June 13,2009

More Shots Fired in Chinalco-Rio Spat

By CT Johnson

In a surprise move, China's Ministry of Commerce announced that it has regulatory authority over the proposed iron ore joint venture between Australian miners Rio Tinto and BHP Billiton.  "According to China's anti-trust law, we can veto such a merger agreement if the concentration of overseas business operators will affect domestic market competition," said Ma Yu, Director of the Foreign Investment Department at the Ministry of Commerce's Academy of International Trade and Economic Co-operation.  The statement, made on China Central Television last night, was in keeping with China's increasingly tough stance on protecting its access to the resources it needs to fuel its growing economy.

Ma's statement is China's strongest reaction yet to domestic metal giant Chinalco's unsuccessful bid for Rio last week.  The company, which currently holds a 9% stake in the Australian mining giant, had been in talks with Rio to purchase an additional 9% interest for $19.5 billion.  The deal unexpectedly fell apart when Rio abruptly broke off negotiations in favor of a $15.2 billion rights offering and an iron ore production joint venture with rival BHP Billiton.  Had the transaction been successful, it would have been China's largest ever acquisition.

China's government and business community have been livid about what they see as treachery on the part of Rio and the Australian government.  Xinhua, China's official news agency, condemned Rio as "perfidious" and compared it to a "cheating" spouse.  The news service also accused the Australian government of conspiring to scupper the deal, saying the Foreign Investment Review Board extended its review process in order to allow Rio time to find another suitor. 

Prime Minister Kevin Rudd, among other government ministers, has repeatedly denied the accusation of government interference.  "We welcome Chinese investment in Australia," Rudd said on June 5.  "Our policy on foreign investment in Australia is non-discriminatory."

While some expressed surprise that China would try to exert authority over a transaction occurring between foreign parties entirely outside China's borders, several experts confirmed that such actions were within the government's purview.  "The law has explicit extra-territorial reach and is broadly interpreted the same way as in OECD countries," explained Allan Fels, the former head of Australia's Competition and Consumer Commissions and an advisor to Beijing on drafting the law.  The Ministry of Commerce, which houses Mr. Ma, is partly responsible for administering this law.

The driving force behind Beijing's interest in the deal is its massive demand for iron ore.  China, the world's largest steelmaker, consumes approximately half the world's iron ore supply.  Rio and BHP, along with Brazil's Vale do Rio Doce, produce about 70% of the world's iron ore.  Both the Chinese government and the domestic steel industry see an anti-competitive threat in the concentration of ore production in so few hands.  The China Iron and Steel Association, which is currently negotiating significant cuts in ore prices with all three producers, denounced the Rio-BHP joint venture as having a "strong monopolistic tint."

The Australians were quick to dismiss China's threat.  Foreign Minister Stephen Smith said, "I've seen those media reports and frankly I wouldn't put them as high as to say they're suggestions from the Chinese government.  I'm sure both Chinese industry and the Chinese government appreciate that these are commercial decisions." 

Industry analysts question China's willingness to follow through with sanctions which, in the end, will be passed through to Chinese steelmakers.  As Australian Resources Minister Martin Feguson pointed out, "We will get through it.  In the end, China needs our resources and Australia needs China."

BHP chief executive Marius Kloppers took the even stronger position that China's opinion didn't matter.  "We are largely a seller of product into those markets, so we don't have any local businesses…that would be affected."


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