Michael Wei and Lucy Hornby
China may launch an antimonopoly probe into BHP Billiton's $39 billion bid for Canada's Potash Corp, the China Business News said on Wednesday, citing a source familiar with the matter.
China will also review the merger of two Russian potash firms -- Uralkali and Silvinit -- given the major impact the two deals would have on China, the paper cited the unnamed source as saying.
The report was another indicator that China, the world's biggest importer of fertilizer, is wary of further concentration in the market, following BHP Billiton's launch of a hostile bid for Potash Corp last month.
But it was unclear what steps, if any, Chinese regulators could take in opposition to the bid.
BHP declined to comment on the newspaper report, and China's Ministry of Commerce was not immediately available to comment.
BHP has said the deal only needs approvals from regulators in Canada and the United States, where Potash Corp sells around half its production.
China buys around 7 percent of the output of Potash Corp, which controls around one-fifth of world production of the key crop nutrient. Potash demand in the country has been growing by around 5-8 percent a year, faster than other fertilizers.
China consumes about a third of Russia's potash output, so it was not surprising that Beijing was closely following the potential of Uralkali and Silvinit teaming up to create the world's second-biggest group in the sector after Potash Corp.
China is one of the key consumers of Russian potash, and it is natural for China to be worried that a merger would lead to an increase in average prices, but it has no way to influence the process, said analyst Anna Kupriyanova at Uralsib in Russia.
The Russian deal is expected to get speedy approval from Russia's own anti-monopoly authorities since it was supported by the state, she added.
Russia's deputy prime minister said on Wednesday he did not oppose the union of Uralkali and Silvinit.
BHP Billiton does not currently produce any potash but does have potash resources it could develop in the future, including the massive Jansen project in Canada. The mine would begin producing in 2016 at the earliest, if the company approves development in 2011.
China's largest fertilizer distributor, Sinofert Holdings Ltd, said last week it was worried about the impact that a BHP deal would have but would not say if its parent, Sinochem, was planning a rival offer.
Government departments and state-owned Sinochem Group have held meetings recently to review the possible impact the two high-profile acquisitions could have on China and about possible countermeasures, according to the source quoted by China Business News on Wednesday.
BHP may yet have to submit paperwork on the deal to China's anti-monopoly regulators.
According to Chinese law, its regulators have jurisdiction over a foreign merger if two of the parties each have over 400 million yuan ($58.7 million) in sales in China in the last fiscal year and if their worldwide sales exceed 10 billion yuan. The BHP Billiton bid for Potash Corp appears to meet that criteria.
BHP Billiton might argue that since it currently does not produce potash, a takeover of Potash Corp would represent a change in ownership but no increase in market share.
However, Chinese regulators when evaluating the deal could take into account future production from deposits that BHP owns, including the Jansen mine, in projecting future dominance.
China's ability to enforce rulings in cases where neither party has operations or assets in China is so far untested.
The test case is in fact BHP's proposed merger of its Australian iron ore operations with those of Rio Tinto. Chinese authorities have yet to rule on that merger, though Chinese officials and the steel industry are adamantly opposed.
A Chinese fertilizer specialist said there was concern about BHP getting control of Potash Corp adding to its own large potash reserves.
So in terms of buying this resource, or negotiating, the Chinese government and people don't want to see this kind of concentration, Chen Li, a fertilizer expert at China National Chemical Information Center, told Reuters Insider television.
But this is a market operation, and no-one can block it. So we can only rely on our own efforts to overcome the difficulties if the takeover succeeds, she said, referring to efforts to raise output in China and at Chinese-owned assets overseas.
On Tuesday, the Canadian province of Saskatchewan, the home of takeover target Potash Corp, said it would have lots of concerns about a Chinese sovereign fund or state-owned company buying part or all of the company.
Potash Corp shares in New York had gained 0.5 percent to $147.92 by 1445 GMT, 14 percent above BHP's offer on speculation that BHP will have to raise its offer or that another company or consortium might enter the fray.
BHP shares in London jumped 3.5 percent to 1,895 pence in line with the broader London market.
(Additional reporting by Ken Wills in BEIJING, Sonali Paul in MELBOURNE and Polina Devitt in MOSCOW; Editing by Lincoln Feast and Will Waterman)