Rio Tinto Arrests Raise Interesting Questions

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Commodities, Global Trade

A crazy story surfaced two days ago involving the arrest of four Rio Tinto mining employees (based in Shanghai) on suspicion of espionage and stealing state secrets, according to Shanghai’s State Security Bureau. One of the arrested, General Manager Stern Hu is an Australian citizen. The remaining three are Chinese nationals. The story appears sensational due to a range of factors cited in different media accounts.

To wit, China Daily ties the arrest to a potential bribery investigation, The investigation might be related to bribery at one of the major domestic steelmakers, said a source with a local steel producer, who did not provide further information. The Wall Street Journal makes no mention of bribery yet paints a broader picture about the potential significance of the Chinese authorities’ actions, The case is an unusual example of China’s secretive national-security apparatus becoming involved with a multinational company. The line between commercial information and state secrets is often not clear in China, where many major companies are controlled by the government. The implication involves a potential chilling effect on foreign trade relations.

The story broke on Wednesday, though the Rio Tinto employees had been arrested in July 5. And according to
this story released yesterday, Chinese steel mills and the iron ore miners came to an agreement of a 33% price cut for a six month iron ore contract running from April to October. News reports did not indicate which mining firms had made the agreements. But from a Chinese perspective, a 33% price cut was much worse than what CISA (China Iron and Steel Association) had hoped to negotiate (they had sought a 50% price cut according to the linked article above). In addition, the mining firms preferred the six-month contract, to create better price visibility. So that piece of the negotiation also went in favor of the mining firms.

These factors combined with some positive effects of China’s own stimulus package, according to the article, have all worked in favor of the mining firms and against the Chinese steel mills. The other key element of the story noted in the Wall Street Journal article involves the negotiation strategies of the big mining firms Rio Tinto and BHP Billiton. This year, they both decided to enter into sales negotiations with smaller steel mills, effectively picking apart some of the consolidated volume and negotiating power brought by CISA. CISA’s hard-line negotiation tactics appear to have backfired.

All of these issues beg a few questions:

  1. Did Rio obtain information illegally during its discussions with smaller steel producers and violate company or state secrets?
  2. Were bribes involved?
  3. Or, is this a case of CISA and China as a whole, losing so much face in the negotiations that the Chinese authorities had to do something drastic to try and save face?

It’s easy to believe these are trumped up charges, even though Australia’s own foreign minister does not believe there is a connection between the iron ore negotiations or Chinalco’s bid for Rio earlier this summer.

I’m leaning toward three above. What do you think? Post a comment!

–Lisa Reisman

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