China is playing a very strategic, long-term game in its search for secure sources of resources. Rowan Callick reports.

As Big Mining follows Big Oil towards consolidating into a handful of global corporations, will the prime buyers of minerals be forced to pay previously unthinkable prices for their copper, nickel and iron ore, as everyone already does for oil?

China’s answer, as the world’s top market for minerals, is simple: if you can’t beat the system – and it doesn’t want to, it is today a leading driver and beneficiary of globalisation – then join it.

China Inc is funding – through the government owned banks and new sovereign wealth funds – champions to “go global,” to become as big in mining as the country already is in manufacturing.

“…it now appears that China’s prime target is Australia”

This is the setting of China’s biggest ever overseas investment – that made on February 1 by aluminium giant Chinalco, which is hastily diversifying into other minerals, in Australian/British corporation Rio Tinto, one of the world’s great mining houses.

Through ownership of resources, China intends to win security of supply, and to control the price its steel makers, smelters and other industries pay for crucial inputs they require to maintain the country’s breathless pace of development.

And following some false steps in the USA and Canada, it now appears that China’s prime target is Australia.

That is hardly a surprise, given the constant refrain of a couple of generations of Australian federal and state politicians, echoed by party and government leaders in China, that our economies are marvellously complementary – as China’s Foreign Minister Yang Jiechi put it in Canberra recently, they are “really, really cut out for each other.”

The frantic recent rise in the price of shipping such bulk cargoes is underlining that strategy. China and Australia are closer than any other major market is to a major supplier; transportation is thus of course cheaper.

In 1986, the Chinese trading house Citic took a stake in the Portland aluminium smelter in Victoria, and now holds 22.5 percent. The following year, Sinosteel took 40 per cent of the new Channar iron ore mine developed by Rio Tinto within its vast Pilbara assets in Western Australia.

Since then, many Chinese firms – almost all of them state owned – have taken minority stakes in Australian mining and processing projects. Today, it would in fact be unusual if a new iron ore mine, say, in WA did not have a Chinese foundation partner on its books.

On February 8, for instance, China Shenhua Energy, the country’s biggest coal producer, said it was planning to buy for A$2.2 billion, 15.85 percent of Fortescue Metals Group, the company chaired by Andrew Forrest that is determined to make its mark as Australia’s third biggest iron ore producer, also based in WA.

The growth in the value of the commodities that Australian miners and their partners are digging up and distributing, is far outstripping the growth of supply alone. In the years 2002-2006, the total value of copper sold rose 388 per cent, that of zinc 370 percent, of nickel 295 percent, or lead 252 percent, of tin 204 percent, and of aluminium 131.5 percent.

The last three annual price rises for iron ore, the key input for China’s industrial growth, for which it produces a third of the world’s steel, have been 71.5 percent, 19 percent and 9.5 percent. The next round is well under way, and analysts are widely expecting a result closer to 2005’s 71.5 percent than to the 9.5 percent agreed in December 2006.

Ian Ashby, president of BHP’s iron ore division, told an Australia China Business Council function in Perth late last year that China would probably buy half the company’s ore in 2007, compared with 20 percent just five years ago.

Concern at the top levels in China about where this is all heading, and an eagerness to flex its muscles as the market leader in consuming ore, drove the A$16.5 billion purchase by Chinalco, with the USA’s Alcoa as a minority partner, of 9 percent of Rio Tinto.

This move is a watershed in the relationship between Australia and China, driving the two still closer, economically – but no longer within the comfortable complementarity applauded
by political leaders of both countries.

The relationship is bound to change as it is placed under ever greater pressure, with each depending more strongly on the other for economic wellbeing. Each side is growing anxious that the balance of power is shifting, and is moving pre-emptively to shore up its own base.
Corporate Australia is being driven both to invest heavily and to chase consolidation, in order to satisfy more effectively the huge opportunities opened up by Chinese demand. And it is effectively locked out of expansion within China by the recently enhanced protection of the domestic resources sector.

Ian Bauert, Rio Tinto Iron Ore’s managing director sales and marketing, said at the big Iron and Steel Conference in Dalian that the company had ploughed back all its A$5.4 billion iron ore earnings since the boom in China demand began four years ago, into building vast new capacity. BHP says if it merges with Rio, becoming the producer of 35 percent of the world’s traded iron ore, it will do so more efficiently and on a larger scale.

China’s strategic planners are chasing globally – and especially, now, in Australia – the control that they still exercise at home in core sectors such as resources and steel making. Where this winds up is anyone’s guess, but the chase is enthralling.

* Rowan Callick is The Australian’s Beijing based China correspondent