The Australian government Friday downplayed any political
element in the collapse of a proposed US$19.5 billion deal between
Anglo-Australian mining giant Rio Tinto Plc (RTP) and Aluminum
Corp. of China, or Chinalco.
Still, tensions have been simmering below the surface for months
between Canberra and Beijing over a deal that would have given
state-owned Chinalco an 18% stake in Rio, the world's third-largest
miner, and a board seat.
It raised concerns among some Australian opposition lawmakers
about the potential for Chinalco, also a major buyer of Australian
commodities, to influence prices. Rio owns rich iron-ore and copper
mines in Australia and offshore. Some even argued that the proposed
deal posed a threat to Australia's national security.
The collapse of the Rio deal could revive memories in China of
another failed natural resources foray: Cnooc Ltd.'s attempt to
take over Unocal Corp. of the U.S. four years ago. That deal fell
apart after U.S. lawmakers raised concerns about the ties between
China's government and its businesses.
For its part, the center-left Labor government has played its
cards close to its chest throughout the process, stating frequently
that it welcomes foreign investment - a line reiterated Friday by
Treasurer Wayne Swan, who would have decided the fate of the deal
had it not been abandoned by Rio.
The end of the deal is a "commercial matter between the
partners", Swan told reporters Friday, strongly denying any link
between Australia's drawn out foreign investment review process and
the deal's collapse.
Nevertheless, Canberra has in a sense dodged a bullet in that
Rio's decision to abandon the deal comes just as Australia's
Foreign Investment Review Board was poised to advise Swan whether
or not to approve it by June 15.
Rio said the deal looked less valuable in the wake of recent
market movements, which have seen Rio's share price strengthen and
commodity prices recover. The transaction also faced strident
opposition from some institutional shareholders in London.
In addition to the fading commercial terms, however, local media
had speculated that Canberra might impose strict conditions on the
deal designed to check Chinalco's influence over Rio, which could
have made the deal unpalatable to both parties.
Australian Trade Minister Simon Crean Friday declined to comment
on whether the government may have sought to impose tough
conditions on the deal that contributed to its collapse.
He said the protracted deliberations by Australia's FIRB were
due to the deal's "complexities", rather than any concerns about
China's increasing interest in Australia's vast natural resources
sector.
"Whatever the outcome was, I don't think it would have been
tricky. I think that the explanation would have stood on the
justification or the merits of the case," Crean told reporters.
Nevertheless, Patrick Colmer, executive director of the
Australian Treasury's foreign investment division, this week
provided a telling insight into the way Australia's foreign
investment review process works.
Testifying to a Senate economics committee Thursday, Colmer told
lawmakers that FIRB considers that any government-owned entity
cannot operate completely independently of the foreign government
in question.
Instead, it looks at the governance of the entity, seeking to
satisfy the key question of whether it is operating independently,
and "without direct or continuing government control", Colmer
said.
For its part, Chinalco largely directed its disappointment at
the deal's collapse toward Rio Friday, although it did indicate the
deal would have needed amendments to appease regulators.
Chairman Xiong Weiping said the Chinese group had worked hard to
engage with Rio on potential changes to the deal terms to reflect
the changed market conditions and feedback from shareholders and
regulators.
"As a result, we are very disappointed with this outcome," he
said.
The Australian government has made repeated public statements
about its openness to foreign investment in recent times. And, it
has approved a string of smaller resources deals, albeit with
conditions attached.
But that can't mask an undercurrent of concern about China's
aspirations in Australia. Opposition toward China's growing
appetite for Australian resource and energy assets has been
shrill.
Malcolm Turnbull, leader of the main opposition Liberal-National
coalition, panned the deal in a public speech, arguing that it
would give Chinalco direct management control and a level of
influence right down to the operating level of Rio's most important
assets.
Barnaby Joyce, a Nationals senator, and independent senator Nick
Xenophon, went a step further, sponsoring an advertising campaign
against the deal.
Chinalco remains Rio's largest shareholder with a combined 9%
stake.
Analysts say the collapse of the Chinalco deal is likely to
strain relations between the pair. But Rio is too important as a
producer of key commodities, namely iron ore, to provoke a serious
backlash.
"China has to be realistic that the market moved in Rio's
favor," one Sydney-based analyst said.
The decision to terminate the Chinalco deal also won't hamper
progress on long-stalled free trade talks between China and
Australia, Australian Trade Minister Crean said.
"In all of the discussions that I have had with China on the
FTA, the Chinalco deal was not linked to the FTA by us, or by the
Chinese," he told reporters.
-By Rachel Pannett, Dow Jones Newswires; 61-2-6208-0901;
rachel.pannett@dowjones.com (Elisabeth Behrmann in Sydney
contributed to this story)