As this blogger keeps saying, not all markets are created equal. In strategic commodity markets, where governments are big players, the dynamics are not as simple as the balance of supply and demand determining equilibrium. In strategic commodities, when prices go up, demand does not fall. Rather, it increases as governments panic about security of supply.
The Australian government’s failure to grasp, or ignoring of, this basic point has placed the national relationship with China at risk, has damaged our national champion companies BHP and Rio and has compromised our democracy. Let this blogger explain.
According to the SMH today:
The chief executive of BHP Billiton, Marius Kloppers, took personal credit for quashing the largest Chinese investment in Australia – the state-owned Chinalco’s proposed $23.9 billion investment in Rio Tinto – on the day before the deal collapsed, according to a WikiLeaks cable.
Mr Kloppers further believes BHP won a strategic victory in encouraging the Australian government to “draw a line in the sand” against large-scale Chinese investment in resource companies and projects.
His candid remarks were made in confidential discussions with the US consul general, Michael Thurston, at BHP’s Melbourne headquarters on June 4, 2009.
… Mr Thurston reported to the State Department that Mr Kloppers had confirmed that BHP “had taken steps to derail” the proposed Chinalco investment in BHP’s rival, Rio Tinto.\
“Despite Chinalco’s late May announcement that it would restructure its investment deal with Rio Tinto to allay [Australian government] concerns about the perceived Chinese influence on Rio Tinto, Kloppers confidently predicted on June 4 that the deal would fall through,” Mr Thurston reported.
… Describing himself as “only nominally Australian”, the South-African born Mr Kloppers expressed the belief that Rio Tinto’s new chairman, Jan du Plessis, also a South African, would be “more amenable” to a potential deal with BHP Billiton.
Immediately after pulling the plug on Chinalco, Rio Tinto announced a joint venture with BHP to combine their iron ore operations in Western Australia.
Nine months later, Rio announced a HUGE new iron ore development in partnership with Chinalco in Guinea to compete with Australia iron ore. One could argue that preventing the Chinese takeover sent the money destined for Australia to Guinea.
So is Mr Kloppers hero or villain? Neither.
The problem was not BHP, nor Rio. It was the Australian government, which ignored reasonable and clear rules for competition in the iron ore market that would have prevented the entire debacle.
Let’s think back to 2007, when BHP proposed the Rio takeover. The rationale for the merger was cost savings, but in reality, it was mostly about market power, the creation of a dominant iron ore monopoly.
The Australian government ignored the understandable pleas of iron ore customers in Asia and around the world, the ACCC passed rubber-stamped the monolith, and in so doing spooked the Chinese, who, at the first opportunity, sought to buy one half of the incipient monopoly.
Of course, allowing a Chinese merger with Rio would have disadvantaged Australian iron ore in pricing negotiations (if you accept that Chinalco is, in some way, allied to Chinese interests).
On these reasonable grounds, as well as at the behest of Mr Kloppers, the Australian government was set to reject the Chinalco takeover when Rio pulled the plug itself, with the help of Mr Klopper’s JV.
The whole freakin’ debacle, the lobbying, the secret deals, the blurring of national and corporate interests, the damage to BHP’s and Rio’s reputations, could have been avoided if the Australian government had knocked the original merger back on the basis that it was anti-competitive, as it should have done.
Today, we would be in exactly the same position, with an effective two-pillar policy for the iron ore market-makers, but without all of the waste and damage.
This blogger hopes the government has learned its lesson.