Given our COVID-19 monumental borrowings Australia is going to need Chinese iron ore revenue like never before. And China’s President Xi Jinping knows it.
China has openly pronounced that one of its national goals is to lessen its dependence on Australian iron ore. And as China takes steps to do that it will refocus our nation on the controversial decisions that were made decades ago that led to our major iron ore exporter, the then Australian controlled Hamersley, becoming controlled in London via Rio Tinto, with a Chinese state-owned enterprise Chinalco becoming Rio’s largest shareholder.
Rio Tinto now looks like being a long-term leader in the Chinese thrust to lessen dependence on Australia.
The first step the Chinese are undertaking to lessen dependence on Australia is to boost Brazil. China’s largest steel maker, Baowu, has entered into a co-operation agreement to boost Brazilian production and undertake research and development.
Africa focus
But the really big challenge to Australia comes from the world’s largest high-grade iron ore deposit, Simandou in Guinea in West Africa.
Areas one and two of the deposit are now controlled by Chinese state enterprises. Areas three and four were jointly controlled by Chinalco and its “associate” Rio Tinto. But Chinalco has sold its direct interest to Baowu which, when combined with its Brazilian exercise is clearly spearheading the challenge to Australia. Fascinatingly, Rio Tinto for some fifteen years has operated a joint venture mine in Australia with Baowu.
The amount of money required to develop the Simandou mine is colossal, because a major rail link is required. BHP looked at Simandou a decade or so ago and concluded it was too hard. But with iron ore prices now well above $US75 a tonne the mine in its own right suddenly looks more attractive, although the outlay looks to be in the vicinity of $US20 billion. But for the Chinese its part of a strategy to lessen dependence on Australia.
While the Chinese will provide a big proportion of the total funding if Rio Tinto retains its stake it will be a major outlay for the London-based company as it becomes part of the Chinese challenge to Australia. Theoretically, it might be cheaper to develop additional iron ore capacity in Australia. Given the current calibre of the Rio Tinto board they will only proceed with Simandou if it make sense for shareholders.
The Hamersley shift
Some years ago they tried to sell their stake to their major shareholder Chinalco. But if Rio Tinto seeks to raise capital as part of the move of the Chinese to diversify from Australian iron ore, it will bring the Hamersley history back into focus.
With Rio Tinto, Hamersley moved from being part of a “naturalised” Australian company to being London based with a relatively small Australian equity of around 20 per cent. Having a Chinese state-owned enterprise as its major shareholder (albeit without board representation) remains a very sore point in Australian political circles.
Back in the mid 1980s Hamersley was owned by CRA, which was then less than 50 per cent owned by the Londoners at Rio Tinto. Under CEOs Rod Carnegie and John Ralph our biggest iron ore producer was very much an Australian operation.
But in one of his few errors Paul Keating as Treasurer agreed that Rio Tinto could absorb CRA in a dual listed operation. Keating did not insist on a majority of Australian directors and that control had to be based in Australia. The Londoners outsmarted Australia and control moved to the UK and Australian equity ran down. It was one if Keating’s few big mistakes and when Peter Costello, as Treasurer set the rules for a similar duel listing deal between Billiton and BHP he made sure the BHP head office remained in Australia.
Chinalco rescue plan
Meanwhile Rio’s Londoners started to make big errors. In 2007 they bought Alcan in Canada with heavy borrowing. Rio Tinto suffered huge losses and was on its knees. BHP tried to buy it, and then in came the state owned Chinalco to the rescue as a “white knight”.
The state-owned company wanted influence over the supply of the Australian iron ore and board representation so China could see the Australian costs. For that they would pay a big premium. BHP withdrew and the government was opposed to the Chinalco deal, which fell over. There was great bitterness in China. The Australian government approved Chinalco taking a major interest but limited the long term share holding to 15 per cent with no board representation.
Chinese state-owned enterprises operate independently to government but are beholden to major national policies. The bitterness remained despite the deal. Soon after, in 2009, Rio executive Stern Hu and three of his colleagues were arrested during iron-ore contract talks and were convicted of accepting bribes totalling about $14 million and stealing trade secrets. The Rio executive was jailed for nine years.
About two years ago Rio Tinto wanted to buy back more of its own stock but was blocked by Chinalco because it would have caused them to go over 15 per cent, given they did not want to sell.
Back in the spotlight
But the amount of money that will be required to be raised for the massive Simandou development, as well as other Rio Tinto expansions, could put the long term capital structure of Rio Tinto and its relations with Australia back in the spotlight.
Of course, it maybe be some years before capital will need to be raised.
But if that process involves ending the dual listing and/or allowing Chinalco to increase its shareholding in the group, then the “Keating mistake”, all the undertakings and historic statements, as well as the rulings of the Foreign Investment Review Board and the Australian government will be re-examined. A decision will be made as to how they should be applied.
Meanwhile in the current environment, executives of Australian companies should learn from the Stern Hu saga. Right now there is almost no political contact between Australia and China.
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