Tag Archives: Rio Tinto

Canberra Getting Antsy Over Rio 4

Australia trade minister Simon Crean has called on Beijing to lay charges or release detained Rio Tinto sales executive Stern Hu, an Australian citizen, and three Chinese colleagues. The four men are accused of stealing state secrets in connection with the iron-ore price negotiations earlier this year. Rio had denied the allegations. The quartet has been in detention since July 5th without charge as Chinese law allows.

Trade relations between the two countries increasingly risk being harmed, Crean says, without the case being settled one way or the other. The Australian met his Chinese counterpart, Chen Deming, at the APEC trade ministers’ meeting in Singapore, where the issue came up and we understand Crean made his government’s position crystal clear.

China is Australia’s biggest trade partner, with iron ore exports to China accounting for $14 billion of $53 billion in bilateral trade, so the case is more likely to proceed at China’s pace than Canberra’s. And with the iron-ore price negotiations dragging past their June 30 deadline, no bargaining chips are going to be given away cheaply.

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Rio Arrests Tip Of New Anti-Corruption Crackdown?

Knives are being sharpened. China Daily is suggesting that Rio Tinto has been engaged in widespread bribery in the steel industry, with the natural resources company bribing executives from all 16 steel mills involved in the iron ore price talks. Five Chinese steel executives are now said to be under investigation. Is this the early stage of a new campaign to crack down on corruption in Chinese industry-especialy those sectors in which there has been a lot of foreign direct investment?

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Thoughts On Foreign Capital And China’s National Economic Security

As a follow-up to yesterday’s post about the shifting sands of economic security policy, this Bystander passes on this paper from 2007, Economic Security: Redressing Imbalance, as an informative piece of background. It is written by Jiang Yong, director of the Economic Security Research Center at the China Institutes of Contemporary International Relations, which does policy research for the government.

Jiang makes the point that China’s policy makers are concerned that foreign capital is supplanting domestic ownership  in the backbone industries (including steel) and has reached a critical level in many of them at which, even then, it was seen as threatening the country’s national economic security. Plus he puts a case that policy makers, perhaps taking a leaf out of Japan’s book 20 years ago, should ensure that there is national reciprocity when it comes to foreign capital investment, not to be protectionist but as a deterrence to overwhelming inward flows.

Much of the paper is concerned with the growth of foreign capital in the financial sector (making it a worthwhile read now for anyone in financial services) but its broad points provide some context to make the recent Rio situation a little more understandable.

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Detention Of Rio Execs May Signal Shift In China’s Economic Security Policy

In any commercial negotiation, intelligence about the other side’s intentions is invaluable. At some point gathering information becomes corporate espionage. Where the line between the two is drawn is rarely clear, and in China, perhaps, murkier than in most places, and more a political than legal decision.

The detention without charge of Rio Tinto’s chief iron-ore salesman in China, Stern Hu, and three of his Chinese colleagues from Rio’s Shanghai office is a case in point. It is making many multinationals operating there look again at the security of their communications, while Australia’s foreign minister, Stephen Smith (Hu is an Australian citizen) has warned that it puts at risk a wide range of business dealings with the country. But this may all be more about internal politics than international trade.

The case is complex and unclear. The four men, all involved in negotiations earlier this year with China’s steel companies over iron ore prices, were detained on July 5th. They are accused of stealing state secrets and bribing Chinese steel makers for information. Chinese officials have given no details (there is no charge yet, so no evidence to support it is necessary, though the government says it has it: Catch-22; Chinese law lets people be held for investigation for some time with charges being brought).

Chinese press reports say the four Rio executives acquired information about an internal meeting of the China Iron and Steel Association regarding the price negotiations. Other press reports say that their computers have been seized, which could contain details of Rio’s negotiating tactics and other commercially sensitive information. (Rio hasn’t said anything publicly about computers as far as we can tell.) Yet more press reports say several Chinese steel executives are also being investigated and that one, from Shougang, China’s eighth-largest mill, has been detained.

The detentions also followed the collapse of a proposed $19.5 billion investment in Rio by Chinalco, Rio deciding late on to raise capital through a rights issue instead, and to strike an iron ore production joint venture with BHP Billiton, decisions that sat ill with Chinalco. That adds grist to the conspiracy theorists’ mill.

But the collapse of the Chinalco Rio investment was followed by the establishment of a top-level committee to take a tighter strategic policy grip on investment deals with the Party’s standing committee taking a leading role. President Hu Jintao appears to have endorsed the detention of the Rio four (the same President Hu who bailed from the G8 meeting in Italy last week to deal with the Urumqi riots; these days, we are seeing less of the once ubiquitous Prime Minister Wen Jiabao, and more of Hu.) Ever since the global financial crisis hit China hard last September, Chinese economic policy has become a national security concern (for the economic prosperity/social instability/political legitimacy nexus we have outlined frequently before). The Party’s survival strategists — the political risk managers and security people — not the economic planners and reformers are in charge. They appear to be moving from the macro — the 8% target growth rate, the 4 trillion yuan stimulus package to deal with the collapse of the real estate market, the fall in share prices on the Shanghai and Shenzhen exchanges, and the unemployment in the export workshops of the Pearl River Delta and other coastal regions — to the micro. While the reasons for that are only to be guessed at (anything from internal power struggles in the run up to the changing of the guard in 2012 to defense of regional fiefdoms to just old habits dying hard) if the Rio four’s detention turns out to be anything more than an anomaly, this is a significant policy shift.

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Beijing Hints At Flexing Its New Antitrust Muscles On Behalf Of Jilted Chinalco

There was obviously some wounded pride following the collapse of Chinalco’s proposed $19.5 billion investment in Rio Tinto. But to add insult to injury, Rio is now proposing an iron-ore joint venture with BHP Billiton in Western Australia.

Such a combination would account for 80% of the exports from one of China’s main sources of supply, Australia. To Chen Yanhai, who heads the raw materials department at the Ministry of Industry and Information Technology,  “The potential deal has an obvious color of monopoly. The joint venture is likely to have a big impact on the Chinese steel industry as China is the world’s biggest iron ore importer” (from CCTV via Reuters). “The deal should be subject to Chinese anti-monopoly law,” Chen adds.

That sting in the tail will raise some eyebrows among international M&A bankers. China’s anti-monopoly law says the ministry has to approve business combinations if the joint global revenue of the companies involved exceeds 10 billion yuan ($1.5 billion) or 2 billion yuan in China if two or more of the firms involved each cross a threshold of 400 million yuan of revenue in China during the previous accounting year. Both BHP and Rio have blazed past that. In the year ended June 30, the former’s revenue in China was $11.7 billion while the latter’s was $10.8 billion.

It is unclear what remedies would be imposed if the Rio-BHP deal was found to be monopolistic by Beijing (or even if it could apply such a ruling), but Chen indicated aid to domestic miners could be one. There have already been discussions around this between Canberra and Beijing at the diplomatic level, we hear. And BHP says it and Rio would be discussing the potential regulatory issues with Chinese officials, according to Reuters.

Meanwhile, Chinalco has to decide what to do with the stake in Rio it does hold, and whether to take up its allotment of Rio’s rights issue that is replacing its investment. It could dump its stock with a grumpy flourish and take the loss, not do that but not take up its rights issue allotment, thus diluting its stake, or take up its rights and hang in to see what develops. Patience rather than petulance might well be the right virtue in this instance.

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Chinalco-Rio Update

Rio Tinto has confirmed that the $19.5 billion Chinalco investment is off and that it will instead raise $15.2 billion through a rights issue (see “Chinalco’s Rio Deal On Verge Of Collapse“). Chinalco’s president Xiong Weiping said in a brief statement that the company is “very disappointed”. It is not clear what Chinalco’s next steps will be to secure raw material supplies around the world, or whether the rebuff to what would have been the largest Chinese foreign investment will deter other Chinese enterprise from investing overseas. “Chinalco will continue to explore opportunities to advance its strategic objectives and in the meantime will monitor developments at Rio Tinto as the company’s current largest single shareholder,” Xiong said in his statement. Which isn’t saying much at all.

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Chinalco’s Rio Deal On Verge Of Collapse

Some Rio Tinto shareholders have long questioned the economic logic of the company taking a $19.5 billion investment from Chinalco, saying existing investors could raise the money through a rights issue. Now it appears they have the upper hand. Reports from London say that the Rio board is expected shortly to announce that it has withdrawn its support for the deal.

That might spare the generally pro-Beijing Australian government a potentially awkward decision on whether to veto the deal on national interest grounds (the Foreign Investment Review Board was due to rule on June 15th), and strike at least one item from the list of hot button issues with Beijing right now that spans maritime rights to Gitmo Uighurs.

A rising  share price and easing debt markets have made a rights issue more feasible for Rio, which now plans to raise $15 billion that way to pay off debt, rather than take Chinalco’s convertible bond. But the state-owned aluminum giant is going to want a break-up fee for being jilted; $195 million is the number being bandied about.

The collapse of what would have been the largest Chinese foreign investment also reopens the door for Rio to some sort of tie up with BHP Billiton. Chinalco’s options look more limited.

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Will Australia Retaliate For Coca-Cola’s Blocked China Bid?

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.

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Chinalco’s Xiao Moves On And Up

Chinalco’s president, Xiao Yaqing, is moving on at what would seem to be a critical time for the company with its $19.5 billion capital injection into Anglo-Australian miner Rio Tinto now starting to do the rounds of regulatory approvals. But having announced the proposed deal in London earlier this month, Xiao is now not just moving on, but up, to a position with the State Council, Caijing magazine reports. Xiong Weiping, who was president of Chinalco’s Hong Kong subsidiary before moving in 2006 to be general manager of China Travel Service in the territory, is tipped to replace Xiao at Chinalco.

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Rio Tinto Confident Chinalco Deal Will Pass Australian Regualtors

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.

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