluminium rather than iron ore.
South Africa’s Competition Commission has recommended the bid should be approved by the nation’s Competition Tribunal only if the miner agrees to divest Rio’s Coega aluminium smelter project within 12 months of the merger.
It did not suggest that any other potential asset sales would be required for the deal to proceed.
Within the next few weeks the European Commission is expected to raise concerns in a confidential "statement of objections" about the combined company’s domination of the iron ore market.
BHP is believed to be unfazed by the potential need to sell the $US2.7 billion ($4.2 billion) Coega project, which has already been delayed by a chronic shortage of power in South Africa. BHP, the only aluminium producer in South Africa, this year was forced to curtail some of its production indefinitely because of the power shortages.
But the commission said the mere threat of Rio entering the market had already led it to price products on more favourable terms. Therefore, it wants BHP to sell the entire project to another party to ensure there is adequate competition in the South African domestic aluminium market.
Rio acquired the Coega project through its $US37.8 billion acquisition last year of the Canadian aluminium producer Alcan.
At an investors seminar in November – before the emergence of the electricity crisis, Rio said it expected Coega to produce its first aluminium in 2010.
But by May, Rio was already admitting that timeline was no longer realistic and there were suggestions the project could be abandoned altogether.
"Whether it eventually gets abandoned or not is uncertain," Rio Tinto Alcan’s chief executive, Dick Evans, told theHerald at the time.
"There is definitely an opportunity, but I think it will be postponed for two to four years."
In recommending the divestment of the project, the commission said construction would have already been under way if not for the power shortages.
"This delay will be short-lived as there are plans to address this problem in the near future," it said.
But South Africa is not expected to have adequate power supplies until 2012 at the earliest.
In the meantime, the aluminium price has also plunged, making investments in that sector less attractive.
Alumina Ltd and its joint venture partner, Alcoa, yesterday said that because of the dramatic fall in aluminium prices, they would reduce alumina production at their high-cost Point Comfort refinery in Texas by 25 per cent, or 550,000 tonnes a year.
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