Energy & Resources, Talking Point

Hu’s to blame, it seems

Rio Tinto turns its back on jailed China executives, focuses on business

Hu’s to blame, it seems

“We have no perpetual enemies,” said Lord Palmerston. “Our interests are perpetual and eternal and those interests it is our duty to follow.”

It’s a remark the British statesman made over 160 years ago, but for Rio Tinto’s boss, Tom Albanese and China’s prime minister, Wen Jiabao it has lost little of its potency.

In fact, it pretty much sums up the odd relationship that has developed between the world’s fastest growing large economy and the mining titan. For while relations between the two have been far from friendly in the past year, both seem to recognise that they need the other. Rarely has a relationship between a foreign company and the Chinese government been more in the news.

Why so?

On Monday, a Chinese court sentenced Stern Hu – a former top Rio iron ore salesman – to 10 years in jail. Three other China-based employees of the Anglo-Australian firm were also convicted. The ‘Rio Four’ were found guilty of bribery and – more controversially – stealing state secrets for commercial gain.

“The Rio Tinto case has generated enormous interest,” comments the Wall Street Journal. “For executives of major multinationals in other industries, the detention of the executives in July raised concern that their employees—particularly those born in China, as all four of the Rio Tinto executives were—could be accused of similar crimes in the course of doing their jobs, such as gathering industry information.”

Suddenly the definition of a ‘state secret’ had foreign executives worried. Lawyers struggled to pin down what this vague and elastic term meant. Could we be next, head offices asked local staff? The sense of anxiety was heightened by the fact that Hu is a naturalised Australian citizen. The conclusion: a foreign passport no longer offers much protection – he was detained despite protests from the Australian government.

But for some observers, the panic over ‘state secrets’ was a red herring. They thought the matter was always (and exclusively) about Rio and China’s desire for retribution.

Retribution for what?

In the depths of the financial crisis, Rio’s business fortunes were hit by the double whammy of sagging prices for its natural resources and its high leverage. A $19.5 billion deal was brokered with the Chinese state-owned firm, Chinalco, which would have seen its existing stake in Rio increased to 18% and given it ownership of some of Rio’s individual mines. For resource-hungry China this looked like a great outcome: buying resources at the bottom of the market.

However, the deal soured in June and Rio pulled out when minority shareholders revolted (and market conditions improved).

China’s reaction was anything but muted. “An act of perfidy,” the state news agency, Xinhua fumed, adding that Rio was behaving like “a dishonourable woman”. The warning was of long-lasting damage to its reputation: “There is an old Chinese saying: ‘A gentlemen’s agreement is beyond the letter.’ Honesty is the blood of business behaviour.”

Instead, Rio inked a deal with BHP Billiton to create a joint venture in Pilbara – pooling their iron ore mines. Chinese steel firms then watched as the iron ore spot price continued to rise through the year. The bounce back in the price of ore – largely down to China’s supercharged stimulus spending on steel – blocked their negotiators attempts to dictate a contract price during the annual round of negotiations (see next story). The talks ended in acrimony.

It was against this backdrop – a livid China, and Rio keeping its nerve to play hardball – that many observers thought Stern Hu had become a pawn. The arrest was the Chinese government’s way of publicly punishing his employer.

Has that view changed?

As the New York Times stressed “until the verdict on Monday, Rio had strongly defended its employees”. But with Hu and the others admitting to taking bribes, the company’s stance changed dramatically. It fired all four for “deplorable behaviour” and issued a statement that the evidence that they had taken $13.5 million in bribes was “beyond doubt”.

Australia’s foreign minister, Stephen Smith remained more critical. He described the sentencing as “very tough by any measure” and said the closed-door nature of the trial “left serious unanswered questions” about China’s definition of stealing ‘state secrets’.

However, within hours of the verdict, Rio’s CEO Albanese told media that the company wanted to draw a line under the incident and move on. “I am determined the unacceptable conduct of these four employees will not prevent Rio Tinto from continuing to build its important relationship with China.”

So signs of improving relations?

In fact, even before the sentencing, Albanese had been sending out some strong signals that he wanted to repair relations. On March 19, he signed a $1.35 billion deal with Chinalco to sell it 47% of the Simandou iron ore project in Guinea. “We have long believed that Rio Tinto and Chinalco could work together on major projects for mutual benefit,” he said. “”We believe the Simandou project is a large-scale, long-life asset and is the single best undeveloped source of high-grade iron ore.”

After last year’s public spat, this was a pragmatic peacemaking. Rio has had trouble developing Simandou, and hopes China’s African diplomacy can help. From the Chinese perspective, it will have a direct stake in a much-coveted iron ore supply – and it has a vested interest in Rio succeeding, since Chinalco still owns 9.3% of the miner.

A symbolic gesture followed last Friday’s China Development Forum, where Premier Wen met 60 executives from leading multinationals.

The photograph of Wen shaking hands with CEOs was seen around the world – and the presence of Albanese was noted by most media.

A handshake not a kowtow…

New Century Weekly reports that during the Forum’s gala dinner Lu Mai of the China Development Research Foundation passed on a message to Albanese purportedly from Wen. “Let us focus on the future,” the Rio boss was told.

Something that Rio very much hoped to hear. Unlike Google – which pulled out of Beiijng over a censorship row (see WiC54) – it had little choice but to patch things up. TIME points out China’s now Rio’s biggest market.

But this is no one-way relationship. Sure, Albanese looks to be doing his best to mend the rift, but he is doing so from a position of strength. China’s leadership is well aware that it failed last year to boss producers into lowering their prices. Rio, BHP and the Brazilian giant Vale were having none of it. The experience taught the China team some of the limits of their influence.

Perhaps now a new rapprochement has been reached, premised on the understanding that the Chinese government is as dependent on Rio’s natural resources as Rio is on China’s market demand.

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