U.S. President Barack Obama has dropped a hot potato in the lap of Australia’s pro-Beijing Prime Minister Kevin Rudd. He has asked him to take at least six and as many as 10 of the remaining 17 Uighurs being held at Guantanamo Bay.
Beijing wants them all returned. The U.S. won’t do that because of fears in Washington that the Uighurs, coming from a Muslim minority which has a separatist movement, will be persecuted. China accuses the Gitmo Uighurs of belonging to the East Turkestan Independence Movement, which is Beijing’s culprit of first choice for almost any act of political violence in China.
The Gitmo Uighurs, captured in Afghanistan in 2001, were cleared for release in 2004 after being cleared of links to terrorism. Albania took five and Sweden one but U.S. appeals to other countries to take some have fallen on deaf ears–or at least been drowned out Chinese warnings not to.
Australia’s foreign minister Stephen Smith has played a straight bat so far: “We will consider these individuals on a case-by-case basis in accordance with our immigration law, in accordance with our domestic and international immigration obligations,” he said and added “where it is appropriate, take into account security advice and considerations.”
In the end Australia will have to choose sides between its old best friend, America, and its new best friend, China.
As the dust settles on Beijing’s decision to block Coca-Cola’s $2.3 billion bid for Huiyuan Juice on antitrust grounds, how does Chinalco’s proposed $19.5 billion investment in Rio Tinto look?
Chinese officials have been quick to stress that the Huiyan decision, which stopped what would have been the largest foreign investment in China, was not protectionist, but it is not being seen that way by at least one Australian lawmaker. Sen. Barnaby Joyce, who has been pushing for a review of Australia’s foreign investment laws in the wake of the proposed Rio deal, says the Coke decision “shows that China is being protectionist but wants Australia to offer up its important assets for a quick sale.”
Australia’s Foreign Investment Review Board has already extended by up to 90 days its review of the deal, which would be China’s biggest overseas acquisition. A proposed $443 million investment by Hunan Valin Iron and Steel in Fortescue Metals has also had its review extended.
However open China remains to foreign direct investment in to basket-case companies and to greenfield FDI (and it does seem to be that), the perception that established brands and putative national champions are off-limits will only reinforce the forces of retaliation.
Rio Tinto’s chief strategy officer, Doug Ritchie, says he is confident Chinalco’s proposed $19.5 billion capital injection will pass muster with the Australian regulators. The country’s Foreign Investment Review Board is seen as a key hurdle for the deal to clear, given the misgivings it has previously expressed about the state-owned aluminum company’s potential sway over Australia’s natural resources.
Speaking on TV, Ritchie said the deal had been structured to meet Canberra’s concerns. The Chinalco investment is split $12.3 billion in joint venture stakes in nine Rio businesses and $7.2 billion of convertible debt.
The later part may just have squeaked under the wire as the FIRB is seeking to amend its rules so convertible debt counts as equity when considering a foreign ownership stake.
Filed under Economy, Markets
Australia is walking a fine line over Chinese investment in its natural resources. It has approved Chinalco’s recent purchase of a minority stake in Anglo-Australian miner Rio Tinto, but said any further share purchases will require prior approval. Nor can Chinalco have a seat on Rio’s board, Wayne Swan, Australia’s Federal Treasurer, ruled on Sunday.
State-owned Chinalco, along with the U.S.’s Alcoa, has been buying what they say is a target 14.9% stake in Rio, the subject of a $164 billion takeover bid from BHP Billiton. The pair said in February that they had paid $14.1 billion for a 12% stake in Rio’s London-listed shares, or 9% of the total group. As a consumer of iron ore in particular, China doesn’t like the prospect of so much supply being concentrated by the merger of the world’s no 2 and no 3 products.
Approval of the share purchases to date was expected, despite some muttings that Australia was leaning towards backing off its open-to-foreign-investment stance. The Australian government does seems to have used the ruling to set a ceiling on what it it considers an acceptable level of Chinese investment, and that may mean Chinalco won’t end up with a large enough shareholding to have a material affect on the outcome of the Rio-BHP bid.
The other point in all this is that while China is still an important market for Australian natural resources, taking 20% of Australia’s output, Australia is getting relatively less important as a supplier as China’s needs continue to grow and China’s companies turn to mines in Africa and South America. Rio and BHP operate on those continents, too. The Australian government may be walking the wrong line.
China has already gone abroad to secure supplies of energy and minerals by investing in mines and oil fields, so why not do the same for food? The Beijing Morning Post quotes Xie Guoli, a senior trade promotion official with the agriculture ministry, as saying that China is looking at leasing farmland in Russia, South America and Australia.
China already has rice farm joint ventures in Cuba and Mexico. High international grain prices could be pushing Beijing to consider doing the same on a larger scale and for more foods. How seriously it is pursuing the idea remains to be seen, but there is one reason for doing so beyond high import prices.
Very big, China, as Noel Coward famously said, but it is also running out of farm land. Arable land was reduced by 40,700 hectares to 121.7 million hectares last year, mainly because of urbanization. That is close to the minimum of 120 million hectares Beijing has said it regards as needed.
China says it will meet the Dalai Lama’s envoys. It is a change of tactics in what has been a campaign to vilify the exiled Tibetan spiritual leader since the anti government protests started in March, though Xinhua claims the door of dialogue has remained open.
China has been under international pressure to talk to the Dalai Lama who, Beijing says, is the guiding hand behind the unrest. The two sides have held several rounds of inconclusive talks over the past five years.
No details yet of when these latest talks might take place. And as with Beijing’s similar public softening of its stance over Darfur in the face of international calls for it to do so, not much of substance is likely to change.
Another notable change of PR tactics by Beijing: when the Olympic torch passed through the Australian capital Canberra on Thursday pro-China supporters heavily outnumbered pro-Tibet ones as the large ex-pat community in Australia was mobilized.
Reports from Australia ahead of that country’s prime minister’s visit to Beijing that China wants to elbow its way into the takeover by BHP Billiton, the world’s largest mining company, of its rival Rio Tinto.
In February, it acquired a 9.3% stake in Rio for $14 billion through state-owned Chinalco. Wanting to secure raw materials for its steel industry, Chinese officials have been concerned that BHP’s $135 billion bid for Rio would lead to the merged group having too much power in negotiating prices. The price of iron ore has jumped fivefold since 2001, while coal prices are more than twice last year’s levels.
Baosteel has repeatedly been touted as a BHP bidder, but it would be a financial stretch even for China’s leading steelmaker. Just a 9% stake in BHP could cost upwards of $20 billion.
A consortium bid, if one is to materialize, seems more likely. And a consequential minority stake is more likely than an outright bid. Offshore investors must gain Australia’s Foreign Investment Review Board approval to buy more than 15% of a local company. Entities judged to be backed by Sovereign Wealth Funds cannot buy any shares without FIRB approval.
There are plenty of other deals for Prime Minister Kevin Rudd to talk about during his visit, too: Sinosteel Corp last month offered A$954 million for iron ore miner Midwest Corp, while China Metallurgical Corp has agreed to pay $300 million to buy a Cape Lambert Iron Ore Ltd project. Shougang, China’s fourth-largest steelmaker, already holds an 8.4% stake in Australasian Resources Ltd, which is developing an iron ore mine in Australia, all of which is making some Australians call for tighter regulation of foreign investment in the country’s natural resources.
Australia’s Takeovers Panel has given Chinese companies another sharp lesson in the ways of cross-border M&A. This time: no concert parties.
It has ruled that Shougang Concord can’t go ahead with buying a 19.7% stake in Australian iron ore company Mount Gibson because Apac Resources, in which Shougang Hong Kong holds an 18% stake, already owns 20..2%. That would take Shougang above the 19.9% stake that triggers the requirement for a full bid under Australia’s takeover rules.
Shougang Concord and Shougang Hong Kong are both subsidiaries of state-owned steelmaker Shougang Corp. Shougang Concord was proposing to buy its stake in Mount Gibson from Gazmetall, an ore producer controlled by Ukranian-born billionaire Alisher Usmanov.
Chinese steel companies have been trying to buy a number of Australian mining companies in order to secure raw materials. Sinosteel is making a hostile A$1.2 billion bid for Midwest Corp, and Baoshan Steel is involved with BHP Billiton’s attempt to buy Rio Tinto for $140 billion. The Takeovers Panel has made it clear that if the Chinese are to come, they have to come in through the front door.
Filed under Economy, Markets
State-owned China National Offshore Oil Co (CNOOC) ran into a wall of xenophobia that stopped dead its bid for the U.S. oil company Unocal in 2005. With the world even more sensitive to China’s global scavenge for natural resources, state-owned Aluminum Corporation of China (Chinalco) is seeking to preempt similar objections to its investment in Australia’s Rio Tinto.
Chinalco has taken a 9% stake in Rio in partnership with Alcoa of the U.S. Rio is trying to fend off the $140 billion takeover interest of fellow Australian miner BHP Billiton, prompting speculation that Chinalco might make a bid or be positioning itself to buy Rio’s aluminum assets, notably Alcan. A 15% stake would trigger a review under Australia’s inward foreign investment rules. BHP has to make a formal bid Wednesday or walk away for six months under takeover rules.
Though still shy of that, Chinalco has voluntarily submitted itself to an informal review. Australia Prime Minister Kevin Rudd and Foreign Minister Stephen Smith met Foreign Minister Yang Jiechi and Natural Resources Minister Martin Ferguson met Chinalco president Xiao Yaqing in Canberra this morning to discuss the investment.
Any deal that leaves a state-controlled foreign company controlling significant Australian natural resources would potentially put Australia in a delicate position with one of its leading trade partners. The government has been dancing around the question of whether either a bigger Chinalco stake or a full bid would fall foul of national-interest provisions of the foreign investment rules.
In 2001 John Howard’s government blocked Royal Dutch Shell’s planned $9.1 billion takeover of Woodside Petroleum, the Australian oil and gas group, on just such grounds.
Meanwhile, on a much smaller scale Sinosteel looks set to by Australia’s iron-ore miner Midwest Corporation for $1.1 billion, now Murchison Metals, the Australia-listed mining group backed by Mitsubishi of Japan has abandoned its bid. Sinosteel has made a highly conditional offer for Midwest but has yet to make a formal bid despite building a 20% stake.
One final thought: if Chinalco does end up buying Alcan off a merged BHP-Rio, that will likely trigger national-interest reviews from the Canadian and French governments. More delicate dancing to come.