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Despite the economic downturn Chinese investors are queuing up to invest in Australia’s rich resources sector. Australia’s commodity prices have nosedived in recent months, but Chinese end-users are strategic enough to know demand will return in their domestic market, and having reliable access to high quality minerals and resources will be as important as ever. Three major Chinese deals recently presented to Australia’s Foreign Investment Review Board (FIRB) and the Federal government for approval have generated an unprecedented public debate over Chinese ownership in Australia, which echoes similar outcries during the 70s when Japanese investment was the bogie man.
There are increasing concerns that the tone of the debate has gone well beyond a rational and necessary appraisal of commercial and national interest investment guidelines and has allowed perceived anti Chinese sentiment and political opportunism to overshadow rational commercial and investment assessment.
The first of the deals, China HunanValin Iron and Steel’s $AUD 644 million bid to increase its stake in Fortescue Metals Group was approved by Federal Treasurer Wayne Swan on March 31. Valin increased its stake in Fortescue from 9.79 per cent to 17.55 per cent.
But investment bids by state owned Minmetals and Chinalco have run into problems. Minmetals’ initial bid has been rejected and Chinalco has encountered a storm of domestic Australian criticism.
China Minmetals $2.6 billion bid for OZ Minerals was rejected by the Australian government on the grounds of national security. Part of the proposed acquisition adjoined the military weapons testing site of Woomera in South Australia. Minmetals is reported to be revising the terms of its bid to make it acceptable to FIRB and the Australian Government.
The bid by Chinalco for a $28 billion stake in international mining giant Rio Tinto will be China’s single largest international investment. If the deal is approved, Chinalco will emerge with 18 percent of the firm, two seats on the board and a hold on some of the world’s richest resource projects. This proposal has generated the fiercest level of debate.
Both are much larger investments than Hunan Valin’s buy in, and both have raised debate over Australian national interest issues. The current debate, which has been compared to Japan’s quests during the 70s is actually much closer in nature to the one triggered when Singapore’s Singtel bought into Optus – because Singtel, like the Chinese investors – was a government controlled or government owned entity. A second dimension is the claim that by allowing customers to hold stakes, the deals create a clear potential for major conflict of interest, and may allow undue external influence over operations and pricing.
All three deals have been supported by the target firms as being in their commercial best interests. Rio, for example, has supported the Chinese bid as the best commercial avenue to pay off its corporate debt. Fortescue has characterized the deal as a platform for further expansion in Australia and China.
While endorsing the importance of existing Australian guidelines on foreign investment and national interest criteria, Fortescue Metals and Rio Tinto have pointed out Chinese investments do not create control, let alone ownership, and in cooperation with the Australian government will put explicit controls and safeguards in place.
For example Rio has noted if / when Chinalco’s bid is approved, it will win only two seats on the board. One board member will be nominated by Chinalco, the other will be an independent - and both will be subject to acceptance by the Rio Tinto board nominations committee. In the case of Fortescue Metals, the Australian government and the firm have adopted a range of measures to prevent any conflict of interest. For example any person nominated by Hunan Valin to Fortescue's board must comply with Fortescue’s Directors Code of Conduct and a nominated person must submit any potential conflict of interest relating to Fortescue's marketing, sales, customer profiles, price setting and cost structures for pricing and shipping.
It is worth noting the acrimonious debate over growing Chinese investment in Australian resources has not gone unnoticed in China, where domestic media has been reporting on recent developments in Australia.
As long as the Chinese bids make sound commercial sense, and are evaluated rationally according to legitimate investment and Australian national interest requirements, all parties stand to gain. |
