MAC: Mines and Communities

London Calling raises some awkward questions about Chinese arrests

Published by MAC on 2009-07-20

For the past ten days a media rumour mill has been relentlessly grinding over possible motives for the July 5 arrests of Stern Hu, a top Rio Tinto executive, along with three lower echelon staff, in China.

The detentions have been variously viewed as a state security force "palace coup"; a return to the "bad old days" of Peking realpolitik; as stemming from the regime's outrage at Rio Tinto's reneging on its US$19.5 billion deal with Chinalco. Or, primarily, as a consequence of the company's recent success in negotiating a fairly buoyant price for its iron ore imports. Like in 2002, when China's state-owned Minmetals bid, unsuccessfully, for control of Canada's Noranda, there's been more than a hint of Sinophobia to some of the commentaries.

On July 15, Australia's foreign minister announced that the "world is watching" what the Chinese authorities now do with Mr Hu and his colleagues. Now, that's hyperbole for you! Some might regard the statement as ill-befitting a top diplomat, representing the one country which has enjoyed more mineral-related commerce with the Peoples' Republic, and for longer, than any other.

So far this much seems clear: Stern Hu, Rio's top iron ore price negotiator, is accused of espionage, stealing state secrets - and probably bribery to boot. Indeed, at the end of the day, that may be the only charge to stick.

Rio Tinto is keeping shtum about the affair. Nor does the company appear to be fazed at the possibility that medium term trade with the Chinese will suffer. The company announced last Wednesday that its global iron ore output would be maintained at current levels, in anticipation of a recovery of Chinese demand; and that of course, implies reneweal of friendly negotiations over price.

No doubt this is a prudent strategy on Rio's part. It's certainly conceivable that Mr Hu and his colleagues greased the palms of some Chinese steel owners in order to secure information for leverage negotiations with members of China's Iron and Steel Association (CISA). But it's also possible that Rio Tinto's higher flyers - in London and Australia - didn't know of the alleged chicanery or chose to ignore rumours that it was ocurring. In any event, the company will now urgently be trying to determine whether corrupt dealings in fact took place.

Bribery - par for the course

According to one industry insider, bribery " get access to industry data... has become an unwritten industry practice," [see article below].

There's certainly no doubting that Rio Tinto has long led the global field in brokering contracts with Chinese steel mills that operate in its (and BHP Billiton's) favour.

Arguably, the recent negotiations verged on attempting to establish a price-fixing cartel; or at least to separate negotiations with smaller steel mill owners from their giant state-owned counterparts.

If so, it's hardly surprising that Mr Hu and colleagues are now suffering incarceration while the details of an alleged plot are being investigated, and to prevent them leaving the country. Faced with a similar situation in the US or EU, wouldn't anti-monopoly authorities have considered doing the same?

Mr Hu (an accomplished violinist - his forename deriving from Isaac Stern, the celebrated exponent of the instrument) will be treated kindly while he's serving at the pleasure of the Beijing regime.

But the fate of his arrested colleagues is less certain (few in the media have even mentioned their names.)

Other Rio Tinto employees who may have been in on the "plot" are already well clear of the battle ground: according to the July 15 Australian Financial Review, the company pulled out its mid and lower level staff from mainland China before the arrests. Was this was for their own protection or, more sinisterly, to protect the company's inside information ? We may never know.

Meanwhile, the fate of many dissidents, not to mention labourers, within the Peoples' Republic is far worse. See:

Disturbingly, the international press which has got so agitated over the detention of Mr Hu and his friends, have offered little, if anything, by way of outrage at how hundreds of thousands of these workers are being treated.

Rio Tinto bribery across the board with all 16 Chinese steel mills involved, report says

Business Spectator (Australia)

15 July 2009

Rio Tinto Ltd may have bribed executives from all 16 Chinese steel mills participating in iron ore price talks this year, an industry insider claims as Beijing moves to reassert its authority in the iron ore sector.

According to the China Daily, there is some speculation that the Chinese government may invalidate 20 iron ore import licenses to regulate the business, as the diplomatic row heats up with regards to the detention of Rio Tinto executive Stern Hu.

"Rio Tinto got to know the key executives of the 16 steel mills, who have sensitive industry information, when the China Iron and Steel Association (CISA) brought them to the bargaining table," a senior manager at a large steel company, who requested anonymity, told the China Daily.

"And then Rio Tinto bribed them (to get access to industry data), which has become an unwritten industry practice," the source said.

Rio Tinto has made any comment on the issue. However, the miner did say earlier on Wednesday that it was shipping iron ore to international customers as scheduled, including China.

"Shipments continue as scheduled and it's business as usual," the spokesman said, but he was unable to immediately clarify whether the company had stopped tendering shipments," a company spokesman said.

China's coercion game

Business Spectator

15 July 2009

There are all sorts of complicated and sophisticated analyses of the motives behind China's decision to arrest Stern Hu and his Rio Tinto colleagues for stealing state secrets. No doubt the motivation has many layers. At its heart, however, it would appear that China is simply trying to act in its own national and commercial interests.

Chinese media reports that senior executives from five big Chinese steelmakers (which follows the arrest of at least one senior executive from a major mill) tend to support the theory that while there might be some element of retribution, at least in terms of its timing, for Rio's decision to abandon the proposed alliance with Chinalco and embrace its former foe, BHP Billiton, the intervention of China's state security apparatus in the industry has more to do with events that pre-date those developments.

It was Rio Tinto that led last year's acrimonious benchmark price negotiations with China's Baosteel that led to last year's extraordinary 86 per cent increase in iron ore prices.

Rio escalated the tension in the relationship with the Chinese authorities when it subsequently, quite lawfully, exercised an option in its contracts to deliver only 90 per cent of the volumes it had agreed to deliver, instead diverting that volume into the spot market to take advantage of higher prices. Given that it was laden with its Alcan-related debt, and under takeover from BHP, its priority was to maximise its cash flows and value.

In the post-crisis environment, it has again been Rio leading this year's as-yet uncompleted round of contract negotiations. This time it has been an even more adversarial process and has become so protracted that the June 30 deadline for rolling over the contracts passed without a deal, leaving Rio free to sell its ore wherever it wants.

What Rio, BHP and Vale have been doing is selling either into the spot market or doing direct deals with individual steel mills, some of whom have then on-sold some of their volume to smaller mills which are unable to source ore themselves, given the collapse of China's domestic iron ore industry.

Early this year, as the tension in the negotiations started to rise - China wanted to unwind most, if not all of last year's price increases - Baosteel, one of the more progressive and commercial new-style state-owned enterprises, was replaced as lead negotiator for the Chinese mills by the China Iron & Steel Association, until then a noisy but somewhat irrelevant old-style organisation that was once a kind of conduit for government influence in the sector.

In effect, Beijing appears to have decided that Baosteel was not being tough enough in the negotiations. It was unable to fully exploit the leverage that the crisis and global recession should have provided the customers over the consumers, and in the process punish other producers, particularly Rio, for using their market power rather more successfully when the roles were reversed.

The exchange of negotiators hasn't, to this point, proved successful. CISA may have demanded a bigger reduction than the prices agreed to by the Japanese and Korean mills, which averaged about 37 per cent, but Rio hasn't budged. And the mills, desperate for supply, have been busily acquiring near-record volumes of ore from the big producers, even as CISA tried to present their position as one that was unified and resolute.

Setting the security service loose on Rio and the mills will presumably put a dampener on that activity.

That's why, whatever the other influences on the decision to arrest Stern Hu and his colleagues, the most obvious explanation for such a significant and inflammatory step is that China wants to bring its own mills into line so that it can create the countervailing power to impose its own pricing framework on the producers and protect its own national interest in reducing the cost of supply.

If China can't do that in the current economic climate, it will be at the mercy of the three heavyweight producers as the global economy recovers, given the impact of the crisis on its domestic production and on emerging higher-cost and/or lower quality alternative sources of supply.

Apart from the diplomatic nightmare and tensions the arrest of the Rio executives will cause, primarily with Australia, the decision to reassert state authority and the aggressive way the change in policy has been implemented - particularly the use of China's massive security apparatus - will cause concern around the world.

The Chinese may believe that, given the way the crisis has ravaged the West, there is no risk in demonstrating its indifference to international commercial and legal norms or sensitivities.

Its actions, however, will cause consternation and strengthen the cynicism in the West about the professed independence and commerciality of China's state-owned enterprises.

Chinalco and the other more progressive SOEs may well see themselves as akin to normal commercial entities, and may well be committed to act as if they were driven purely by shareholder returns, but China has now demonstrated that whatever the intentions and aspirations of the SOEs, it can re-impose central control and direction in an instant, in a very coercive way.

It will be almost impossible for the foreign investment authorities and governments of the countries whose resources the Chinese SOEs have been acquiring and coveting to ignore the demonstration effect of what is now occurring. The natural response would be to be even more cautious about any proposal that involves resources or other assets of even the slightest national interest sensitivity.

One could also posit that imposing central controls and injecting some elements of fear into the more commercially-minded and outward-looking SOEs probably isn't going to be in the longer-term interests of the Chinese economy and the efficiency with which it deploys its vast reserves.

The other problem for the Chinese is that they could, perhaps, force iron ore prices lower, or perhaps cause Rio, BHP and Vale to lower production, by prohibiting the mills from acquiring iron ore other than through a CISA-negotiated deal.

In the short term, however, while that might hurt the big producers it would also damage second-tier groups and the mills themselves, not to mention China's own economy and its ability to implement the massive infrastructure component of its stimulus programs. In the long run, a prolonged effort to coerce the mills and intimidate the producers is good for no-one, including the Chinese.

Rio sticks to 2009 production target on recovery in Chinese steel demand

By Ginger Ding, Interfax China Metals and Mining

17 July 2009

Rio Tinto, the world's second-largest iron ore producer, will keep its worldwide iron ore production target unchanged at 200 million tons for 2009, as it expects China's steel demand to continue to recover over the rest of the year, according to the company's second quarter review released on July 15.

Rio Tinto's global iron ore output reached 45.16 million tons during the second quarter of 2009, increasing by 8 percent on an annual basis and 43 percent from the previous month. Its iron ore production for the first half of the year totaled 76.81 million tons, down 3 percent from the same period of 2008.

China imported 55.29 million tons of iron ore in June alone, up 3.42 percent from the previous month. The country's imports for the first half of the year reached 297.18 million tons, up 29.3 percent on an annual basis.

According to Rio Tinto, during the second quarter, the company settled 2009 long-term iron ore supply contracts with steel mills in Japan, South Korea and Taiwan. It charged a provisional price or spot prices for deliveries to other customers including those in China. Approximately half of Rio Tinto's iron ore output so far this year has been sold through spot markets.

Iron ore price talks between Chinese steel mills and Rio Tinto, as well as the other two major iron ore suppliers, have yet to conclude. Chinese authorities are also investigating an espionage case involving Rio Tinto employees, which is directly related to the annual price talks.





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