Men Of Steel Sharpen Focus On Australia
The Age
Monday April 28, 2008
Australia has gained enormously from Chinese investment. An interesting phase is developing as China seeks to expand its stake in Australian resources.
SINOSTEEL president Huang Tianwen began his career hoeing fields and doing odd jobs to earn merit points for the family during the Cultural Revolution. He had no money and no privileges and yet was talented enough to get to Shanghai Maritime University and then be assigned to China MinMetals Corporation, where he and six other graduates literally lived in the company's conference room. Huang rose through MinMetals, completed a masters degree in business at America's Seton Hall University and returned to introduce the concept of "logistics" to China's hopelessly jammed port system. Meanwhile, in February 1984, then prime minister Bob Hawke and Chinese premier Zhao Ziyang agreed on a foreign investment strategy to help China build its coastal steel industry, grow comfortable with relying on imported resources and generally shake its autarkic habits. They pushed through China's regulatory and bureaucratic fortress to announce the country's first major foreign investment: the 1987 Channar mining joint venture between Sinosteel and Hammersley Iron in the Pilbara. That template agreement helped China step out into the world and make both countries richer. But Sinosteel still had a lot of problems that were exposed by the depressed commodities prices of the 1990s and a rocky transition from government agency to profit-oriented enterprise. Huang's appointment as president in 2003 pushed the company into its second pioneering phase. Sinosteel diversified into high-technology engineering services and other major overseas mining ventures. Cash flow rose 10-fold in five years to 111 billion yuan in 2007. Now Sinosteel is returning its focus to Australia. Last year it signed a uranium joint venture in South Australia, which it hopes will start production by 2011. This year it made a hostile take over bid for Midwest Corporation, which runs an iron ore project inland from Geraldton in Western Australia.And at least one other Australian investment proposal is being held up by the Foreign Investment Review Board (FIRB). At times, the company still shows its inexperience. Like other Chinese commodity importers, it was caught out after rejecting earlier Australian investment opportunities at much lower prices and is now desperately trying to buy in near the peak of the cycle.Midwest would be China's first hostile takeover, if it succeeds, just six weeks after Chinalco's raid on Rio Tinto. Sinosteel's its haste to buy into Midwest may have tripped up its own plans to use a Chinese consortium called Yilgarn to build a rail and port system. Sinosteel has fierce detractors among Australian mining companies, Chinese steel mills and Chinese iron ore traders. One problem is that its accounts are opaque and provide no indication of how 111 billion yuan in cash flow produced just 2.6 billion yuan in profits. The company must have made at least that much from the 10 million tonnes of iron ore it was entitled to from the Channar joint venture.Last week a Sinosteel executive told BusinessDay that about half of that volume was re-sold on the Chinese "retail market" - perhaps at double the price that Australian mining companies were getting on their benchmark contract sales.He said Sinosteel bought and sold an additional 20 million tonnes of iron ore, contributing 18.7 billion yuan to its cash flow.But even Sinosteel's most vehement detractors concede that its president has pushed the company forward. "They were absolutely atrophying," says an Australian mining executive. "They're still atrophying, but at least their atrophying with some ambition."Others are lavish in their praise. "He is very much a new breed of CEO in China," says Robin Chambers, who did the legal work on a number of Sinosteel projects beginning with Channar. "He's American educated, speaks very good English, he's very smart and he brings a lot of Western business practices to Sinosteel."Sinosteel managers now talk about transparency and public relations and they publish sustainability reports. "We have zero tolerance for breaching the laws of host countries, such as work safety," says a Sinosteel executive. "And we believe you must make some contribution to the community." Sinosteel's next ambition is to raise about $A2 billion, probably on the Shanghai stock exchange, in the next few months. The IPO would push Sinosteel to be more transparent about its accounts and governance systems. But it might also trigger a change of ownership for the purposes of Australia's Foreign Investment Review Board. If so, that would force the company to again seek FIRB approval for its three existing Australian projects and another that is in the pipeline. Normally these would be routine approvals. But these are not normal times. The Government has to work out what to make of BHP's crude lobbying against Chinalco's right to interfere with its bid for Rio Tinto. It is also watching how China's stunningly counter-productive "defence" of Tibet and the Olympic torch will affect broader Australian public opinion. Australia is far more rational about Chinese investment than are most Western countries, but there is a new degree of anxiety. Equally, BHP's bid for Rio reignited China's resource fears, while the Tibet and torch fiascos have made the whole country defensive and insecure. The more Australian politicians react to Australian anxieties and vested interests, the more anxious, defensive and unpredictable China becomes. The only way through is to insist on transparency and permit all but the most significant Chinese investments. It's an opportunity for Kevin Rudd to take a lead from the role he helped Bob Hawke play in the 1980s, which was to help China become the country it wants to be, rather than the one we fear.
© 2008 The Age