China will have learned from failed mega-deal

Relations between China and Australia - at the political and corporate level - are strong. Our economic fortunes are tied. But friction, often caused by cultural differences, is inevitable from time to time.
Paul Keating this week accused Kevin Rudd and his government of being too defensive in their dealings with the giant power to our north. Well, there’s been no such timidity from the business community. They’ve fulfilled Keating’s advice to be “outgoing … alert, dextrous and positive” to the letter.

By their own admission, China’s corporate leaders have a fair bit to learn about Western business practices. And in two cases in the past month, they have been given some pretty harsh lessons.
At the start of last month, Rio Tinto scrapped talks with Chinalco on their $24 billion alliance - which would have been the biggest ever foreign deal for both countries.

Australians, led by Barnaby Joyce, had been quick to question the motives of Chinalco when the deal was announced in February, accusing the state-owned firm of acting as little more than an arm of government intent on plundering Australia’s natural resources. As it turns out, they were pointing the finger at the wrong party. Behind China’s back, Rio was hatching a deal to merge its iron ore interests with erstwhile rival BHP Billiton, leaving Chinalco out in the cold.

The state-owned Chinese press - always a good guide to the official thinking in Beijing - was quick to claim foul play. Acting like a jilted lover, it accused Rio of, among other things, “perfidy’’ and certain Australian politicians and media commentators of “wantonly shouting the so-called ‘China threat’‘’.

In reality, however, Chinalco and its political masters could never grasp why Australians, even those usually open to foreign investment, felt differently when the foreign buyer was 100 per cent owned by a government - and a non-democratic one at that. Not matter how many times they insisted “state-owned does not mean state-run’’ and that its companies were commercial beings that competed fiercely with each other, China would always be asked to jump a higher hurdle to buy into Australia. Just how high we never found out, with Rio’s change of heart saving the government from having to make a call on the deal.

This week, Rio had another win at the expense of the Chinese. For months, the China Iron & Steel Association, a lobby group which this year insinuated itself into annual iron ore price negotiations between the Australian producers and the Chinese steel mills, had been demanding deep 40 per cent-plus cuts in prices for the coming year.

The producers, led by Rio, had been insisting China fall in line with the 33 per cent cuts agreed by Japanese and Korean mills.

The Chinese tried every trick in the book. Last week they rolled out the we-don’t-need-your-stinking-ore ploy, announcing, through the pliant media, the “discovery” of a “new” iron ore deposit somewhere in the northeast of the country. The tactic was laughed off. The deposit, well known to those in the industry, is deep, low-grade and uneconomic. The miners stood firm and this week, through the Chinese media, CISA meekly rolled over.

These two wins were not purely the result of brilliant brinkmanship. Events had also overtaken both Chinalco and the steel mills.

In February, when a debt-ridden Rio fell into the arms of Chinalco, China was just about the only source of cash into the world. By June, the financial skies had brightened and Rio had other, far less controversial options.

Likewise, when CISA got down to negotiations with Rio, the buoyant, commodity-sucking Chinese economy was viewed as the last hope for the Western world. If Australia and other iron exporters desperate to sell ore didn’t like CISA’s terms, then tough. Unfortunately for CISA, Chinese steel mills really like our high-grade ore, and with demand on the rise, were starting to go behind CISA’s back to lock in supplies.

Usteel.com analyst Du Wei said some good would come of the iron ore dispute, which has never before stretched into the new financial year. He told The Australian it would “help the Chinese to improve their negotiation skills and CISA should learn to have better judgment on market trends’‘.

After the collapse of the Rio deal, Chinalco, in its English statement, expressed “disappointment’‘. Its Chinese-language statement was more forthcoming: “Through pushing forward this deal,” read a rough translation, “Chinalco has participated in global resource project operation, enhanced communication and co-operation between a global mining company and Chinese financial institutions, accumulated abundant overseas purchasing experience, set up and trained a team familiar with international operations, and showed a good social image of Chinese enterprise.’‘

The Chinese are learning. And they will be back.