Alexander Smith

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Beijing’s Rio talks must avoid iron fist

July 8, 2009

Chinese anger at Rio Tinto for reneging on a deal with aluminium group Chinalco and opting instead for an iron ore joint venture with BHP Billiton last month was understandable. Indeed, China has good reason to question the Rio-BHP JV on competition grounds.

But the detention of four Rio Tinto employees – on suspicion of espionage according to Australia’s foreign minister — bang in the middle of sensitive negotiations on iron ore exports to China is a
dangerous step in the wrong direction. Beijing must either justify the arrests publicly or release the Rio staff immediately.

Rio is locked in tough negotiations with China’s massive steel sector following its refusal to agree to Chinese demands for a bigger cut in contract prices. As a result, Rio is for now at least charging its Chinese customers spot market prices, which are considerably higher.

Comments earlier this week by a Rio Tinto spokesman saying the company has never been so busy and is selling all the iron ore it can make can’t have pleased its customers or the government in Beijing.

There is a history of bad relations between the two big iron ore producers and China’s government. In the past this has prompted the miners to wrap themselves in the Australian flag to draw Canberra in on their side to protect their interests.

That last open confrontation came in 2006, when Canberra protested vigorously about a secret letter from China’s Ministry of Commerce to the country’s customs inspectors urging them to pay particular attention to the paperwork accompanying imports of Australian ore to ensure the ore matched the documentation precisely and reject any cargoes that did not.

Canberra threatened to refer the discriminatory treatment of Australian ore exports to the World Trade Organisation. The situation was defused following negotiations between Canberra and Beijing that resolved the “misunderstanding”.

This is not the first time that China has charged foreign companies for espionage. In 1996, the authorities arrested a Chinese manager at Shell and one of her counterparts at the
China National Offshore Oil Corp. (CNOOC), charging them for stealing state secrets regarding plans by Royal Dutch Shell to build an oil refinery in southern China.

The secrets, according to media reports, involved information on the financing and environmental implications of the project. CNOOC was to become Shell’s partner at the venture.

Foreign oil companies have believed that the arrests reflected concern about Chinese nationals working for foreign firms and using their local knowledge to violate the law.

Australia has rightly pushed China for an explanation of why the four Rio staff, who are part of its iron ore sales team, have been held. The four include one Australian national who is apparently accused of stealing state secrets, while the other three employees are reported to be Chinese citizens.

It’s clear Rio is already in Beijing’s bad books. But the company’s “perfidy” — Chinese news agency Xinhua’s description of Rio’s u-turn on the Chinalco deal — is part of the cut and thrust of business. Deals don’t always work out and in the case of Rio-Chinalco the decision to scrap it was in the best interests of the Anglo-Australian miner’s shareholders.

Chinese hunger for natural resources — particularly oil and iron ore — is taking it to all four corners of the world to secure supply, often by buying assets or the companies that control them. Sinopec’s recent agreement to buy Addax Petroleum and CNPC’s renewed negotiations to acquire Repsol’s Argentine asset YPF indicate Beijing has finally overcome previous resistance to its overseas expansion plans.

The quid pro quo for accepting investments by state-sponsored Chinese companies in raw materials abroad is an understanding that companies wanting to operate in China can do
so without fear of retribution if business deals do not go Beijing’s way.

There is no place for detaining salesmen during negotiations on commodity prices, which smacks of bullying tactics. If there is real evidence of espionage or stealing state secrets, then Beijing needs to produce concrete evidence and fast. Failure to do so will stick in the throat.

It is in China’s long-term interest to prove to the rest of the world that it can compete while playing by the rules.

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  • About Alexander

    "I am a Reuters columnist specialising in financial services -- particularly investment banking, M&A and corporate finance. I am based in London, but have lived and worked in Spain and South America. I have been a journalist and editor for almost 19 years and before moving into commentary at the beginning of 2009 I was the editor responsible for Reuters coverage of company news in Europe, Middle East and Africa."
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