The Chinese government is learning to tread lightly when buying major assets abroad. But its purchase of a minority stake in mining company Rio Tinto on Friday represents a new sovereign wealth twist: an attempt by Beijing to influence a foreign, private market without trying to seem like it’s doing so. No matter the window dressing, that’s bad for competition and free markets.
Aluminum Corp. of China (known as Chinalco) and US-based Alcoa purchased about 12% of Rio Tinto’s London shares, or $14.5 billion, on Friday. The purchase thrusts the consortium into the middle of Australia-based BHP Billiton’s proposed mega-merger with Rio Tinto at a sensitive time. Alcoa reportedly contributed $1.2 billion, with the rest financed by the China Development Bank, a state-owned institution under the jurisdiction of the state council.
Chinalco is at pains to represent its intentions as those of any other private-market actor. President Xiao Yaqing said Monday in Sydney that the “objective of this investment is to make a return”. The company submitted an application to Australia’s Foreign Investment Review Board, though it’s not required to do so. As for the timing of the stock purchase, just before BHP’s Wednesday deadline, well, Xiao says that was merely a “coincidence”.
That’s hard to believe, given that the president of a Chinalco subsidiary publicly expressed concern last year over the pricing power that a combined BHP-Rio might wield. China has also tried to muscle into private commodity markets before. In 2006, Beijing threatened to impose price controls if iron ore producers tried to raise prices on Chinese steel makers. Beijing backed off after Australia’s government objected.
It isn’t clear that a BHP-Rio merger would lead to monopoly pricing. A combined company would become the world’s largest producer of copper and aluminium and the second biggest of iron ore. BHP’s pitch to Rio is also premised on the synergies that both companies could realize from combining facilities and port assets—and from growing demand from China. But prices for bulk commodities such as iron ore are negotiated once a year, and Brazil’s CVRD would remain a force in price-setting. Base metals such as copper and aluminium trade on more liquid markets. Russia’s United Co. would be a major player in aluminium, as would Chinalco itself. By buying into Rio, China is trying to influence or stall a natural process of market consolidation that’s been accelerating in recent years.
As Chinalco’s junior partner, Alcoa won’t wield much power at the negotiating table. It’s more likely Alcoa wants access to some of BHP-Rio’s assets (especially Alcan Canada hydro smelters) if regulators require spin-offs as part of allowing the merger to proceed. As a private US company, Alcoa also gives China some cover against fears that China’s motives are political.
This Chinese play looks like an unnecessary, and unwelcome, sovereign-wealth intrusion into a private transaction. Australian, British and European regulators are all going to vet a BHP-Rio link-up for anti-competitive implications.
(The Wall Street Journal)
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