A Rio Tinto reclaimer working in the Yandicoogina stockyard and loading a conveyor with high grade iron ore in Western Australia's Pilbara region. (AFP PHOTO/RIO TINTO/FILES)
CITIC Pacific executives had to put on brave faces at Cape Preston when they shipped their first shipload of iron ore concentrate last December. There are a lot of people in Beijing who are unhappy about the largest Chinese mining project in Australia.
Chang Zhenming, the chairman of CITIC, has tried to justify the project – which is $6 billion over the budget and four years behind schedule – citing tough local conditions and, interestingly, what the project means for China’s resource security.
“This will help us to break up oligopolies in the resource industry, increase our voice in the market place, thereby ensuring strategic resource security for our national economic development,” Chang told Chinese reporters.
CITIC estimates that once all of its six production lines start producing – which, based on their performance so far, is a long way off – they could dig up 24 million tonnes of iron ore every year. That’s about 10 to 15 per cent of Australia’s total iron ore exports to China.
However, the idea that Chinese ownership equates to resource security is a seriously flawed idea and a very expensive one at that.
Beijing’s heavy reliance on sourcing raw materials abroad fuels its deeply seated anxiety about resource security. The country imports 65 per cent of its iron ore and Australia’s “big three” – BHP, Rio Tinto and Fortescue – control 70 per cent of the global seaborne trade.
Chinese companies have rushed abroad to buy assets everywhere from Equatorial Guinea to the Pilbara in Australia. They have often done it in the name of resource security for China. Sometimes it is just a cynical plot to get generous financing deals from big state-owned policy banks like the China Development Bank, which has a bigger balance sheet than the World Bank.
The rush to buy abroad has been nothing but a disaster, apart from a few success stories. It will take decades for CITIC to make a profit on its $8 billion plus investment. Sino Steel’s $2 billion Midwest project has been mothballed since June 2011.
Billions of Chinese investments in magnetite projects in the Mid-west region are in purgatory due to infrastructure bottlenecks. Beijing has reportedly suspended further investment in magnetite projects in Western Australia.
What it clearly shows is that the Chinese are not good at owning, operating and building large scale mining projects and especially in Australia, which has vastly different labour, environmental and technological standards.
Even more importantly, Chinese ownership does not mean security of supply or even cheaper prices. In the event of hostility between China and the United States, it is very unlikely that Beijing will have any claim over its assets in Australia, which is treaty-bound to fight on the side of Washington.
Mark Thomason, a former defence department official at the Australian Strategic Policy Institute makes that point clear in a policy paper.
''As a recipient of substantial net foreign investment, we would seem to have greater leverage over the source countries than they have over us. After all, the assets are largely immobile and hence potentially subject to Australian government control,'' he said.
Zhang Huapiao, one of China’s top private equity investors who obtained his degree from the Australian National University said the idea of securing natural resources through ownership was “self-delusion” at the Mines and Money conference in London last December.
“When the world is at peace, supply is not a problem. However, when war breaks out, it is irrelevant who owns iron ore mines in Australia or oil fields in Africa, be it Chinese or Italians. It is meaningless,” he said.
Zhang, a former central banker and Credit Suisse executive, stipulates that it only makes sense for the Chinese to invest abroad when they have state-of-art exploration or extraction skills that no one else has.
“Otherwise, it is much cheaper and simpler to buy from international markets. It also saves you the troubles from dealing with governments, environmental groups, indigenous tribes and NGOs,” he said.
Securing natural resources through ownership is a stupid idea. China should rely on a well-functioning international market to solve its resource needs. Owning a few big mines will not make China more secure nor will it influence the commodities price.
By drumming on about natural resources security, China is also antagonising host countries like Australia about the non-commercial objectives of its investments. It is no surprise that Canberra does not like strategically motivated investment.
Both the Coalition and Labor governments have made it clear that Australia wants any investment from China to be purely based on commercial decisions. It is not only good politics but sound business advice too.
CITIC’s Chairman should drop his rhetoric about resource security and focus more on his due diligence before deciding to invest again in unfamiliar foreign places.