DealZone

China’s Iron Ire

August 10, 2009

Chinese demand for industrial commodities has long been the defining variable in establishing global market prices for everything from alumina to zinc. The modern engine of global manufacturing has made great strides toward embracing freer markets, but its deep roots in its command economy have clouded global markets’ ability to gauge demand. If Chinese allegations are true that Rio Tinto spied and adopted such unsavory tactics as bribery to gather market intelligence, the actions of the western company could be considered an attempt to attune its business practices to the local climate.

Share of Rio Tinto were sagging on Monday after China stepped up its spying allegations. China’s state secrets agency said on its website over the weekend that Rio Tinto had spied on Chinese steel mills for six years, resulting in the mills overpaying $102 billion for iron ore, Rio Tinto’s biggest earner. Australia’s Foreign Ministry says there’s nothing new in the latest allegations. Rio declined to comment on the accusations, which followed China’s detention a month ago of four Rio employees in Shanghai, including Australian Stern Hu, on suspicion of stealing state secrets.

When considering China’s motivation in this political drama, the brutal realities of the marketplace are also a key consideration. “Most observers see a link between the detentions and Chinalco’s failed attempt to up its Rio stake,”  according to Reuters columnist John Kemp. “While a direct link is hard to prove, there is no doubt the allegations have been prompted by high-level frustration at the way the annual ore negotiations have been conducted.”

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