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After Rio deal, will China break the Japan mould?

(Agencies)
Updated: 2009-02-13 11:06

With a single $20-billion deal, China will acquire a sizeable chunk of the raw materials it needs to grow its economy, and State-owned Chinalco grows from a provincial powerhouse to a diversified global player.

Related readings:  Chinalco to hike Rio Tinto stake  China resource industry sees opportunity amid global crisis  More funds for unlocking mineral wealth  Minmetals eyes overseas expansion

For some, that rang alarm bells over the risk of China Inc holding sway over the world's second-largest mining house at a time when it is fast becoming the firm's biggest customer.

But if Japan's precedent set four decades ago is any guide, one thing Thursday's deal won't guarantee is cheaper prices for the copper, iron ore and bauxite it needs to grow its economy.

The question now, say some analysts, is whether China sticks with the Japanese model or seeks to break the mold, becoming a much more powerful force on the global stage.

In the deal, which still requires regulatory approval, Chinalco will pay $7.2 billion to potentially double its share stake in Rio Tinto to 18 percent and another $12.3 billion to buy minority stakes in a suite of assets, including its biggest iron ore mine, which already sells half its output to China.

Wrapped in the veneer of a corporate deal that gives Chinalco an upstream presence and will help Rio pay down its whopping debt burden, the political significance is clear as the world's biggest minerals consumer seeks to secure industrial growth.

"If anything it's a supply issue. China's got the growth potential going forward and that means keeping raw materials coming in," said DJ Carmichael & Co analyst James Wilson.

It's a strategy pursued most clearly by China's oil companies since five years ago and more recently by smaller-scale investments in the mining sector, particularly in Australia.

As China enters into bigger deals, its precedent stretches back to Japan's investment of the 1960s in Australian iron ore and coal mines, in deals that initially raised questions about national sovereignty before being accepted as business as usual, at a time when Japan's post-war economy was booming.

Part and parcel

"It's important to recognize that joint ventures have been part and parcel since the 1970s, '80s and '90s," Rio Chief Executive Tom Albanese told reporters on Thursday.

A 50-50 alliance between BHP Billiton and Japanese trading house Mitsubishi called BMA is already Australia's largest coal miner and exporter, and the world's largest supplier to the seaborne coking coal market.

Also, a third of Rio's giant Robe River iron ore mine is owned by Mitsui, with Nippon Steel holding 10.5 percent and Sumitomo Metal Australia 3.5 percent.

"Chinalco is exactly the same as BHP and BMA ... People have got short memories," said metals and mining Australia head analyst for Deutsche Bank Peter O'Connor.

Despite those investments, coking coal and iron ore prices have skyrocketed through most of the past decade -- something Japanese investors have done little to impede.

That suggests Chinalco will be unlikely to win its domestic cousins Baosteel and other mills preferential treatment on Rio's iron ore supplies, driving a wedge between Rio and rivals BHP and Vale, as some had speculated.

So far, Rio, BHP and Vale, which together account for about a third of world iron ore, have profited hugely from driving a hard bargain with Chinese steel mills. While Chinalco may now have better access to market insight, it won't carry much clout arguing for lower prices from the majority shareholders.

"To suggest Chinalco would undermine Rio's revenue from iron ore to help out the Chinese steel industry is a stretch, if only because it would undermine its investment in Rio in the first place," said a mining analyst in Perth who asked not to be named.