Wednesday, July 29, 2009

China and RioTinto

RioTinto is a multinational mining giant with Head Quarters in London and Melbourne. The company was founded in 1873 when a consortium of investors purchased a mine complex on RioTinto river, Spain from Spanish Government. The commodities produced by the company includes Aluminum, iron ore, copper, uranium, coal and diamonds etc. This global 500 company have 35,000 employees as of 2007 and net income of US$4,650mn with a revenue of US$58,065mn in 2008.

In February this year RioTinto announced about the on going talks with state controlled Chinese firm Chinalco, to receive a substantial equity infusion. Chinalco bought 9% of companies ownership in 2008 and after this move - which if succeed(chances are low as investors are also exploring other options) the ownership may grow to 18.5%.

Up to now everything goes fine, Chinese now one the shareholders of a leading multinational mining giant. But the story didn't end here.

After the equity talks, Chinese demanded a 45% discount in iron ore prices due to global economic slowdown but RioTinto struck to 33% only.

Later Chinese authorities claimed that four of RioTinto employees including one Australian where guilty of stealing state secrets. They arrested the 4 employees, accused of spying and stealing state secrets by allegedly bribing Chinese steel mill officials. As a matter of fact in China anything can be a state secret. It is said that till some years ago, a Chinese patient didn't know his disease. All diseases have numbers

The arrest made a huge pressure on Pro Chinese PM of Australia Mr Kevin Rudd. Later the Australian Trade minister said that
"It's important for the Chinese to understand better the concerns that we have about the circumstances surrounding not just Mr Hu's detention but the lack of detail. This is important as a signal to all people seeking to do business in China."
This 'signal' may not limited to RioTinto, but it also alarm other international companies too, recently RioTinto pulled out all foreign nationals from China.

Beijing told US and other foreign oil companies to halt work with their Vietnamese partners in South China sea or face consequences inside China. In Sparty Islands affair friction grown up between China and Vietnam, Philippines, Malaysia, Brunei and Taiwan. The border dispute with India is not yet resolved. Another issue with Japan in the case of Senkaku island - which is now under Japanese control - is still active. Beijing's attempt to block loans from ADB to Arunachal Pradesh- an Indian state claimed by China, even if not succeed is not yet forgotten. String of Pearls strategy is another one by China which creates panic in Indian ocean countries.

What is the key asset of China is its US$2.15trillion foreign exchange reserve, which will give Beijing enormous capacity in negotiations and commercial arm twisting. How far they can go with this 2.15trillion reserve is yet to see, but they are very successful in getting business in central Asia, Africa etc where most of the time they will outbid their competitors.

But the RioTinto affair will burn China's hands, more and more companies will become worried about their employees especially foreign nationals who are working in China. Whatever China do, in this case it is difficult to get a face saving exit.


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