Forget Hu, it’s back to business in China: Bartholomeusz

Stern Hu and his colleagues have paid a terrible price for being in the wrong positions and, it appears, doing the wrong thing at the wrong time.

The lengthy jail sentences meted out on Monday may or may not be warranted – the Chinese legal system and process is so murky and unfamiliar that even the guilty pleas to taking bribes can’t be taken at face value – but there appears to be little doubt within the resources sector that the Rio Tinto executives were originally singled out more because of the company they worked for than for their particular transgressions, which are said to be commonplace in China.

Hu and his colleagues were arrested in July last year. The backdrop was an already fractured relationship between Rio Tinto and Chinese steel mills who were angered that, under pressure from BHP Billiton’s attentions, Rio Tinto had delivered less than its contracted tonnages in 2008, diverting (as the contracts allowed) 10% of them to take advantage of higher spot prices.

Then Rio Tinto, BHP Billiton and Vale of Brazil, stared down attempts by the China Iron and Steel Association, negotiating on behalf of the industry, to force bigger benchmark price reductions on the producers than were negotiated with the Japanese and Korean mills as a response to the financial crisis and the collapse in demand. There was no benchmark deal last year.

The decision, in June, to walk away from a $US19.5 billion strategic alliance/financial rescue package agreed with China’s Chinalco therefore poured oil onto already wildly flickering flames.

Chinalco had gotten within a hair’s breadth of gaining unprecedented influence over one of the world’s largest resource groups and a series of exposures to its underlying assets. Then Rio Tinto, under pressure from its own shareholders and with BHP proposing a value-creating joint venturing of the two groups’ Pilbara iron ore business, reneged on the deal and recapitalised itself.

The Chinese weren’t happy and shortly after Hu and his team, responsible for marketing Rio Tinto’s ore in China, were arrested. It may, of course, have been a coincidence…

There was a period when the arrests looked likely to poison relationships between Australia and China that were already tense because of the federal government’s treatment of a series of foreign investment applications by Chinese state-owned enterprises. They also looked likely to make any kind of rapprochement between Rio Tinto and China and a return to business-as-usual problematic.

The guilty pleas, statements made by the defendants’ lawyers in open court that Rio Tinto had no knowledge of their activities, the leaking of an internal Rio Tinto investigation/audit that cleared it of any wrongdoing or knowledge of wrongdoing and the Rudd government’s decision not to protest the closed hearing of the charges that the men had stolen commercial secrets pointed to a changing context.

Rio Tinto, initially cautiously but clearly supportive of its team, had effectively distanced itself and insulated itself from them and whatever their fate might be.

The recent signing of a new memorandum of understanding with Chinalco for a proposed joint venture development of Rio Tinto’s Simandou giant iron ore prospect in Guinea was a tangible sign that its relations with China had been normalised (Rio Tinto’s China play, March 19). That came just after reports of a Chinese post-mortem of the failure of the Rio Tinto/Chinalco alliance which absolved Rio Tinto of blame.

Last week Rio Tinto’s Tom Albanese was able to give a speech to a development forum in Beijing in which he outlined a long-term opportunity for Rio Tinto and China to become partners.

Whether the Rudd government and Rio Tinto saw the writing on the wall or whether they were simply being pragmatic, the once prickly relationship with China appears to have been repaired and the mutuality of interest between a commodity-producing nation and a commodity-consuming nation has survived the stresses initially created by the Stern Hu affair. Rio Tinto is well on its way back to being a preferred partner, with access to cheap Chinese funding and perhaps China’s own prospective mineral resources.

Stern Hu and his colleagues have been sentenced to languish in a Chinese jail, in Hu’s case for a decade.

For everyone else, it’s back to business as usual. Well, not quite business as usual – after the Stern Hu affair, no western company is going to risk its employees or its reputation by failing to adapt its processes and structures to reflect the vulnerabilities the arrests of Hu and his colleagues exposed.

This article first appeared on Business Spectator.