SA Mines and Energy Journal : June 2009
JUNE/JULY 2009 SA MINES & ENERGY JOURNAL 19 OPINION It's all about Rio Concerns over the proposed Chinalco- Rio deal do not translate to opposition to foreign investment generally, Stephen Bartholomeusz writes on Businessspectator website. Rio Tinto's global head of strategy, Doug Ritchie, has outlined in some detail the arguments for Federal Government approval of Chinalco's proposed US$19.5 billion investment in his group. While comprehensive, they aren't so compelling as to shut down or even narrow the national interest elements of the debate. Ritchie's presentation to a Committee for Economic Development of Australia function in Melbourne was about the broader issue of foreign investment and the mining industry, with the national interest implications of the Chinalco deal a particular focus. His starting point is not contentious. Foreign investment is hugely important to the Australian economy and of particular importance to development of our resources. The growing role of China in the global economy and as a consumer of the resources we produce makes it a significant and valuable trade partner and prospective capital provider. Australia's share of global resource industry production was, Ritchie said, slipping as Brazil, India, Indonesia and Russia pursued business with Asia. There was a risk that if Australian conditions weren't conducive to foreign investment, it would flow elsewhere and further diminish Australia's market share. Ritchie drew parallels between Japanese investment in resources in the 1970s and 1980s -- and the way that it was centrally planned and directed -- with the waves of investments by China's state- owned enterprises (SOE) today. He also said that the proposed Chinalco deal involved fewer rights and limitations than had typically been the case with Japanese joint ventures, and that Rio would not cede control over decisions on issues like product mix, production, pricing, contracting strategies or marketing tactics. He likened the Chinalco deal and other resource investments to that of Singapore's Temasek Holdings' investments in Merrill Lynch, Barclays and SingTel, which owns Optus; said sovereign wealth funds had shown themselves to be reliable long-term commercially driven investors; and asked whether we wanted to discourage investment by an entire class of Chinese companies. In the context of the debate about the Chinalco deal, the wider discussion of the merits of foreign investment is irrelevant. Other than a few populists, most engaged in the debate understand how vital foreign investment is to a country with a structural current account deficit. The significance of Rio within the global resource sector, the importance of its massive tier-one Australian asset base to the national interest and the fact that Chinalco is owned by a centrally directed state that has an obvious interest in not only securing supply of resource but in doing so at the lowest possible prices, make the proposed multi-layered relationship with Rio much more sensitive than others. Rather than a general rejection of foreign investment, or even Chinese investment generally, the debate around the Rio- Chinalco proposal is quite specific to the deal and the context in which it was agreed. While Ritchie compared the Chinese SOEs to the Japanese Ministry of International Trade and industry-directed trading houses in the 1970s, the similarities are superficial. Ritchie's reference to the greater rights the Japanese companies have in joint ventures made a specific mention of their ability to dispose of their interests. Chinalco sought and gained the explicit ability to transfer its interests in Rio assets to another Chinese SOE. If it did so, though, Rio could remove it from the management committees and joint marketing arrangements that would form valuable elements of the relationship. Rio was clearly concerned that Chinalco could be directed to transfer the interests to an SOE, perhaps a steel producer, whose interests would directly conflict with its own. The history of Chinalco's involvement with Rio, which started with a raid designed to intervene in BHP's attempted merger, is of some interest, particularly given reports that it was chosen for the raid by Beijing after what was effectively a beauty parade of aspiring national champions that included the steel mills. The man who led that raid -- and paid a massive price to acquire a Rio shareholding at the peak of the BHP and commodities boom-inflated market for its shares -- was Xiao Yaqing. Despite effectively wiping out Chinalco's shareholders' funds with that purchase, he was promoted to the post of deputy secretary- general of China's cabinet. That, and the fact that China's state-owned banks have lined up to provide the funding for the Rio deal on very attractive terms, would suggest that neither Chinalco nor its motivations are necessarily conventional or commercial. It is the peculiar circumstances of the Chinalco involvement with Rio that has caused such intense scrutiny and debate. It isn't axiomatic that criticism or scepticism in relation to the Chinalco proposal translates to opposition to foreign investment generally or to Chinese SOEs as a class of investors. Indeed the evidence demonstrates that Australia is one of the economies most open to foreign investment. Whatever the fate of the Chinalco deal, that isn't likely to change. Businessspectator.com.au Alcoa's North American President Alan Cransberg and Chinalco President Xiao Yaqing after the Chinese aluminium producer and its American partner paid A$15.5 billion for a 12 per cent stake in Rio Tinto's London shares.
April May 2009