fortescue breaks ranks to ink deal with china, page-35

SNAP ANALYSIS: Huge gas deal warms China-Australia ties
Tue Aug 18, 2009 3:00pm EDT

BEIJING (Reuters) - China's economic relations with Australia appeared to warm up on Tuesday with news of a A$50 billion gas deal -- the biggest trade deal ever between the two nations -- but behind the smiles a welter of economic and political disagreements remain to be sorted out.

Australian Resources Minister Martin Ferguson flew to Beijing to unveil the liquefied natural gas supply deal between PetroChina (0857.HK) and Exxon (XOM.N), a partner in Australia's Gorgon gas project, a day after the two countries seemed to patch up some of their differences over iron ore.

He denied politics had played any hand in the timing of the deal, but it adds to the evidence that the two countries have put the worst behind them -- or at least are trying to give that impression.

The relationship between the two commodity market giants has been defined in the past few months by a diplomatic row over iron ore. Things hit rock bottom when China arrested four Rio Tinto (RIO.AX) employees on suspicion of stealing state secrets.

Since then, both governments have been trying to cool things down. China dropped the state secrets charge and after months of wrangling with Rio and BHP Billiton (BHP.AX) over iron ore pricing, Chinese steel mills agreed a face-saving deal with the much smaller Fortescue Metals Group (FMG.AX) on Monday, signaling a way out of the impasse.

Despite the deal with Fortescue, analysts say China is unlikely to persuade Rio and BHP that it deserves a bigger price cut than the 33 percent offered to Japanese and South Korean steel mills in June.

The two sides depend on one another, with China's massive steel sector the only bright spot for Australia's dominant iron ore suppliers following a slump in global demand, but neither side has been prepared to blink first.

MUTUAL DEPENDENCE

Australia's rich resources and China's soaring demand has driven the two countries closer.

"The Exxon Mobil A$50 billion contract with Petrochina is a very strong statement of the close alignment between the Australian and Chinese economies," Ferguson told Reuters.

"Australia is a resource- and energy-rich nation, and we have a capacity, if we develop our resources, to meet the economic needs of China," he said. "I think the Exxon-Mobil contract indicates that from time to time there are tensions in the diplomatic relationship, but commercial activity goes on."

The $41 billion LNG deal shows that China's growing demand for gas, uranium, iron ore and coal -- and Australia's investment needs -- will overshadow any short-term political rows. And Australia is well-placed to supply that demand, boasting much shorter Chinese shipping times than suppliers in the Americas.

Despite the high-profile rejection of Chinalco's Rio Tinto bid, Chinese firms continue to acquire and develop smaller-scale Australian mines desperate for new investment.

The Fortescue deal included a promise of up to $6 billion of financing for the Australian company, which also aims to fund its ambitious expansion plans by listing on the Shanghai Stock Exchange.

Meanwhile, China's Yanzhou Coal Mining (1171.HK) last week agreed to buy Felix Resources (FLX.AX) for $2.9 billion, and smaller Australian metals firms like Kagara Ltd (FMG.AX) are also up for grabs, continuing a flow of investment deals that were barely interrupted by the global financial crisis.







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