The Australian government Friday downplayed any responsibility
for the collapse of a proposed US$19.5 billion deal between Rio
Tinto Plc (RTP) and Aluminum Corp. of China, or Chinalco, and said
the country remains open to foreign investment from China.
Analysts say the decision by Rio to end its Chinalco alliance,
in favor of a rights issue and iron ore joint venture with BHP
Billiton Ltd. (BHP.AU), clears the air for the Australian
government to give the go-ahead to other less high-profile Chinese
deals.
Already Friday, Prime Minister Kevin Rudd said he is meeting
with Chinalco executives in Canberra to discuss "a range of other
interests" in Australia beyond the Rio deal, suggesting the Chinese
firm is down, but not out for the count.
Ian McCubbin, an expert in China business at international law
firm Deacons, said the magnitude and complexity of the Chinalco
proposal, which would have been China's biggest-ever overseas
investment, "tended to overwhelm".
That set off a broader political debate on the merits of Chinese
investment - to the detriment of other deals in the pipeline, he
said.
With the Chinalco proposal no longer on the table, future deals
can be judged on their own merits, rather than being caught up in a
perceived "bilateral impasse" between Australia and China over
Chinalco, McCubbin said.
Tensions have been simmering below the surface for months
between Canberra and Beijing over the Chinalco deal, which would
have given the state-owned company an 18% stake in Rio, the world's
third-largest miner, and two board seats.
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 iron-ore and copper
mines in Australia and offshore. Some even argued that the proposed
deal posed a threat to Australia's national security.
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 Australian Treasurer Wayne Swan
whether or not to approve it by June 15.
While the government played its cards pretty close to its chest
throughout the process, local media had speculated that Canberra
behind the scenes was set to impose strict conditions on the deal
designed to check Chinalco's influence over Rio. Those conditions
could have made the deal unpalatable to both parties.
For its part, Chinalco largely directed its disappointment at
the deal's collapse toward Rio, although it did indicate the deal
would have needed amendments to appease regulators.
Chinalco 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.
Canberra will now never need to make public, or risk ruffling
Chinese feathers, with its decision on Chinalco.
But Patrick Colmer, executive director of the Australian
Treasury's foreign investment division, earlier 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.
Had the Chinalco deal gone ahead, only to be knocked back by
Australian regulators, it would have revived memories in China of
another failed natural resources foray: Cnooc Ltd.'s (CEO) US$18.5
billion attempt to take over Unocal Corp. of the U.S. four years
ago.
Cnooc abandoned its bid after it was criticized by U.S.
lawmakers, and China's state energy giants haven't acquired oil and
gas assets in U.S. territory ever since.
To be fair, Australia has approved a string of smaller resources
deals by Chinese companies in recent times, albeit with conditions
attached.
But that can't mask a deep undercurrent of political concern
about China's growing appetite for Australian resource and energy
assets.
Australia so far is the most targeted nation by Chinese
investors in 2009, with US$3.4 billion worth of deals announced so
far, according to Dealogic.
Malcolm Turnbull, leader of the main opposition Liberal-National
coalition, panned the Chinalco 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.
Rio played down the role of regulators in scuttling its Chinalco
alliance Friday.
It said the deal looked less valuable in the wake of recent
market movements. The transaction also faced strident opposition
from some institutional shareholders in London.
Swan told reporters the end of the deal is a "commercial matter
between the partners", strongly denying any link between
Australia's drawn out foreign investment review process and the
deal's collapse.
Chinalco remains Rio's largest shareholder with a combined 9%
stake.
Analysts say the collapse of the alliance is likely to strain
relations between Rio and Chinalco. 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 Simon Crean said Friday.
"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 and James Glynn in Sydney and Alex Wilson in
Melbourne contributed to this story)