Working Papers

Blame it on Rio

John Durie sees straight through Treasurer Wayne Swan:

FEDERAL Treasurer Wayne Swan went to extraordinary lengths not to make a ruling on Chinese investment in Australia’s resources industry by partially knocking back the OZ Minerals deal.

His excuse was as lame as they get: the Chinese rescue could not include the Prominent Hill copper and gold mine because it was too close to the defence facility at Woomera in South Australia.

The mine is 162km from the facility and to define it as being of strategic importance is a stretch of extraordinary proportions.

If China or anyone wanted to spy on Woomera, and few would, all you would need to do would be to log on to Google Earth rather than pay more than $4 billion to buy a gold and copper mine…

For a Government that boasts about its good work in helping the country through the recession, this decision says the exact opposite…

Swan’s non-decision has made an already murky part of Government even murkier.

Apparently, Chinese miners are more of a security risk than the Russians.

posted on 29 March 2009 by skirchner in Economics, Foreign Investment

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Self-Inflicted Chinese Influence Peddling

The ACCC clears an increased Chinalco stake in Rio in terms of section 50 of the Trade Practices Act:

Chinalco and Rio Tinto would be unlikely to have the ability to unilaterally decrease global iron ore prices below competitive levels. Given this conclusion, it was not necessary for the ACCC to reach a determinative view on the extent to which Chinalco could control and influence Rio Tinto.

It is noteworthy that the ACCC’s decision was based on the worst-case assumption that:

Chinalco and various steel makers are subsidiaries of the same parent entity and therefore may have common commercial interests.

As I noted in an earlier op-ed, given its determination in relation to the formerly proposed merger between Rio and BHP, the ACCC could hardly have concluded otherwise. 

Having cleared the competition policy hurdle, the deal must now be cleared in terms of the Foreign Acquisitions and Takeovers Act.  But with the economic issues now settled from a regulatory standpoint, what does the FATA have to add to this process?  The FATA’s only purpose is to serve as a vehicle for ministerial (in this case, Prime Ministerial) discretion over foreign investment. 

Is it any wonder then that the Prime Minister is being lobbied by some of the highest echelons of the Chinese government?  While some see this as sinister, this sort of influence peddling is entirely of our own making, being effectively institutionalised by Australia’s FDI controls.  As I noted in Capital Xenophobia II, these controls are much closer to those used by the Chinese than to those used by comparable countries.  The lesson is, if you don’t want foreign investment policy in Australia being manipulated by the Chinese, then keep Australian politicians out of the process.


posted on 26 March 2009 by skirchner in Economics, Foreign Investment

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‘They will just dig them up and cart them away’

The FT’s David Pilling on the proposed increase in Chinalco’s stake in Rio:

But to say there is state involvement is not the same as imagining a monolithic apparatus planning world domination. In any case, the west, whose banks, carmakers and god-knows-what else are underwritten by the state, is not in an ideal position to lecture others. If China wants to use its trade surplus to secure mineral resources, one response might be: so what? But Chinese companies, even state-owned ones, are as likely to be engaged in cut-throat competition as in cosy cartels or state-sponsored carve-ups.

That undermines the idea that Chinalco, an aluminium maker with no need of iron ore, would seek to persuade Rio to sell cheaply to China Inc. Even if Chinalco were in a position to influence price negotiations – and with just two board members that seems doubtful – it is more likely to try to maximise prices for its own sake than to minimise them for China’s good.

Evidence that China’s forays abroad have been led by companies, and not orchestrated by an all-knowing state, is plentiful. Chinese companies often compete for the same asset. Both Shanghai Automotive and Nanjing Auto bid for Rover when the UK carmaker went chassis-up. Fears that Beijing is making a huge asset grab while the world reels from financial crisis also ignore the fact that foreign adventures are out of vogue in China. State institutions that invested in sinking foreign banks have faced public outrage for squandering national resources.

Pilling quotes NLP Senator Barnaby Joyce as saying:

“If they own the resources, they will just dig them up and cart them away.”

Yes, Barnaby - that’s how mining works. 


posted on 26 February 2009 by skirchner in Economics, Financial Markets, Foreign Investment

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Market Power is Bad, Except When it’s Our Market Power:  Harry Clarke versus the ACCC

Harry Clarke offers a ‘market power’-based defense of restrictions on Chinese ownership of equity capital in the Australian mining industry.  Harry prefers a Rio-BHP merger over selling assets to Chinalco, saying that ‘BHP-Billiton would have enjoyed unparalleled and enhanced monopoly power were it to consumate [sic] a marriage with Rio.’  However, this was not the conclusion the ACCC reached when it approved the proposed merger between BHP and Rio:

“The merged firm would be a significant global supplier of a range of commodities, including iron ore, coal, bauxite, alumina, copper and uranium. In particular, the proposed acquisition would combine two of the three major global suppliers of iron ore,” Mr Samuel said. “While significant concerns were raised by interested parties in Australia and overseas, the ACCC found that the proposed acquisition would not be likely to substantially lessen competition in any relevant market.”…

“The proposed acquisition would combine two of the three major global seaborne suppliers of iron ore lump and iron ore fines. While barriers to market entry are high, involving significant sunk costs, market inquiries indicated there has recently been significant new entry and expansion in response to high demand for iron ore,” Mr Samuel said. “This increase in supply, which has included new large scale Australian operations with associated infrastructure, has frequently been supported by commitments or investments by steel makers.

“The ACCC considered whether the availability of alternative suppliers and the ability of steel makers to facilitate capacity expansions would be likely to undermine any incentive the merged firm may have to seek to influence the global supply and demand balance of iron ore in the future.

“The ACCC’s inquiries indicated that the merged firm would be unlikely to limit its supply of iron ore given the uncertainty it would face in relation to the profitability of this strategy and the risk that limiting supply would encourage expansions by existing and new suppliers as well sponsorship of alternative suppliers by steel makers.

“In relation to the supply of iron ore in Australia, market inquiries indicated that steel makers in Australia are unlikely to face higher iron ore lump and iron ore fines prices, based on a move from export parity pricing to import parity pricing. The ACCC found that alternative suppliers are likely to be available to Australian steel makers, including alternative suppliers with established rail and port infrastructure in Australia.”

Based on the ACCC’s analysis, Chinese interest in Australian commodity assets can be viewed as pro- rather than anti-competitive, not just in terms of the market for ownership and control of equity capital, which is important in itself, but also in terms of the relevant commodity markets.

But Harry argues this is a bad thing, because it undermines whatever market power Australian producers might have.  The logic of Harry’s argument is that Australia should use foreign investment controls to further the cartelisation of commodity markets to extract higher rents from Australian commodity output.  OPEC tried to do the same in the oil market, but only succeeded in demonstrating how difficult it is to effectively corner commodity markets.

Harry’s concern is with who captures whatever rents are associated with Australian mining output.  Chinese interests might sell Australian mining output to related entities at below market prices, but this would simply be a transfer of profits between these entities.  Australia might capture these rents more fully by nationalising domestic commodity production, a strategy followed by oil producing socialist states like Venezuela.  I’m pretty sure this is not what Harry wants, but that is where the logic of his position leads.  The globalisation of investment necessarily entails the globalisation of profits.  Using foreign investment controls for the purposes of cartelisation and rent extraction is beggar-thy-neighbour protectionism.

Harry is not alone in thinking that the sale of assets to Chinalco is a bad deal for Rio shareholders.  But it is not the role of government to protect businesses from making bad decisions.

posted on 19 February 2009 by skirchner in Economics, Foreign Investment

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