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— Analysis —
A year after the speech, the strength of their relationship will be sorely tested as an unprecedented alliance between Chinese and Australian companies is about to come undone. At press time, it appeared all but certain that an agreed deal for Rio Tinto Group to sell $19.5 billion in assets and shares to Aluminum Corp. of China Ltd. would collapse, even before regulators or shareholders approved or rejected the transaction.
Chinalco, as it is known, is a major Chinese corporation and a significant Rio Tinto Group customer, which made the potential megamerger both politically fraught and financially volatile, buffeted by shifting stock and commodity values, public outbursts and tense boardroom negotiations. The expected decision by Chinalco to abandon the deal comes after Rio Tinto, the world's No. 3 mining company, presented the Chinese state-owned concern with a raft of changes, including a substantial reduction in the amount of stock it would be offered. Those changes were thought necessary to win approval of Rio Tinto shareholders but Chinalco deemed them unacceptable. Specifically, Rio Tinto sought to reduce the equity in the deal, rewriting the sale of bonds convertible into a 9% holding and replacing it with a wider sale of new shares. Chinalco rejected the plan. The proposed alliance was part of the efforts of China's state-owned metal companies to buy into Australia's mining sector. So far this year, Chinese buyers have acquired more than $2.5 billion of Australian mining assets. Opposition from its shareholders ultimately undid Rio's share. That resistance hardened in recent months as Rio Tinto's share price rebounded and as credit markets became more liquid. But opposition to the deal was not limited to existing investors. Opposition political parties also came out against the deal. Selling mining assets to Chinese companies would leave "another government owning Australia," says Barnaby Joyce, the senate leader of the National Party, which is part of the coalition opposition to Rudd's Labor Party. Added Malcom Turnbull, leader of the Liberals, Australia's No. 2 political party, "This will give Chinalco, and hence the Chinese government, the seat of greatest influence and access to information about production, costs, pricing and marketing strategies of our second-largest resource company." Australia's Labor government didn't waver, though. In April, it approved the $1.2 billion sale of most of Oz Minerals Ltd., the world's second-largest zinc mining company, to China Minmetals Corp., imposing only the reasonable modification that the Chinese company drop plans to buy a mine near an Australian military site. "The issue is really how much [the Chinese] own and what sort of control they want," said Angus Geddes, founder and chief executive of Sydney-based brokerage FatProphets. "If it is a couple of board seats [as in the case of Chinalco's investment in Rio Tinto], I don't see a problem, and I don't imagine the government will, either." At the end of May, China's ambassador to Australia sought to calm fears that the Chinese government was seeking direct control over Australian resources. "State-owned is not state-run," said Junsai Zhang. "Yes, the chief executives are appointed by the government, but their performance is judged on whether they can make money." Some opponents of Chinese influence in Australia's mining sector draw comfort from the restrictions that its own government and companies are placing on new investors. Rio Tinto had promised that Chinalco representatives would play no part in the annual benchmark price negotiations. Certainly no one can ignore the economic interdependence between the two countries. China is Australia's second-biggest trade partner and its fastest-growing market. Two-way trade between the nations was worth A$67.7 billion ($55.4 billion) in 2008, an increase of 28.3% on the previous year. The value of Australian goods sold to China in 2008 was about A$32.5 billion. Of those goods, 86% were dug or pumped from Australia's mineral- and energy-rich soils. China's vast cash wealth, estimated at about $2 trillion, and its voracious demand for minerals to fuel domestic growth suggests its major corporations will be back to test Australia's friendship soon enough. |
Australian Prime Minister Kevin Rudd, a fluent Mandarin speaker, chose his words carefully. Australia would like to be a "zhengyou" to China, he said in 2008 on his first visit to the country as the head of state. The word translates as friend, but it's a loaded expression. A zhengyou is a friend who is close enough to disagree without being cast aside.
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