The Australian

http://www.theaustralian.news.com.au/business/story/0,28124,25593776-30538,00.html

CHINA'S huge steel sector is publicly confident that the proposed tie-up between BHP Billiton and Rio Tinto's iron ore operations in the Pilbara will not hand any more market power to the global iron ore oligopoly that has squeezed record prices out of its customers in recent years.

Concern about the market power of iron ore suppliers was one of the key reasons state-owned Chinalco initially invested in Rio last year.

Its $US14 billion ($17.4 billion) stake in Rio was viewed as a move to prevent BHP being successful in its takeover of Rio, uniting the iron ore rivals.

However, Chinese steel mills, analysts and traders were yesterday publicly sanguine about the new Pilbara alliance.

"We note the announcement of the joint venture in the Pilbara between Rio Tinto and BHP Billiton and will continue to monitor developments in relation to this project," Chinalco president Xiong Weiping said shortly after Rio confirmed it had walked away from its alliance with Chinalco.

Negotiations for new iron ore contracts are continuing in China after Rio agreed to a 33 per cent cut from last year's prices with Japanese-made South Korean steelmakers. China is still pushing for a 40 per cent drop.

The Chinese steel industry warned that anti-monopoly measures were available if the new BHP-Rio alliance began to display monopolistic tendencies.

"At this point, it's merely a joint venture," said Zou Jian, executive director of the government-run Chinese Iron and Steel Association.

"We can't call it a new monopoly yet. But if it does become a new monopoly, there will be anti-monopoly measures available to deal with it," he said.

The association, which has taken the lead on price negotiations for the first time this year, does not believe the Rio-BHP alliance will affect the current round of talks, which may be clouded by a growing stockpile of iron ore in China that has surged past 100 million tonnes.

"I don't believe there will be much effect on China on the iron ore price, because China is too big a market," Mr Zou said. "That in itself is an advantage."

Metal trader Zhang Xinyun of Harbin Jingwei said two companies could not manipulate the market price for iron ore because China also bought from countries including India, Chile and Mexico. He said they all provided sufficient quality iron ore to meet Chinese mills' demand.

"I'm satisfied with Australian ores quality, but not happy with the price, various prices," he said. "I'm a businessman, I work for profit. I won't do it when there is no profit."

Fu Yao, an analyst at the iron and steel information website Umetal.com, said the BHP-Rio alliance was a deal between two companies that would not "affect the whole market".

"China's market is good, so iron ores from different countries are flooding in -- from Brazil, from India, from Russia, from Ukraine," he said.

Chinalco has expressed its strong disappointment with the collapse of its $US19.5 billion bid for a greater slice of Rio Tinto. Yesterday's news marks another failure by China Inc to complete a major deal with a blue-chip international company. "We are very disappointed with this outcome," Mr Xiong said. "We continue to believe our proposal presented an outstanding value-creating opportunity for all Rio Tinto shareholders and would have provided a strong platform for a long-term strategic partnership between the two companies."

The collapse of the long-running deal came while Mr Xiong was in Australia in a bid to salvage the partnership.

"In recent weeks Chinalco has worked hard to respond constructively and engage with Rio Tinto to make appropriate amendments to the transaction terms announced in February to better reflect the changed market background and feedback from shareholders and regulators," he said.

Chinalco made no mention of any further co-operation with Rio, simply saying that it would "continue to explore opportunities to advance its strategic objectives and in the meantime will monitor developments at Rio Tinto as the company's current largest single shareholder".

Liu Zhengshan, a young economist and columnist in several Chinese media outlets, wrote today on his blog that "Cold War thinking made the deal fail".

"The commercial conduct of Chinese companies is being excessively interpreted. When Chinese company buy copper, they say China wants to control copper market; when China buys strategic stocks of petroleum, they say China want to have more say at international oil market.

"For Chinalco and Rio Tinto's deal, they say China aims to control ore price or for political interest: it's a reflection of Cold War thinking and prejudice against China."