Sinosteel's Big Losses Seal President's Fate

The Age

Friday December 12, 2008

JOHN GARNAUT

HUGE losses at Sinosteel, China's dominant metals trading company, caused the temporary shutdown of Rio Tinto's joint venture Channar mine in the Pilbara and will jeopardise development of the entire Midwest iron ore region, industry sources say.

Sinosteel president Huang Tianwen is under great pressure and will have his powers neutered by the appointment of a new party secretary and chief executive before the National People's Congress in March, the sources say.

Mr Huang was recently the darling of the Chinese business media for winning China's first international hostile takeover bid, when it paid $1.3billion for the Australian mining prospect Midwest Corporation.

The deal was struck close to the top of the market after Mr Huang had turned down earlier opportunities to buy in at a fraction of the price. The value of that investment has since collapsed with iron ore prices.

"Midwest could now be worth $100million, or it could be worth nothing if it doesn't work," said a source with close knowledge of the deal.

The prospects of Sinosteel developing the Midwest region have also been hurt by a Foreign Investment Review Board decision in June that prevents Sinosteel from buying a majority stake in neighbouring Murchison Metals.

"The Australian Government has managed to kill the development of the entire Midwest region," said an Australian official, referring to the area west of Geraldton that had been earmarked as Australia's second great iron ore mining region.

But the troubles at Sinosteel suggest the Midwest project would have been in trouble anyway.

Sinosteel has long infuriated Australian suppliers and Chinese steel mills by buying cheap Australian contract ore from its Channar joint-venture mine and on-selling it at huge mark-ups.

But the tables turned when iron ore prices began to collapse in August, leaving Sinosteel with tens of millions of tonnes of expensive iron ore that it could not offload.

The Age believes Sinosteel refused to honour its joint-venture contractual obligation to pay the benchmark contract price for all of the annual 10million tonnes of iron ore produced at the Channar mine, which it owns in a joint venture with Rio Tinto.

"Channar has been shut down because they (Sinosteel) were not taking anything and Rio said, 'Fine, we'll shut it down'," said a well-placed mining industry source.

Rio Tinto spokesman Gervase Green confirmed Channar was closed from about November 19 and had only recently reopened.

The collapse in Chinese spot market iron ore prices and freight prices has turned Australian contract iron ore from the cheapest to the most expensive in China.

Investment bank Credit Suisse recently calculated that Chinese steel mills could buy Brazilian contract ore for about 11 per cent less than Australian contract ore.

And Rio Tinto was left as the world's most-expensive supplier to China after BHP Billiton's decision last month to place a substantial proportion of its ore on the Chinese spot market rather than long-term contracts.

A well-placed source in China said the Government agency that owns Sinosteel, the Assets Supervision and Administrative Commission, is furious about a separate huge and undisclosed business failure by Sinosteel in China.

"I was told that SASAC is not happy with Mr Huang's performance ... over the past year and a half and has decided to send two people to supervise," said the source, who is a leading a figure in China's iron ore trade.

"SASAC say Huang will manage human resources and a new CEO will run the business."

© 2008 The Age

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