The synergies in the mining operations create value in the merged entity. Rio is still trying to capture some of that increase in value for its current shareholders. The ACCC decision lets the game go on. Some commentators were expecting the Commission to apply conditions and Rio would be pleased they did not.

The customers are still likely to be worried. Let’s focus on the Chinese mills but the Japanese mills have also expressed concern. The ACCC logic sounds good, but if you are buyer the costs of an error might weigh heavily.  What are their options to manage that risk? Get in on the deal is one reply, and Chinalco is already doing that by sitting on equity in Rio, not with an eye mainly on iron ore trade but on aluminium trade.

Another response, if you are really worried, is to start thinking about alternative supplies. The question is what cost is involved, is the payment of the premium by going further away or to lower quality deposits worth the reduction in risk?

If BHPB is right about the economies in the operations of the merged entity, the new business will be a competitive seller, though there might have to be a continuous pitch to the buyers to sell that.

The real concern is that the buyers’ strategies are not being designed in stable policy environment. WA Premier has used the word ‘confused’, but we would apply that in a different manner. Peter Drysdale and I have argued that Australia has got itself ‘into a pickle’ because of the additionality being applied to investments by Chinese state-owned enterprises. That’s a federal government issue.

Now at state level, there’s a reaction. It is reported that the new WA Premier has proposed a renegotiation of the royalty arrangement with BHP and Rio to pay ‘the full price’, that is, higher royalties on fines iron ore.This adds to uncertainty in the investment environment. It might only be a couple of percentage points but the signal for the stability of the policy environment matters, especially to long-lived projects.

It would be better to review that decision in the context of an evaluation of the original policy objective (presumably related to incentives for processing) rather than making a project-specific proposal.

Premier Barnett has also asked questions about the Chinese investment strategy in the iron ore sector. He compares the Chinese approach unfavourably to that of Japan in an earlier period. In our recent paper Peter Drysdale and I argued

In the large majority of cases, the suggestion that Chinese investors are seeking control over Australian projects and companies does not square with the facts. Like Japanese investors such as Mitsui, Nippon Steel and Sumitomo, who are part-owners of Rio Tinto’s Robe River iron ore assets and Mitsubishi and Mitsui, who are joint one-sixth owners of the North-West Shelf LNG, Chinese investments are directed at minority stakes in Australian-based mining ventures. Unlike many Japanese investments, which are joint ventures and minority partnerships, Chinese investments involve transparent shareholding in listed companies, and arguably involve less potential covert control of the operations in which they are involved.

And we made the point that

This feature of the crop of current Chinese investment proposals may be under-appreciated and the virtue of the Japanese joint venture model of investment in the minerals and energy sector over-appreciated by some policy leaders.

The hard-headed thinking shown by the ACCC has wider application, particularly in these times where raising funds for big projects is not getting any easier.