08/04/2010 - 00:00

Complexity is the catchword

08/04/2010 - 00:00


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Recent developments between Australia and China point to both the increasing importance and growing complexity of the relationship.

THERE has been a lot of posturing of late over the Australia-China relationship, especially regarding the vexed issue of iron ore prices.

The latest instalment came this week when the China Iron and Steel Association asked Chinese steel producers and traders not to import iron ore from the world’s three biggest suppliers – Australia’s Rio Tinto and BHP Billiton, and Brazil’s Vale – for two months.

The request reflects frustration at the ever-rising prices being secured by the iron ore exporters, who look back at 2009 as a short-term blip in a long-term upward trend.

BHP Billiton has reportedly secured a 90 per cent increase in iron ore prices in its negotiations with Japanese and South Korean steel mills and has moved most of its sales into the spot market, which will benefit exporters in a rising market.

This change was considered almost fanciful just a couple of years ago.

The frustration in China, is, for now at least, good fortune in Australia and Brazil, which are seeing surging investment in iron ore mines and export facilities.

The CISA protest should be seen fundamentally as a token gesture.

It came just a few days after the release of data showing that China had displaced Japan’s 43-year reign as Australia’s number one export market.

It also came just a few days after Rio Tinto’s team of iron ore price negotiators, including Australian Stern Hu, were given lengthy jail terms after being found guilty of bribery and other charges.

The closed trial and the confessions of the four men have left many outsiders uneasy about the Chinese judicial system, but the diplomatic row that had been anticipated did not materialise.

Prime Minister Kevin Rudd delivered a few critical comments but, like the CISA statement, it was a token gesture.

The real business was evidenced last month when Rio Tinto struck a new deal with Chinalco, the state-owned company that had planned to invest $US19.5 billion in the debt-laden miner.

Despite that deal falling through, the two companies have now agreed to jointly develop the Simandou iron ore project in Guinea.

This shows how quickly businesses can overcome setbacks and put aside political tensions when they see a mutually beneficial opportunity.

The power of Rio, BHP and Vale continues to create opportunities for other iron ore miners in emerging provinces like the Mid West of Western Australia.

China’s Sinosteel has bought Midwest Corporation and is developing its Weld Range project; Ansteel has entered a joint venture with Gindalbie Metals and is currently developing the Karara mine; and Crosslands Resources is pursuing its mining plans at the Jack Hills project with backing from Japan’s Mitsubishi Corporation.

These iron ore mines will be the foundation customers of the $4.3 billion Oakajee Port & Rail project. Looking ahead, the pattern of Chinese investment in Australia is likely to change, a new analysis by the Economist Intelligence Unit has concluded.

The report found that Chinese companies made 298 cross-border acquisitions in 2009, a record number.

Historically, Chinese companies investing offshore have tended to seek outright ownership or at least managerial control of their targets.

The EIU’s analysis of transactions worth more than $US50 million between 2004 and 2009 shows that half the deals involved the buyer taking at least 50 per cent ownership of the target.

Sinosteel’s purchase of Midwest was a prime example.

The EIU anticipates that Chinese companies will take a more cautious approach to foreign expansion, preferring to seek partnerships and alliances.

One reason is the political sensitivity in Western countries towards Chinese investment.

The EIU also found that Chinese companies are discovering just how difficult it can be to get mergers and acquisitions (M&A) right, especially when they are cross-border deals.

In a survey conducted for the report, 82 per cent of respondents cited a lack of management expertise in handling M&A as the biggest challenge for Chinese companies making purchases abroad.

Only 39 per cent feel they know what is required to integrate a foreign acquisition.


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