BHP Billiton and Rio Tinto ditched plans to form the world's biggest iron-ore joint venture, in a victory for steel makers and a move that could prompt both miners to step up competing expansion plans.
The deal's long-expected demise marks the second failed attempt in three years by BHP CEO Marius Kloppers to buy into Rio's superior iron ore assets and strengthens the hand of steel mills, which had feared the pair would gain too much pricing control.
Today's announcement also leaves BHP focusing squarely on a $39 billion hostile bid for fertiliser group Potash Corp, no longer distracted by the complex $116 billion marriage of the two miners' mammoth Australian iron ore operations.
"The failure of the joint venture will be slightly more positive for Rio than BHP, but it's important to remember it's actually a negative for both companies," said Ben Lyons, an analyst at ATI Asset Management.
A joint venture between Rio and BHP, the world's second and third largest iron ore miners, would have eclipsed Brazil's Vale, the world's largest supplier, and would have reaped more than $10 billion in savings from combining rail and port operations.
BHP and Rio Tinto had a fall-back option to share some iron ore infrastructure in the event the full joint venture failed, but this "Plan B" is also in doubt, given the opposition that has emerged among competition regulators to the venture.
Analysts had estimated Plan B could yield at least half of the savings envisaged in the joint venture plan.
Now, BHP and Rio Tinto will have to review regulators' objections to their joint venture plan to gauge whether even a more modest collaboration would be allowed, a source close to the process said.
The decision to call off the deal was widely expected after European regulators indicated they would block the deal, so the share price reaction was muted: BHP shares fell 1.1 per cent and Rio Tinto lost 0.3 per cent in a broader market down 0.8 per cent.
"The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing," Rio Tinto chief executive Tom Albanese said in a statement on today, describing the joint venture as pro-competitive.
"I am disappointed that ultimately the regulators did not agree with us," he added.
Rio Tinto and BHP were recently advised that their proposal would not be approved by competition watchdogs in the European Union, Australian, Japan, South Korea and Germany.
"Extensive discussions with the European Commission indicated the companies would not be able to go ahead with the joint venture without large divestments, which would have destroyed the synergies and eroded long-term growth options," the source said. "Both parties didn't think that was acceptable."
Steelmakers cheered the outcome on Monday which would leave 30 per cent of global iron ore seaborne trade in the hands of Vale, 25 per cent with Rio Tinto and 15 per cent with BHP.
"We were concerned about the monopoly of a proposed joint venture of Rio and BHP. We are relieved that the deal is not going to happen," said a spokesman at South Korea's POSCO, the world's third largest steelmaker.
Reuters