Commentaries

Is China after the secret of Guinness?

July 21, 2009

DIAGEO/Is Beijing trying to get its hands on the secret brewing recipe for Guinness?

China’s sovereign wealth fund has bought a 1.1 percent stake — worth around 240 million pounds – in drinks group Diageo, which owns the legendary Irish stout.

Politics, economics collide over Opel

By Paul Taylor
July 20, 2009

Political and economic logic are set to collide in the byzantine decision-making over the future of German carmaker Opel, the main European arm of fallen U.S. auto giant General Motors.
If politics prevail, as seems likely, the cost to German taxpayers will be higher and the chances of commercial success lower.

Nabucco pipeline turns corner but needs gas

By Paul Taylor
July 13, 2009

Things are finally looking up for the Nabucco pipeline.
After years of setbacks and wrangling, the prospect of building a supply route for Caspian natural gas across Turkey to central Europe, by-passing energy giant Russia, took a big step forward on Monday when five nations signed a transit agreement.
Getting Turkey on board was crucial, at a time of uncertainty in its negotiations to join the European Union.
What the 7.9 billion euro project most needs now is gas. Key potential suppliers Azerbaijan, Turkmenistan and Kazakhstan face pressure from Moscow to send all their output north, through the Russian pipeline network, rather than west.
China is meanwhile racing to build pipelines that will vie to take Caspian and central Asian gas to the Far East. Iran and Iraq are also potential suppliers to Nabucco but there are political obstacles in both cases.
The European Union, backed by the United States, will need to show unwavering commitment to get Nabucco built and filled. Moscow will try hard to thwart it.
Given their scale and cross-border reach, all big pipeline projects are political. The EU-sponsored Nabucco is just as geopolitically driven as the U.S.-backed Baku-Tblisi-Ceyhan (BTC) oil pipeline was in the late 1990s.
Washington’s determination to create an energy corridor from Azerbaijan across Georgia to Turkey, cutting out Iran and Russia, convinced sceptical oil majors to invest. The fact that BTC was built despite an oil price slump was a triumph of geopolitics over commercial considerations. The rise in prices by the time it opened in 2005 vindicated the investment.
Sceptics say Nabucco, due to be operational by 2014 with a capacity of 31 billion cubic metres a year, will not be built until there is enough signed-up gas to fill it. There is none so far. But the BTC precedent suggests that building it is the key to filling it.
The European Union is weaker and less united than the United States, and Moscow is pressing ahead with a rival South Stream project to pipe gas under the Black Sea to southeastern Europe.
Suppliers will only sign up if they feel confident that the West is fully behind Nabucco, and willing to stand up to Russia.
Last year’s Georgia war and repeated gas crises between Moscow and Ukraine have spurred Europe’s drive to diversify energy sources but made Caucasian and Central Asian governments more wary of the risks of incurring the Kremlin’s wrath.
The EU’s decision to provide 200 million euros in start-up funding for Nabucco is encouraging. But given the credit squeeze, European governments may have to do more to guarantee finance for the project.
The pipeline is only one piece in the puzzle of European energy security, and arguably not the most important.
Creating a single European Union energy market by connecting member states’ pipelines and power grids is the most urgent and practical way to reduce dependency on Moscow.
Developing liquefied natural gas supplies and terminals is another relatively quick way to diversify suppliers and routes.
Reducing fossil fuel consumption through efficiency savings and by developing renewable sources will also help.
But the lengths to which Russia has gone to try to kill off Nabucco highlight the importance of the project.

Rio crisis rooted in marketing strategy

July 10, 2009

– John Kemp is a Reuters columnist. The opinions expressed are his own –
  
   By John Kemp
   LONDON, July 10 (Reuters) – China’s detention of four Rio Tinto <RIO.AX><RIO.L> staff marks the final phase in the long downward spiral of relations with Rio and BHP Billiton,  <BHP.AX><BLT.L> Australia’s two major exporters of iron ore. While the arrests were unanticipated, the seeds of this crisis were planted long ago with changes in the miners’ strategy.  The end result will be to accelerate a shift towards using the spot market — rather than raw negotiating muscle — to set prices.
   Perhaps the most important transformation in the mining industry over the last ten years has been a generational shift at the top of the major companies. The mining engineers who traditionally dominated the top ranks have been replaced by MBA-trained financiers. The engineers’ traditional focus on output maximisation, process optimisation and cost reduction has been supplemented by a new emphasis on prices, profits and marketing.
   Mining firms have made major investments in market research and demand forecasting, as well as building up powerful marketing and negotiating teams. The overall objective is to plan and sequence new investment in capacity, as well as adjusting production from existing mines, to match supply with demand more or less continuously over the business cycle — avoiding the destabilising build up and run down of inventories that previously led to massive price swings.
   The miners’ ultimate goal is to reduce volatility and hold prices at a higher average level over the business cycle — maximising shareholder returns in an industry that was notorious for destroying value.
   MARKETING AND COMMERCIAL INFORMATION
   The best way to think of Rio Tinto, BHP and some of the other majors is not as mining companies but as trading and marketing firms that have mining assets attached. The transformation has had two consequences:
   (1) As traders rather than miners, the firms have counterparties rather than customers. The producer-consumer relationship based on mutual advantage and creating shared value has been replaced by a trading mentality that sees deals as one-off transactions and conflicts over the allocation of value. All is fair in love, war and trading. Both the major Australian companies are perceived in the market as increasingly aggressive negotiators — breeding considerable resentment among customers, not least China’s steelmakers.
   (2) Both firms have invested heavily in market research and commercial information gathering to understand their customers’ requirements — and maximise the amount of value they can extract from negotiations.
   But the development of extensive market research and commercial information teams, allied to a tough negotiating approach, appears to have led to the current problems. There is a fine line between legitimate information gathering and more controversial activities — and the division varies between countries and over time. Disputes that are a matter of civil law in one jurisdiction may be treated as a criminal matter in another.
   China has a particularly expansive notion of what constitutes a state secret and a broadly defined espionage law. But it is not the only one. Switzerland and other OECD countries also have statutes criminalising economic espionage or breaches of confidence.
   At the same time as detaining the Rio staff, China has arrested Tan Yixin, the head of iron ore imports for state-owned steelmaker Shougang for “revealing China’s negotiating strategy” — in effect “China’s bottom line”. <For related news click [ID:nPEK191335]>.
   It is easy to see how the situation in China has become so tense — especially as relations between China’s steelmakers and parts of the Chinese government, on one side, and Australia and the major mining companies on the other, have become so strained. With so much ill-will around, even a misunderstanding can escalate rapidly.
  
   DOWNWARD SPIRAL IN RELATIONS
   The detentions are simply the final phase in the downward spiral of relations. Conflict has been rising for five years as China’s expanding steel industry and booming demand for imported iron ore has handed all the negotiating leverage to Australia’s two major ore exporters and sent prices soaring.
   China responded to what it saw as the oligopolistic pricing power of the Big Three iron ore companies (BHP, Rio and Brazil’s Vale <VALE5.SA>) by organising its own coordinated buyers’ cartel under the auspices of the China Iron and Steel Association (CISA). The objective was to present a united front in the annual benchmark negotiations.
   But these efforts have been undermined by the activities of small speculative ore importers. As each year’s negotiations have dragged on, speculative imports have surged, driving up spot ore prices and strengthening the hand of Australia’s miners.
   Tensions first broke into the open in 2006, when China’s Ministry of Commerce sent a secret letter to the country’s customs inspectors asking them to scrutinise ore shipments for conformity with the bills of lading and import declarations — paying particular attention to shipments originating from Rio and BHP. In effect, the ministry was trying to restrict speculative imports in a bid to strengthen the steelmakers’ hands.
   When the letter leaked, it triggered a diplomatic incident. The Australian government issued a strong protest and threatened to make a formal complaint to the World Trade Organisation (WTO), accusing China of discriminating against Australian exporters. The issue was subsequently smoothed over as a misunderstanding.
   But simmering tensions burst out again when Chinalco’s [ALUMI.UL] recent attempt to increase its holding in Rio provoked a nationalist backlash in Australia in favour of an “all-Australian” tie up with BHP designed more or less explicitly to preserve the companies’ “pricing power”. While both sides have subsequently tried to downplay nationalist aspects of the deal’s collapse, it has added to the legacy of distrust and bitterness.
  
   END OF THE BENCHMARK SYSTEM
   Each year annual benchmark pricing negotiations have become more protracted. This year both the soft deadline of April 1 and the hard deadline of June 30 have passed without agreement. Rio has threatened to shift pricing to the spot market.
   In effect, Australia’s mining companies have suffered a complete breakdown in constructive relations with their most important customer. China still needs the ore, and the mining companies still need to sell it. But the benchmark system may have broken down irretrievably; it is hard to see how negotiations can continue in their present format when some of the negotiators have been arrested.
   The current crisis will probably accelerate the shift to a spot market pricing system. Spot prices could be presented as the outcome of “market forces” rather than raw negotiating muscle, drawing some of the political heat out of the issue.
   The crisis could also create a greater role for merchants and independent traders to act as intermediaries. BHP and Rio have spent years trying to squeeze merchants out of many of the markets in which they operate to build stronger direct relationships with end users. But the escalating conflict may force an about-turn.
For previous columns, Reuters customers can click on [KEMP/] –
(Editing by Martin Langfield )

G8 climate goals a distant mirage

By Paul Taylor
July 9, 2009

So the planet is saved after all. The leaders of the world’s eight biggest industrialised nations have embraced the goal of cutting greenhouse gas emissions by 50 percent by 2050, and the need for developed countries to cut their own emissions by 80 percent by the same date from their 1990 levels.

China Rio arrests pit country vs company

July 9, 2009

    Country or company — where does your loyalty lie? For Beijing, there is simply no question. If you are Chinese — or a foreign passport holder of Chinese origin — you work for China first, second and third.
    The arrest of four Rio Tinto Ltd employees — three Chinese and an Australian — on charges of stealing state secrets is a stark reminder of the dilemma this poses for foreign companies in China, where it is impossible to operate without local staff.  The flip side is the pressure facing Chinese nationals who work for foreign companies. In their enthusiasm to please employers, these employees often risk overstepping the mark and falling foul of the law.
    China, like many countries, does not recognise dual passport holders. So woe betide anyone who was born in China or whose parents were Chinese, who are sure to feel the full force of Beijing’s powers if they are deemed to have broken the rules.
    And in this case, it is not just foreign company staff who have been arrested; the head of iron ore with the foreign trade and investment unit of state-owned Chinese steel company Shougang Group has also been detained.
    Foreign companies rely on their local staff for an understanding of local business mores as well as language, contacts and know-how. And there is often a blurring of the lines between what is acceptable business practice at home and in the country in which they are operating.
    Corporations are no angels when it comes to digging for information. Some mining companies have set up research teams in China, with an emphasis on building market intelligence.
    This is asking for trouble in China where the definition of what constitutes a state secret is particularly strict, especially when it comes to business or economic information.
    But as Anglo-Australian miner Rio and its employees may have found to their cost, the implementation of such laws can be patchy and  unpredictable.
    For while Beijing may not stick to the letter of the law as long as the spirit is adhered to, it can be a completely different story when the government wants to make a point.
    In this case, it’s impossible to ignore a long deterioration in China’s relations with Rio and BHP Billiton, Australia’s two main exporters of iron ore. It can be seen as the final phase in the downward spiral of relations as China’s expanding steel industry and booming demand for imported ore have given all the negotiating leverage to Rio and BHP and sent prices soaring.
    The detentions come just after a June 30 deadline passed for iron ore price talks between China and Rio. And don’t forget, Beijing is still smarting after Rio ditched a deal with Chinalco in favour of an iron ore joint venture with BHP.
    But while the move is bound to make Chinese employees of foreign firms more cautious, it won’t stop the whispered confidences which inevitably accompany business deals the world over.

from Alexander Smith:

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.

Opel keeps hope alive

June 30, 2009

With General Motors in a Washington-guided bankruptcy and car makers around the world benefiting from government subsidies, politics has become firmly intertwined with the fate of the global auto industry. Even so, the deal reached in late May between General Motors and a group led by Magna International for GM’s European arm, Opel, smacked of trying too hard to come up with a politically convenient solution.