China’s stake a big chunk of our resources
O VER the past few years, the Chinese Government, through its state- owned industrial companies, has engaged in what Stephen Mayne, corporate governance activist and media commentator, dubs a
co- ordinated strategy to buy up as much of Australia’s strategic resources as possible’’.
The box below outlines the extent of Chinese investment in Australian resource interests. Adding it all up, Chinese companies — many of them government- backed — have signed deals to spend more than $ 20 billion on companies with a majority of their assets in Australia, and in the process have bought the rights to spend another $ 15 billion- plus directly developing additional projects.
Under John Howard, the Australian Government welcomed all comers. But the sheer weight of Chinese investment, and the first signs of public rumblings initiated by Mayne and the like, has seen the Rudd Government temper its enthusiasm for Chinese investment. In May a clutch of Chinese companies was reportedly told to withdraw resources- related investment proposals from the Foreign Investment Review Board and resubmit them after the Government has had more time to consider the strategic implications of selling off the resources farm.
The Rudd Government is using the build- up of Chinese proposals to the FIRB as a bargaining chip in free trade negotiations with the Chinese. But analysts say increased access to the Chinese mining sector is unlikely to be an attractive option for Australian mining firms: proven Chinese ore bodies are mostly low grade, with some mines producing one tonne of ore for each 10 tonnes of rock mined, compared to one for two from many mines in Australia.
Political stalling or not, Chinese interest in Australian iron ore assets is unlikely to wane. In essence it is cheaper to dig it up here and ship it to China than it is to produce it locally, even with much cheaper labour costs.
China’s long- term goal is to restructure its steel industry from a fragmented series of private and state- owned steel makers into an industry dominated by four producers of 100 million tonnes and six intermediate’’ sized firms making 30- 50 million tonnes a years.
Whether that will happen is an open question, but it does mean that China is undertaking a coordinated effort to ensure stable supply of ore to feed the factories that produced close to 500 million tonnes of steel last year. According to UBS in a May 21 report, with iron ore prices topping 65 per cent, Chinese steelmakers will continue to hunt down offshore iron ore supplies.
On receipt of its first 170,000- tonne shipment of iron ore from Fortescue Metals Group at the end of May, China’s largest steelmaker, Baosteel, stated that it would increase orders from the country’s newest producer and look to buy a stake in the company in the future.
By reducing its reliance on the two majors, and bolstering the fortunes of the third force’’ in iron ore, behind BHP Billiton and Rio Tinto, the company hopes to temper the impact of supply shocks. We will seek a stake when both sides reach an accord on development strategy and prices,’’ Baosteel’s chairman, Xu Lejiang, said.
Baosteel will seek a stake in Fortescue if the company shows good returns to investors and has good development.’’
Clearly, the Chinese government is set to continue its co- ordinated strategy’’, if that is what it is — but not without a fight from its Australian counterpart. Around the time of Kevin Rudd’s visit to China in April, speculation was swirling about a the Chinese buying a strategic stake in BHP Billiton. The Prime Minister said the Government would defend the Australian national interest’’.
But increasing Chinese interest in Australian assets doesn’t seem to bother Australians in general. China might be a communist, totalitarian state with a questionable human rights record, but, according to a poll conducted last year by the Lowy Institute a majority of Australians said they had positive feelings towards China and saw it as our country’s most important economic partner. Only 19 per cent said they were very worried about China’s growing power.
At the same time, the level of Chinese investment is only now beginning to rival those of previous investment booms by the Japanese, Americans and British. It was only last year that China topped Japan as our No 1 trading partner, and it still only accounts for 14 per cent of our exports.
China will be Australia’s most significant trading partner for the foreseeable future. The question for the Rudd Government is how to balance the need for free flows of foreign investment and the sheer weight of Chinese capital with the need to husband the country’s resources for future generations.
Australia should be the richest country in the world,’’ says Mayne. We should be sensitive to the fact that we have squandered so much of our resources dowry in the past. How much better off would we be if we owned more than 20 per cent of our resources industry.’’