Why China Jailed 4 Rio Tinto Employees

rio tinto went back on its word in a tense situation and ended up paying the price in the early 2000s china began a magnificent economic growth trend at a scale unlike anything before seen in this world that growth however found itself dependent on a single valuable commodity china the world's biggest maker of things as varied as cabbages to doorknobs does not have enough good iron ore but australia did and so was born a very rich relationship but as iron ore prices exploded upwards tensions erupted between china and the big mining companies and that led to a monumentally bad situation for everyone involved in this video we're going to explore the tensions that would eventually lead to the sino-australian kerfuffle known as the stern who affair but first i want to talk to you a little bit about the asian nomentry newsletter the newsletter is a good companion to the channel and a great way to stay in touch check out the newsletters for the full scripts as well as additional commentary after the fact i am also adding some exclusives in the future you can find the link to the newsletter in the video description below or you can just go to asianometry.com as of right now you can expect a new newsletter every thursday at 1 am taiwan time much thanks i start this video in times of tension between china and the west ties between china and australia are particularly sensitive and very complicated and i am shoveling up dirt in a corner a particular misfortune needless to say it leaves me a little anxious so i want to get started by first saying that i'm going to treat this matter as neutrally as i can you might say that it could be nicer to this side or that side maybe you do a 20 minute video and someone objects to one sentence somewhere and declares the whole thing corrupt that is how it is i know that my work can't ever satisfy everyone on all sides but i'm going to try all right let's get on with it driven by a need for steel china has been the world's biggest importer of iron ore since 2013. their imports today account for a vast majority of the global total nearly 70 in 2019 on the supply side the majority of global supply is controlled by a small number of companies through consolidation rio tinto bhp and brazilian mining giant vale grew their share of the iron ore market from 31 percent in 1990 to 65 by 2003 before 2002 iron ore was cheap and anyone could buy it the price got to as low as 13.83 cents per dry ton in some markets emergence in the global iron ore industry quickly turned it into a seller's market with prices drastically spiking throughout the 2000s in the perspective of the chinese controlling so much global share essentially lets the big three miners act as a cartel an iron ore cartel with more control over the market than opec has over the oil market they have forty percent such a situation would be frustrating to anyone in two thousand twelve wang xiao qi the vice chairman of china's iron and steel association sysa commented that the iron ore market should be determined by and reflect real supply and demand however monopoly practices and price manipulation have exerted a big impact on prices naturally the three companies push back against this criticism but is there really a cartel are they right when we talk about cartels we are really talking about two different things the first is a supply withholding cartel this is kind of like opec where parties hold back supply from the market in order to keep prices high the hp executives point out that they sell 100 of what they develop in mine so at the surface this type of cartel seems unlikely but companies can slow foot the development of certain mines so that they can come online later one such situation came up in 2008 when the republic of guinea in africa reassigned several blocks in the cimando mine one of the biggest high-grade iron mines in the world from rio tinto to an israeli company the guinean government implied that rio tinto was hoarding the deposit ever since 1997. with that being said the sheer number of overseas iron ore projects being developed make it hard to argue that the big three is trying to keep supply away from china in 2012 there were 1 328 global iron ore projects outside of china the big three owned stakes in just 110 of them furthermore any illegally struck supply agreement between the big three companies would also create incentives for one of them to break it it would create incentives for fringe companies to come into the market and win market share so i'm going to conclude here that a supply withholding cartel is very unlikely but there is another type of cartel the second type of cartel is a price negotiation cartel more like collusion between the companies as they negotiate with buyers on prices and for that the evidence is a bit more interesting starting in the 1970s buyers in japan and miners in australia negotiated benchmark iron ore prices face to face kind of like a trial by combat from game of thrones each side would choose a champion and they would hammer something out together whatever gets decided both industries go with usually for these showdowns japan has traditionally chosen nippon steel australia rio tinto and so it goes this cartel arrangement brought peace and stability to the market but the entry and rise of the chinese steel industry destabilized everything unlike with the japanese taiwanese and koreans the chinese steel industry is very fragmented in japan you have five large steel producers with nippon being by far the biggest in korea and taiwan it is even more concentrated in korea there's pretty much just pasco though hyundai steel gives them a run for their money in taiwan you have only the peculiarly named china steel but in the people's republic the situation is different you have many very large steel producers all over china the reasons for this are not too clear but my best guess is that it has to do with ties to the local city or provincial government such governments would resist consolidation as a means they no longer have control over their area's economic growth model i.e capital buildup anyway back to the fragmentation none of these local steel firms talked to or collaborated with each other and there was no single national champion they competed with one another actually sometimes larger steel mills will resell their iron to their smaller cohorts at three times the price this naturally engendered resentment so what results is a situation where they all have to go to the miners one by one to get the iron ore they so desperately needed remember what caesar said in that movie apes together strong china steel mills did not listen to caesar thus china's fragmented steel industry allowed the miners to push for consistent price increases starting with a nasty 71 price increase in 2005 and a study upwards march thereafter this sucks of course but is it evidence of a sinister cartel coordinating to raise global prices or just the function of insufficient supply in a period of unprecedented demand whatever was the chinese had their answer the 2005 price increase especially alarmed them in 2006 chinese premier wen zhao pao appealed to the australian government for a fair open and reasonable market order as well as a pricing mechanism that is in accordance with international practices prices for iron ore from 2002 to 2012 rose by 588 percent now that does not mean steel prices rose the same amount like with oil and gasoline prices prices rising 10 here does not mean prices rising 10 percent there but overall chinese steel prices did rise nationwide by 38 percent over the same time period looking to find some way to exert some control over this critical aspect of their economic growth engine the chinese government embarked on a series of actions they sponsored industry consolidation and mergers they aggressively underwrote investments in iron ore projects abroad 35 after 2005 alone and they also attempted to create an importer's cartel equal in power to that of the iron ore big three the aforementioned sissa eventually though people decided that china had to have more agency in these decisions that meant taking an equity stake in one of the big mining companies they sought such a deal with rio tinto based in both the united kingdom and australia the 148 year old company is one of the biggest mining companies in the world rio tinto's history is well documented in 1873 a consortium of investors bought a mine along the rio tinto river in spain over the next 50 years the company exploited the mine for its vast copper resources and enjoyed financial success then in 1925 the market prices for its ores crashed forcing the rio tinto company to diversify into africa and australia a series of mergers and acquisitions resulted in one of the world's biggest mining companies i'm not going to lie or sugarcoat it rio tinto has had a controversial history of actions with regards to human rights labor and the environment the wikipedia page alone dryly notes that the company collaborated with the axis powers during world war ii demolished a 46 000 year old sacred site in australia in 2020 and is one of the top 100 industrial greenhouse gas producers in the world rio's relationship with the australian government is complicated especially in the late 2000s the company generates half of its income from australian assets but 75 of its shareholders are based in the united kingdom and while the company might be headquartered in both the uk and australia on paper they gutted the australian office in 1996 and moved the majority of its global management to london this broke a promise made just a year earlier and did not endear the company to the aussies so all in all rio tinto is a controversial company in australia but also an immensely powerful one in february 2009 rio tinto agreed to take a 25 billion australian dollar or 19.5 billion us dollar investment from chinese state-owned company aluminum corporation of china or china co china co is china's largest mining company and is majority owned by the government by now chinaco already owned 10 of rio tinto they had partnered with alcoa in 2008 at the height of the commodities boom to spend 14 billion on the open market for rio shares that investment quickly lost 70 percent of its value on paper this 2009 strategic investment was to try to help recoup some of those losses and strike a more real partnership the strategic investment came in the form of real assets and convertible debt in the real asset part of the deal china coke got 49 ownership of a selection of copper aluminum and iron ore mines across australia the high interest convertible bonds that rio tinto issued to chinaco gave the state-owned company 18 percent of rio tinto and the chance to nominate two of the company's 17 board members why would rio do this in short they were afraid of being acquired despite being so big rio has long been the target of acquisition rumors especially from bhp the world's biggest mining company and itself the product of another uk australia merger in an attempt to bulk up to a heavyweight class they acquired canadian company alcan in 2007 for 49 billion australian dollars or 38 billion us dollars after a bidding war with vale and alcoa the horrendously timed acquisition did help this massive company get even bigger but also burdened his wallet with 34 billion dollars of debt bhp launched an acquisition bid for rio in november 2007 anyway then 195 billion australian dollar or 150 billion us dollar bid would have exchanged three bhp shares for one rio share rio rejected this offer and bhp in turn raised their offer to 3.4 shares if the merger had gone through then it would have created the biggest mining company in the world though i'm not quite sure if it would pass anti-trust scrutiny 2008 and the global financial crisis ended bhp's takeover attempt but it also brought immense financial strain on rio tinto as they attempted to navigate away around their considerable debt some 19 billion dollars in bonds were maturing in 2009 and 2010 less than two years away and nobody wanted to refinance it combined with the massive drop in global commodity prices and rio was finding itself on the ropes share prices in london trading fell to under 10 british pounds in early 2009 from over 70 pounds just a few months earlier this investment from china co would have simultaneously helped rio pay off its owners debt and keep bhp from trying another takeover regulatory authorities in the united states china and australia had to approve the transaction the deal also had to pass a shareholder vote in both the uk and australia at first it seemed like things were on the right track but significant challenges emerged out of the woodwork the response from the mostly uk domiciled shareholder base was very negative right from the start they felt that the china co was getting the company on the cheap essentially vulture capitalism specifically rio was selling the family jewels at a bargain they sold stakes in the aluminum and copper mines at a small 12 premium which is all right but it sold a 15 stake in its one of a kind hammersley iron mines in western australia at no premium to its current net value not all right the negative shareholder response was so strong that rio ceo tom albanese had to delay his trip from london to australia a few weeks to address it the china code deal led to the resignation of paul skinner as chairman of the board and the appointment of south african jan du plessis a move with big future implications in the regulatory and public domain rio tinto advocated for the deal by saying that would save australian jobs about 2 150 current jobs and 750 planned ones almost all of these jobs were in queensland the home state of then australian prime minister kevin rudd the state heavily depends on mining and tourism revenue so they favored allowing the deal to pass the australian competition regulators announced in march 2009 that it would not oppose the deal now the australian government needed to give its final approval so by april 2009 prospects for the deal were looking quite good but at that same time the winds of the market had started to shift bond and stock prices were turning has zero rate monetary stimulus policy started to take effect rio tinto shares left 16 since february allowing the company to raise 2.4 billion australian dollars or 2 billion u.s dollars from the market at rates lower than those from the china code deal now suddenly this china code deal was not looking so good anymore up until then tom albanese and the rio tinto management were saying that they had no other way to pay down this debt but the markets were proving them wrong in early may 2009 rio tinto shares continued their recovery and closed at the dollar equivalent of 49.50 australian dollars this was higher than the 45 dollar strike price of the china co convertible bonds by now it was becoming super clear that china co had struck a fantastic deal for itself but a deal was a deal right management was rapidly losing their will for the deal market options and even a possible joint venture with bhp were looking like friendlier options china co-president xiong weiping came to australia to lobby for the deal downplaying the company's state ties they also hired a lobby firm with ties to the labour party so to try to get the deal through li tang chun then the fifth most powerful person in china came to meet with the prime minister kevin rudd in march 2009 he lobbied for the deal to close too but the political messaging against selling such critical national assets was also quite powerful politicians and the opposition argued against the deal citing australia's national interest opposition member barnaby joyce condensed the matter quite succinctly the australian government would never be allowed to buy a mine in china so why would we allow the chinese government to buy and control a key strategic asset in our country stop the red government from selling australia bhp the other massive australian mining company knew that if the china ko rio deal went through they would be out in the cold so they tapped their own government and corporate connections to influence rio's decision making rio's new chairman at the time jan du plessis turned out to be amenable to such talks the australian government found itself in a tough situation china was pushing hard for this deal and australia did not see a good legal reason to stop it the government had already approved the earlier 2008 investment why not this one in the end rio tinto itself had to be the one to stop the deal in june 2009 a week before the australian government was to give its final decision rio went back to renegotiate the deal in light of the new market conditions but china co-rejected that proposal because it removed the mind stake sales and the board seats rio then cancelled the deal unilaterally rio tinto ended up raising 15 billion dollars from the markets and another 5.8 billion dollars through a joint venture with bhp in the pilbara mines but they had also kicked a massive hornet's nest reaction to the deal falling apart was pretty negative back in china the anger worsened when news came out that nippon steel secured a 33 percent discount during that year's iron negotiations this was less than the 45 discount that the chinese side were calling for and implied that japan was colluding with the australians despite the chinese it represented a pretty big loss of face the state council the chief administrative authority in the people's republic accused bhp of inflaming australians fear of quote-unquote chinese color in other words being racist the chinese media launched a campaign denouncing westerners and australians as evil capitalists taking advantage of the chinese people and hindering the rapid economic development then in july 2009 stern who an australian citizen of chinese birth and three other rio tinto employees were arrested in shanghai stern had been the assistant and translator to rio's chief iron ore price negotiator the authorities accused the employees of stealing state secrets and taking bribes this was based on them having critical data that was too detailed to have been legally acquired which people at the time saw as dubious the former charge holds the death penalty whose villa in a fancy shanghai expat community was raided his data logins were used to download information from the company the arrests made things between australia and china awkward kevin rudd and the australian government declined to intervene on a personal level the minister of trade said that the trial would have no impact on australian trade relations with china they were aware that retaliation would only invite escalation rio tinto executives worked hard behind the scenes to repair relations with the chinese this involved consulting with top party officials and includes among other things giving china code a joint equity share in the aforementioned semando mine in guinea rio tinto's work behind the scenes did manage to blunt the government's anger at the trial prosecutors dropped the charges of state secret theft but kept the bribery charges which the employees pled guilty to rio tinto then fired stern and the other employees on the basis of having accepted bribes looking back on it there is little doubt that the china code deal took advantage of rio's momentary weakness it was a raw deal shareholders hated it from the outset and that more than anything else was the thing that killed it but i think it is also just as true that this annual price negotiation system did not favor the chinese the stern who fair did change this bhp and the rest of the industry shortly dropped the old structure pointing out that they were spending seven to eight months to negotiate a 12-month benchmark from then on they would use the spot market price rio tinto generated 44 billion dollars of revenue in 2020. good money but far from the 60 billion it once made during the peak of the commodities boom likely due to this change in iron price negotiations stern who was released in 2018 having served 8 years of his 10-year sentence i'm not entirely sure where he is now my best bet is that he is probably living a quiet life somewhere in australia today rio tinto continues to closely collaborate with chinese mining companies in projects around the world and china still imports a lot of iron ore each year most of it sold to them by the big three mining companies but it is pretty clear who is who in the relationship thanks for watching that's it for now remember to hit the email newsletter and sign up or check out the patreon if you want to support the work and watch any of the early access videos want to send me an email drop me a line at john asinometry.com i love reading your emails and if you live in taipei i would love to sit down and grab a coffee sometime until next time i'll see you guys later

Channel: Asianometry

Views: 172,215

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Id: H-j6c5aGJ-c

Length: 21min 46sec (1306 seconds)

Published: Sun Sep 05 2021