Crucial role for watchdogs of the world in big mining tie-up

The proposed deal announced last week under which mining group BHP Billiton would take over larger rival RTZ is a classic case of producers trying to increase their power to control the scarce sources of supply of iron ore and other key minerals. They are unlikely to wish to do so for the benefit of their customers.

As this saga develops, the two will no doubt begin to talk about the efficiencies to be achieved and the cost savings to be made. But in reality, given the nature of mining where the main costs are in extracting the ores from remote sites and transporting the stuff to market, arguments about synergy are never going to be persuasive.

On the contrary, the fact the combined group would speak for about 40% of the world's supply of seaborne iron ore, and therefore will have more leverage in negotiations with steel companies in China, is much closer to the mark.

Both companies seem to see this. The RTZ reaction to the bid is not what you would expect from a company determined to stay independent. It has rejected the price as far too low, but when did a target company ever do otherwise at the first asking? Its body language, if a company can have such a thing, suggests it sees the logic of the proposal and is also tempted by the market power the combined group would have.

It was even the focus of the PR briefing. Perhaps anticipating trouble from the competition authorities, the bidder's PR machine has suggested its control of almost 40% of the world's iron ore would not be a problem as it would simply match the 36% already controlled by Brazil's Companhia Vale do Rio Doce (CVRD). Given the two companies proposing to merge are the world's second- and third-largest producers, this is surely like suggesting that if Asda and Sainsbury's merged it would not matter because they would only match Tesco - and deserves to be treated with similar derision. If CVRD has 36% of the market, it is an argument for reducing its power, not creating another giant to match.

Corus, the former British Steel, sought some years ago to take over the then much smaller Brazilian ore producer because even then it was worried about securing supplies of ore at a reasonable price. The City refused to back that vision, the deal eventually fell through, and Corus last year was taken over by Indian producer Tata.

But the point is that if producers were worried about raw material supply even seven years ago, before China really figured in the equation, how much more worried must they now be when faced with this proposed consolidation? And for that matter, what is the impact likely to be on the often relatively unsophisticated countries that have to negotiate with these giants over the exploitation of their minerals? Australia may be able to look after itself, but would you say the same of Liberia or Senegal?

The real challenge in this deal is for the world's competition authorities. They still operate on a national or, in the case of the EU, a regional basis. This is a global combination. How they react to it and how they cooperate between themselves as they seek to control it will have huge implications for the future development of global companies.