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China: Rio Tinto's trouble – commerical bribery or espionage?

According to China Daily, the official newspaper in China, Rio Tinto has virtually bribed the entire management of the steel industry in the country.

More than a week ago, four employees of Rio Tinto were arrested on suspicion of ‘espionage, stealing state secrets and harming the nation’s economic interests and security.’ Stern Hu, an Australian national who is in charge of iron ore trade in China for Rio Tinto is one of the four detained.

More than ten people in different Chinese steel companies have also been detained for further investigation, including the executive assistant of China Shougang Group.

The state secret involved is said to be confidential documents that gave Rio Tinto the upper hand in its iron ore negotiation with China’s state-owned steel mills. More specifically, it includes detailed information of the industry's projected ore demand and production data.

In the recent negotiation on long-term fixed price ore contracts, Chinese steel mills demanded a 40% decrease in price, back to the levels of 2007. But Rio Tinto insisted on a cutback of 33% at most, a price already accepted by Japan. The big three iron ore companies in Australia threatened a stoppage of supply to the open market, which meant that China had no recourse if negotiations broke down.

This tough position by the miners is because they have been informed of the forecasts of Chinese steel mills by insiders who took bribes. In past years, although the largest buyer of iron ore in the world, China has suffered from price rises of over 90% since 2004.

Columnist Li Fuyong comments:

在2002年以前,中国因为进口量小,在铁矿石市场几乎没有发言权;但是,自2003年起,中国成为最大进口国以后,依然得不到发言权,影响不了谈判局势。每次谈判都以中方失败告终,不得不屈从对方高额要价,世界三大矿山巨头每次都似乎号准了中国的脉搏,对中方的底牌了如指掌.

Before 2002 China had little influence in the iron ore market because of its small imports but even since 2003, when they became the largest importer, China still had little say in the negotiations and had to accept the exorbitant prices. The fact that the big three iron ore producers seem to be well aware of the Chinese mills forecast demand seems quite clear.

More details about how the employers of the state-owned steel companies took bribes were soon revealed. Netizens were furious to see that the people enjoying high pay from their own industry were ‘selling China to foreign companies!’

The article ‘从力拓间谍门看中国商业贿赂‘ (commercial bribery reflected in Rio Tinto's ‘Espionage-Gate’)

在2008年北京奥运会开幕前,澳洲铁矿石巨头必和必拓的奥运团队就开始忙碌着接待来自全球各地的“贵宾”,他们主要是购买必和必拓产品的客户和必和必拓各业务高层及业务表现出色的员工。

Before the Beijing Olympics opened in 2008, the team of BHP Billiton had been busy entertaining their guests who were mostly their customers and their own senior executives.

其中,就包括近年来代表中国众多钢铁企业与必和必拓进行铁矿石价格谈判的上海宝钢集团及马钢等钢铁、有色金属企业的高层。

Among them were the senior officials in Bao Gang, Ma Gang etc, who are all steel giants in China representing hundreds of steel mills in negotiations with BHP Billiton.

白天,必和必拓邀请“贵宾”观看奥运比赛,晚上安排客人下榻每间每天数千元的酒店,并与他们在酒店的酒吧或公司预定的场所交流,还专门请演唱“猫”和“Mama mia”歌剧的著名女歌手来献唱。这方面的付出,为澳方铁矿石价格谈判上赢得了先机。

In the daytime, they were invited to watch the Olympic Games and at night, they were accommodated in hotels that cost thousands of RMB per night. BHP Billiton even invited singers from shows such as ‘cats’ and ‘Mama Mia’ to entertain the guests. All this apparently paid off in the iron ore negotiations.

On the internet, the senior officials were called ‘Hanjian’, which means ‘rats amongst the Han Chinese’. It more usually refers to people who helped the Japanese invaders during the WW2.

hanyzj commented on 163.com:

中国人太容易被收买了!

It is so easy to buy off Chinese!

And a netizen named Sunny-day complained:

对付国有企业太容易了,哈哈,美女+金钱,可以横扫一切。

It is so easy to control a state-owned company. With beautiful girls and money, you can overcome everything.

Commercial or political?

The national security bureau has intervened to investigate the ‘espionage’ case. The computer of Stern Hu was confiscated and it was said that confidential information on scores of Chinese steel companies was found inside.

As China stepped up the campaign against commercial bribery there was reaction from overseas.

Australian prime minister, Kevin Rudd, warned China to handle the case carefully so as not to affect international public perceptions. Also the U.S. Commerce Secretary Gary Locke reacted with ‘great concern’ to the arrest of the four employees. Rio Tinto has asked its foreign staff to leave China or not to return to the country.

Last month a Chinese state-owned company called Chinalco just failed to buy a large stake of the Australian mining giant Rio Tinto. Most Chinese people thought the failure was the result of Australian political concern. Therefore an opinion has suggested that the detention this time could be China’s retaliation, but China has denied, saying it was an ‘individual case’.

Rather than the foreign employees, Chinese netizens are angrier at the rats among themselves. 暗香浮动 criticized that the corruption and bribery are the results of monopoly in the steel industry.

而这些垄断行业多是嫡出身,带有先天的优越性,在行业竞争中有着天然的优势,赚了是自己的,赔了找国家要。

The monopoly industries are all state-owned with an inbuilt advantage. They earn what they can earn but when they lose money they seek compensation from the government.

Woyaodese further points out that the centralization of power should be blamed as a hotbed that encourages corruption.

我们对于铁矿石的管制是越来越厉害,这厉害的结果就是中国能够经营铁矿石的进出口的单位只有100多家,远远少于钢铁企业的数量,这些有资质的进出口商最值钱的就是资质,这资质来自权力,当然就要权力寻租了。需要铁矿石的企业,只有找他们代理,而他们的代理费用不如说是倒卖的利润,进口的价格可以加一个 50-100%在给钢厂

We are now imposing strict regulation over the iron ore imports. The result is that only about 100 companies are licensed to import iron ore, a number far smaller than that of the steel companies. The license is their most valuable asset as it means power, the power to make money! Enterprises that need iron ore can only deal with these 100 companies to get the raw material they need so these 100 companies can readily sell ore for a 50 to 100% profit.

Therefore, the qualified companies, which constitute the majority of the negotiation team, all have an incentive to accept a high price. That might be the reason that, this year in order to stop the trend, it is the China Iron and Steel Association who took charge of the bargaining.

A question was raised. Bribery and commission are not unusual in Chinese business circles. Why would China be so adamant in investigating the case that it would even risk international disputes? An article suggested Rio Tinto has violated the hidden rules of business in China. Not only has the failure of China Aluminum Corporation to seize the stake of Rio Tinto seriously annoyed many senior officials, but its tough position in negotiations has also pushed the representatives to the corner.

The article said,

大伙再来看rio近期的表现
通过与中国内地的小钢企达成协议,避开中钢协,满足自己最大利益需求。
大批向中国港口运矿石,就地囤积,制造需求旺盛假象,逼迫中钢协在谈判中就范
这两条还不至于要命,最要命的一点是,把中钢协已经逼到绝路上,放话说,“我们也不坚持百分四十,但三大巨头必须在33%上有所松动”的前提下,依旧步步紧逼。其实中钢协最近那句话完全可以解读为,“老大,算你狠。给我点折扣,让我跟上边对人民有个交代吧,哪怕是0.1%也成,求你了…….”,可是 rio等偏偏装听不见。

Let's look at what Rio Tinto has done recently.
First, it strikes a deal with small steel enterprises to circumvent the China Iron and Steel Association, which is responsible for collective bargaining for the steel giants in China.
Second, it sends a huge amount of iron ore to different ports in China to fake an apparent strong demand in order to pressure the Association.
But the ultimately fatal problem is that it has backed the Association into a corner! The Association has already implied that ‘we won't insist on a 40% decrease but you have to make some concession on your 33% ultimatum!’ It could be interpreted as, ‘Come on, we know you will be the winner but give us some discount so we can at least have something to report back to our bosses. Even 0.1% is enough, please!’ But Rio Tinto pretended to be deaf!

其实,33%也好,40%也罢,中钢协谈判组从中没一点提成可拿。他们只需要rio这边有所松动,让他们跟上头和国内舆论有个交代。如果连续两年毫无建树,他们这个组织就没存在的必要,多少人的前程和饭碗就全毁了。但rio不明白啊,一再把人往绝路上逼。既然这样,中钢协和先前被rio得罪的人,也就没路可退了。

Actually the Association has little to gain from the deal whether it is 33% or 40%. They just need some concession from Rio so they have a reason to exist otherwise their future and pay are forfeit. But Rio either doesn't understand this or doesn’t want to!. So the people that have been provoked by Rio Tinto feel that they have no option but to strike back.

(Bob Guy also contributes to the post.)

3 comments

  • I’d like to make a quick comment about this notion of Rio Tinto violating the so-called hidden rules of doing business in China. I discussed this with someone in the mining industry here in Australia. His response is, “what a load of BS.” According to my friend, Rio and BHP’s ways of doing business with their Chinese buyers are totally consistent with the manner in which these Chinese companies handle relations with their suppliers. Chinese companies are the worst when it comes to observing contract terms. Japanese, South Korean and Taiwanese companies, on the contrary, are by and large much more ethical. That’s why most miners will give buyers from these countries much more leeway in contract negotiation than they would have done with Chinese buyers. In Australia, we also have our “hidden rules” of doing business.

  • […] China: Rio Tinto’s trouble – commerical bribery or espionage? [Global Voices Online] “More than a week ago, four employees of Rio Tinto were arrested on suspicion of ‘espionage, stealing state secrets and harming the nation’s economic interests and security.’ Stern Hu, an Australian national who is in charge of iron ore trade in China for Rio Tinto is one of the four detained. More than ten people in different Chinese steel companies have also been detained for further investigation, including the executive assistant of China Shougang Group.” […]

  • PHILIP WEBB

    STOP SELLING IRON ORE TO THE CORRUPT CHINESE.

    THE WORLD KNOWS OF THE CORRUPTION OF CHINESE OFFICIALS. WHY DOES’NT SOMEONE STATE THE OBVIOUS AND FORGET ABOUT PROTOCOL.

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