Chinese assault on Australian resources

Chinese assault on Australian resources

By Richard McGregor

Published: May 8 2008 17:29 | Last updated: May 8 2008 17:29

Chinese companies have launched an unprecedented assault on Australian resource groups, prompting complaints from China that its businesses are being treated unfairly.

The assault has been led by Chinalco, which in February raided the share register of Rio Tinto, the Anglo-Australian miner under siege from BHP Billiton, its bigger rival. But it also features Sinosteel, Shougang and China Metallurgical Group.

Australian targets include Midwest, Murchison Metals, Gindalbie Metals and Australian Resources, the small mining groups, as well as large infrastructure projects such as Western Australia’s A$3bn ($2.8bn) Oakajee port and rail project.

Successful Foreign Investment Review Board applications from China rose to 437 from 206 in the year ended June 2006, and doubled again to 874 in the year ended last June. But those figures do not include more recent equity deals, worth about A$20bn since early last year.

Although China has invested in Australia for decades, almost all of those investments were until recently in specific projects, often via joint ventures, rather than in listed equities. The Chinese are also becoming willing to use more aggressive tactics, including hostile offers.

Mark Thirwell, director of the international economics programme at the Lowy Institute, a foreign policy think-tank, says Australia should be prepared for a “potential tsunami of investment”, adding that although China is Australia’s biggest two-way trading partner, its level of direct investment trails the UK and US.

“Inevitably investment [from China] will catch up with trade and we are now starting to see signs of that,” he says. “Suddenly investment is shooting up to billions of dollars whereas in 2005-06 it was A$264m.”

Because of the concentrated nature of their recent investments in Australian resources, the Chinese can expect greater scrutiny.

David Roden, an executive at Pali International, the broker, believes that the FIRB had until fairly recently been looking at deals in isolation. “But there could be a concerted, strategic move [by the Chinese] to take a very substantial part of Australian mineral resources, particularly resources under development,” he says.

“The right approach for FIRB if they believe there is such a move is to look at these transactions in their totality.”

Clearance for Sinosteel’s proposed takeover of Midwest came before the FIRB’s “shutters were forced down”, but it later transpired that Sinosteel was also building a stake in Murchison Metals, a neighbour to Midwest in the iron ore district of the same name in Western Australia.

Murchison itself failed in its own attempt to buy Midwest. The Chinese are also looking to fund large infrastructure projects in the district to get iron ore from remote mines to port and then markets led by China.

However, Mr Roden does not fully back the view that Beijing has launched a co-ordinated strategy to buy up as much of Australia’s strategic resources as possible.

“The Chinese companies are trying to lock in supplies and I think many of them are acting as independent entities,” he says. “I would not say it is the Chinese government authorising this, although it may approve.”

Part of China’s recent push is in reaction to BHP’s bid for Rio, he says. “If those two merge and the Chinese have not locked in iron ore supplies they will be in a weaker position.”

Mitchell Hooke, chief executive of the Minerals Council of Australia, also believes Australia must take a robust line when dealing with investments from government-related entities and sovereign wealth funds.

“Of course we welcome foreign investment. But the dividing line is where it is coming from. And that dividing line is not a brick wall; it is a criteria,” he says.

State-owned companies must demonstrate they are in the “business of commerce” and not governed by political objectives, Mr Hooke says. But Australia also walks a fine line and will be at pains not to upset its largest trading partner.

Mei Xinyu, a researcher at a think-tank attached to China’s commerce ministry, believes Australia has delayed approval of Chinese investment projects to keep profits from the mining boom in the country. He questions the role of companies such as BHP, which he says, have profited from sales to China while lobbying to keep Chinese companies out of the market.

“For China, we just want to find a reliable supply of natural resources. If the Australian government hopes to maintain a long-time reliable market for exports, it is better for them to keep the close relationship with China,” he adds.