Setting the benchmark

Iron ore continues to be the thorn in the side of Australia China relations writes Rowan Callick.

The tiger has virtually vanished from China, sadly, and it is unlikely to survive with fewer than 100 animals left in the wild. But it is encouraging that the virtues associated with this Year of the Tiger remain common, in both China and Australia: good luck and courage. Thus the underlying ethos for the year is “fortune favours the brave.”

Perhaps that means that at last we shall see more Australian investments in China, needed to help balance the economic relationship. But China is now indicating that it no longer really needs investment, and is more focused on its own ‘zou chu qu’– go global – campaign.

The failure last year of the Coca Cola bid for major Chinese soft drink maker Huiyuan sent shock waves apparently intended for foreign investors who had assumed that they could grow their businesses in China through acquisitions.

The areas in China where Australia has the greatest capacity to introduce innovation and improve management, are chiefly in the services area. And that remains largely off-limits to foreign involvement above a minority stake, except in distribution.

We must hope that the free trade talks between the countries open some doors. These negotiations were stalled through 2009 but were due to start again in Canberra, as this magazine was going to press. It would suit business if the Australian election campaign – which is already warming up, early and rapidly – stayed away, as usual, from such international issues. For the political spotlight just makes life harder for the FTA negotiators. If anything, the domestic priorities of politicians in both countries – China’s leadership team of Hu Jintao and Wen Jiabao is stepping down in a couple of years, and may feel it needs fresh economic reforms to secure its place in history – and may allow the relationship, which became tense during the last year, to become more relaxed.

But it is the likely end of the long-established benchmark trading system for internationally shipped iron ore, of which China has in recent years been deemed the lead negotiator for the rest of the world, that is set to deliver the greatest “peace dividend” in the Australia- China relationship.

The Brazilian ore giant Vale, in the past a champion of the unique benchmark system for ore, declared at the end of February that the spot price – the market price – would now prevail. These annual talks between the big miners and the steel mills which are their main customers – which have in recent times tended to drag on through most of the year – have become the most difficult and troubling persistent element in this relationship. Certainly, the most predictably so.
The Chinese steel industry remains government-dominated. And Australia is a massive supplier through BHP-Billiton, Rio Tinto and now also Fortescue. Thus the tensions that inevitably arise in the annual negotiations tend to be identified as disputes between China and Australia as countries, even though Canberra exerts little if any influence on the process.

Clinton Dines was the founding chairman of the Australian Chamber of Commerce in China, and was for 15 years, until a year ago, BHP’s China chief – a job for which he pipped Kevin Rudd at the final stage. Dines, who still lives in Shanghai, blogged on the Caixin site on this topic, about which he is an intimate expert: “No other major commodity trade is subject to as much arguing, emotion and hostility between buyers and sellers.” No one really trusts the benchmark system, he said. “It’s seen only as a means to gain negotiating advantage. Every year, buyers and sellers waste months of time and energy on price negotiations. Everyone gets angry and emotional. Every year, relationships are further damaged.”

The managers of the leading mills in China – who have remained optimistic about long-term demand, through the financial crisis – appear prepared for change, even though the older generation of officials entrenched in bodies like the China Iron and Steel Association (CISA) fear that the shift from formal annual talks will cut out a core role for the state.

Last year Beijing, which was in mild panic mode as millions were thrown out of work by the collapse of key Western export markets, surprised the industry by bringing back the traditionalists at CISA to lead the Chinese negotiating team. But they proved overconfident, and over-reluctant to make concessions, and deals were done around and behind them with the Japanese and South Korean steel mills, and then Chinese buyers settled too.

This year’s negotiations have become especially messy, and may now simply dissolve without a formal result. Already, most ore is being bought in China at spot market prices. The 2010 round may prove the last attempt to settle a price by such means. If so, that will remove a regular source of tension in our relationship; a good subject for a ganbei toast to start this Tiger Year, when fortune will favour the brave.

*Rowan Callick is Asia-Pacific editor of The Australian.

 

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