Chilling Effect: Industry Observes China's Rio Tinto Detentions

Spying case sends strong signals about dangers of crossing China.

Whether an Australian mining executive and his three colleagues did indeed steal state secrets or not, China's detention of four high-ranking Rio Tinto employees has had a significant ripple effect on industry from an economic and political perspective.

The business dispute between Beijing and mining giant Rio Tinto has exacerbated the economic relationship between China and Australia - two nations largely dependent on one another for trade - while illustrating the inherent dangers companies face in doing business with a country run as a one-party state.

According to reports in the New York Times and Wall Street Journal, Chinese authorities have gathered evidence that 46-year-old Stern Hu and three other Rio executives were stealing state secrets.

Several state-backed Chinese media outlets reported Hu, who serves as general manager in China for Rio Tinto's iron-ore division, stands accused of bribing officials from various smaller Chinese steel companies for information such as output levels, iron ore stockpiles, and profits that could be useful in iron ore negotiations with the state.

Three of the detained Rio Tinto employees are Chinese citizens; the fourth, Hu, is Australian.

While the steel and mining industries are taking a careful watch of these proceedings, so too are industry leaders in other sectors.

"It is a concern for Australians and other foreign businesspeople working in China that this could happen," says Chris Bowen, Australias financial services minister, in an interview on Australia Channel 10's "Meet the Press" program.

"It should also be a concern for the Chinese government," he said. "If foreign businesses feel that the degree of uncertainty is high, it will change the way that foreign businesses around the world approach business in China and approach the placement of executives in China."

Australian officials have suggested that the arrests are a retaliatory response to Rio Tinto rejecting a planned $19.5 billion investment by state-owned Chinese metals company Chinalco, increasing already existing strains between the two trading partners, just as iron ore term price negotiations were heating up. Those talks failed to yield a long-term contract.

China is the world's largest producer of steel, while Rio Tinto is one of its biggest suppliers of iron ore.

Michael Locker, president of Locker Associates, a New York-based consulting firm specializing in steel and mining, says the stalemate means Chinese steel mills will be paying higher prices this year and facing a distinct commodity disadvantage.

"Theres so much at stake from China's perspective," says Locker. "They can't lose. They're at too much of a disadvantage. Last year, when prices for iron ore went through the roof, they spent an awful lot of foreign exchange to get it. That triggered a heightened sense that they had to get a stronger position within the market. That's why they're playing hardball now."

Other strategic commodities are taking notice especially ones critical to the Chinese economy's engine, such as aluminum, copper, steam and metallurgical coal, as well as titanium.

"My guess is China's sending a message," says Locker. "They're sending a signal to the world iron ore industry, 'Don't play rough with us because we can play rougher with you.'"

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