port hedland port may expand with china's help, page-35

WA THE GOLDEN GOOSE

IMO - The Pilbara the Golden EGG


By: Esmarie Swanepoel
7th August 2009


The minerals’ trade between Australia and China has recently come under the spotlight, as four of diversified giant Rio Tinto’s workers were arrested in China, on allegations of bribery and espionage during iron-ore pricing negotiations.

Despite numerous attempts by the Australian government to negotiate the freedom of these workers, China is sticking to its guns, stating that the Rio Tinto officials had caused a ‘huge loss’ to China’s economic interest.

Whether the allegations are true is a matter of public debate, but it has to be noted that the arrests were made shortly after Rio Tinto negated on an agreement that would have seen state-owned Chinese steel maker Chinalco investing up to $19,5-billion in Rio Tinto. Chinalco would have paid $12,3-billion for stakes in iron-ore, copper and aluminium businesses owned by Rio, while proposing to spend a further $7,2-billion for notes which could have been converted into Rio shares at a later date.

Chinalco would have ended up with an 18% direct stake in Rio.

However, before regulatory approval could be obtained for the deal, Rio Tinto boss Tom Albanese signed an agreement with the other diversified major, BHP Billiton, which would see the two companies jointly developing their Pilbara iron-ore projects. Together, the diversified giants would raise $15,2-billion to develop the Western Australia iron-ore projects.

Newswire Reuters reported that the proposed venture between the two giants could be a threat to China, the world’s largest steel making country, as the combination of the world’s second- and third-largest iron-ore producers could leave only two main suppliers, alongside Brazil’s Vale.

Together, these three companies control about 70% of global iron ore trade, while China consumes more than half of globally traded iron ore, Reuters stated.

Although Australia’s federal treasurer Wayne Swan said that Rio’s decision to scrap the Chinalco deal was a ‘commercial decision’, and completely independent from the government, it seems that the Chinese still reacted badly.

However, Western Australian Premier Colin Barnett noted, at a recent assembly hosted by the University of Western Australia, before the In the Zone conference, that the Australian government should have done more to establish a mature relationship with China.

Barnett is quoted by The Australian as saying that it was not proper that Australia’s diplomatic, political and economic relationship with China was, in part, being determined by a private company, Rio, and its boardroom in London.

“From their point of view, they would think, we are the major customer, why aren’t we being made welcome in the larger companies and quality resources,” Barnett was quoted. “It is very confusing to the Chinese. I don’t believe that Australia has handled the economic and investment relationship with China as well as it could have. To some extent, it seems to be the case of ‘just let us sell raw materials and product to China, and not worry about the broadening of the economic relationship’.”

Barnett is right, to an extent. China is currently Australia’s biggest trade partner, worth over $53-billion in 2008, and iron-ore exports alone accounted for an estimated $14-billion of that figure, which was powered mainly by Rio and BHP Billiton.

THE GOLDEN GOOSE

The government of Australia has reported that its resources sector was the country’s largest single export and during 2006/7, over 80% of its resources output was exported, accounting for about 49% of its total goods and services export.

The resources sector covers exploration, extraction, processing and exporting of minerals and petroleum, of which Australia has large quantities.

The Australian Department of Foreign Affairs and Trade has reported that the continent has the world’s largest resources of recoverable brown coal, lead, rutile, zircon, nickel, titanium, uranium and zinc. It also ranks second in the world for bauxite, copper, gold, ilmenite and silver.

Australia holds an estimated 37% of the world’s economic demonstrated resource (EDR) of nickel, 18% of the EDR of zinc, over 30% of the EDR of lead, and over 16% of the EDR of silver.

The department noted that the EDR for industrial diamonds was also ranked third largest in the world, with its manganese EDR ranked fourth.

Australia is the fourth-largest producer of diamonds by weight, only after Russia, Botswana and the Democratic Republic of Congo. It was the second-largest producer of industrial grade diamonds, and the third largest producer of gem and near gem diamonds. Its EDR of industrial diamonds ranked third in the world, with an estimated 19% of global resources.

It also had the largest reserve of uranium, with about 27% of the world’s reasonably assured uranium resources, recoverable at less than $80/kg.

Growth in the resources sector depended on investment in exploration; and strong growth in the sector in recent years has been underpinned by robust mineral exploration expenditure over the past decade. “The government recognises the substantial contribution foreign investment has made, and will continue to make, to the development of Australia’s industries and resources,” the department has stated.

ENTER THE DRAGON

In May this year, Australian Trade Minister Simon Crean said that the continent had recorded its second-largest-ever trade surplus of $2,5-billion for the month of March, on the back of a new record in export to China of $4,4-billion.

“China will be the fastest growing country in the world this year. I have no doubt that it will be the fastest growing country in the world next year, and probably the year after that as well,” he stated.

This likely had much to do with the $750-billion stimulus package that the Chinese government had invested in its own economy, causing Chinese steel makers to halt exports and supply only their own markets. On top of that, in November last year, the Chinese government announced in November last year that an estimated 6 000 of its coal mines would close down over safety concerns, making it imperative for the Asian giant to import.

Speaking at a foreign investment conference in May this year, Rio’s global head of strategy Doug Ritchie said that there was no doubt that the world had changed, and that China was set to play a major role in the global economy.

“Over the next five years, China is expected to consume more iron-ore than Australia has exported throughout its history. So how Australia responds to China will, I believe, be crucial to the future wealth of this country.”

Ritchie noted that Australia’s major mining companies, BHP Billiton, Rio, Anglo and Xstrata were already majority foreign-owned, and that the foreign ownership had allowed Australia access to the global capital it needed to develop its resources. The stock of foreign investment in Australia at the end of December 2007, totalled $1,6-trillion.

“Foreign capital plays an even more pivotal role when it comes to the growth of the resources sector. For example, in 2006, foreign direct investment was equal to over 80% of new private capital expenditure in the Australian mining sector. Without it, we simply would not have been able to support the growth of the industry.”

Ritchie noted that one of the popular myths in circulation was that foreign investment would suck out wealth and jobs from a country. However, research showed that for every dollar of income generated in Australia, 95c remained in Australia, and only 5c was sent overseas.

“Today, the global competition is even greater. China has huge needs for the future and will buy and develop other assets that are in competition with Australia, if we fail to attract their investment. And it is already happening, China has announced at least $33-billion in acquisition and development initiatives in African resources over the past few years – and then there is Latin America,” Ritchie warned.

The question now, Ritchie said, is how Australia could handle the particular opportunity afforded today by the rise of China? He noted that China was emerging as a principal driver of global growth and a major supplier of capital over the next several decades.

“I believe there is currently a window of opportunity for Australia to position itself uniquely for a mutually-rewarding relationship that could define the next few decades. By forging a deeper engagement with China, including allowing substantial inflows of capital, we could generate enduring export markets at a time when alternative markets are thin on the ground.”

Ritchie said that Australia could also gain a long-lasting relative advantage in securing capital on competitive terms, which could underpin the country’s recovery from the current downturn and its longer-term growth prospects. “Importantly, we could also increase Australia’s standing and influence with the country set to emerge as an economic and strategic super power.”

It should be noted that at the time he was making the comments, Ritchie was speaking at a mining conference in Melbourne, in an effort to win support for the Rio/Chinalco deal.

YING AND YANG

Although the Australian government has, on numerous occasions, welcomed China’s involvement in the resources sector, not all Australians feel the same way.

In a study conducted by the Lowy Institute in September, some 78% of Australians oppose investment by Chinese government-controlled businesses. This compared poll figures quoted by Reuters, which found that some 57% of participants found that Australia should resist Chinese investment in mining companies, while only 25% believed that Chinese investments should be welcomed because it helped the domestic economy and provided jobs.

The Australian worker unions have also thrown their weight behind opposition to Chinese investment, saying that the national debate on the use of export licenses in the resources sector should be revitalised.

“Our unions are cautious about the ownership of our strategic resources by foreign investment controlled capital, especially if this new source of capital acts against our own economic interest, the Construction, Forestry, Mining and Energy Union president, Tony Maher has stated.

“The unions are concerned that these companies holding strategic minority investments, would seek to influence the supply/demand balance in their favour,” said the Australian Workers’ Union’s national secretary, Paul Howes.

“Companies with strong relationships with foreign governments may seek to unfairly influence iron-ore and coal pricing, as well as aluminium pricing, using the current global financial crisis to warp markets to ensure their interests are primary,” Howes added.

Australia’s opposition leader, Malcolm Turnbull has also spoken out on the issue, saying he was concerned that China would not allow any foreign investment company to a acquire a similar stake in that country’s national companies, as it was looking to acquire in the Rio deal.

Reuters has reported that Turnbull said the investment into Rio was clearly strategic because it would enable Chinalco to block other parties from taking over Rio, and would give Chinalco direct influence over some of Rio’s key assets, including Australian iron-ore and aluminium assets.

“The object of the Chinalco acquisition is plainly strategic. This will give Chinalco, and hence the Chinese government, the seat of greatest influence and access to information about production, costs, pricing and marketing strategies of our second-largest resources company,” Turnball was quoted.

With this much resting on the Chinalco/Rio deal, it is little wonder that the Chinese have reacted the way they have to its failure. Chinalco chairperson Xiong Weiping had expressed its frustration at Rio’s decision, and had warned that Chinalco, which remained Rio’s largest shareholder, would keep a close eye on the rights issue of the BHP Billiton joint venture.

At the time of writing, the four Rio employees were still being detained in China, with little indication as to when the issue would be resolved.