China’s stake a big chunk of our re­sources

The Weekend Australian - Review - - Steel -

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.’’

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