Monthly Archives: July 2009
The following article appeared in the Australian ABC web site yesterday, written by its China Correspondent, Stephen McDonell. Stephen is based here in Beijing.
China’s Iron and Steel Association has finally spoken out about the case of detained Rio Tinto executive Stern Hu, and its impact on Australia’s relationship with China.
The association’s deputy chairman said his industry needed to clamp down on leaks at home to ensure that more arrests don’t happen, like in the case of the four Rio Tinto staff accused of industrial bribery.
Luo Bingsheng also attacked his country’s media for supposedly beating up the Stern Hu story, and he had two messages for Australia: that our two countries need each other but that our iron ore companies should stop behaving in a monopolistic way.
According to Chinese media reports, the arrest of Mr Hu - Rio Tinto’s top negotiator in Shanghai - and three other Rio staff is part of a wider crackdown in the iron and steel industry in China.
The theory goes that not only have Chinese authorities been furious that an ex-Chinese citizen could wangle secret information out of local companies relating to their bottom line on price, but that this could lead to China paying who knows how many millions, or even billions, of dollars too much for Australian iron ore.
Today Luo Bingsheng was asked by the ABC about the likely impact of the arrest of Stern Hu on iron ore price negotiations.
He said that the negotiations were proceeding but he had a suggestion as to how this type of incident could be avoided in the future and it basically involves China’s iron ore buyers needing a lesson in secret-keeping.
“By strengthening our ability to keep secrets we can maintain the economic security of the industry and individual companies,” he said.
“And by preventing the leaking of important information and secrets we can make sure cases like this will not happen again.”
The ABC were the only foreigners who managed to find out about the press conference and it was not through an invitation.
For the local press gathered today, Mr Luo read the riot act.
“We wish that our media would stop beating up this story,” he said.
And he was critical more generally of the behaviour of Australian iron ore companies in recent price negotiations.
His reference to “monopolistic activity” means the combining of BHP and Rio Tinto’s operations.
“We oppose artificial price increases in international iron ore trading and we oppose monopolistic activity in international iron ore trading,” he said.
The ABC also asked him if he had a message for Australia in terms of how the Stern Hu case should be sorted out.
“China and Australia - especially in iron and steel trading - are complimentary to each other. Chinese steel enterprises need to import iron ore from Australia; Australia needs to sell iron ore to China,” he said.
“We should make great efforts together to maintain the long-term, healthy, stable development of the iron ore trade which will benefit companies from both countries.”
Mr Luo had to make his way through a scrum of Chinese reporters to leave the room today.
They wanted to know what he had to say about the future of iron ore price negotiations. He said that the whole way that China buys iron ore at the moment needs to be reviewed and that, in the future, there should be a single price set for all of the country.
Industry icon Bob Dickie left Oxbow earlier this year, leaving a large gap (no pun intended) in the fabric and colour of the global carbon industry. I know when I was dealing with Bob in his capacity as Vice President of Sales and Marketing for Great Lakes Carbon, I found him to be extremely knowledgeable, pragmatic and very honest.
So it was my pleasure and honour to be able to grab Bob in a spare moment and put a few questions to him.
Bob, thanks for agreeing to do this interview. How are you enjoying your new life, post Oxbow?
After working full time for 40 years, I am enjoying some extended time off. It is giving me time to improve my well-being as well as spend more time with family and my grand children who live nearby. It is also surprising how much there is to do to get things in order for future retirement. I have also decided to do some consulting and thus am able to stay in touch with many people in the industry and around the world.
Tell us a little of the Bob Dickie story. When did you first get carbon in your veins? How did your career progress?
After graduating from the University of Pittsburgh as a Chemical Engineer I spent a few years in the steel industry as an Environmental Engineer. I joined what was to become the Alumax company where I spent the next 16 years involved with smelter expansion and operations, first at Eastalco in Maryland and then as part of the team to build and operate the last new greenfield aluminium smelter built in the United States, Mt Holly in South Carolina.
I was fortunate enough to work for a very progressive management team at Alumax and was given multi-disciplinary responsibilities, initially as Technical and Environmental Director and the last five years as Carbon manager. The smelter enjoyed a worldwide reputation as employing state of the art technology, progressive management techniques, and achieved record performance and efficiencies.
In 1989 I was able to further apply my experience when I joined Great Lakes Carbon (GLC) as Plant Manager at their Enid Oklahoma calciner and then in 1992 relocated to New York to focus on Commercial and Sales activities on a Global basis. GLC relocated their Commercial and Sales offices to Houston Texas in 1995 where I have remained.
Oxbow purchased GLC in May 2007. I was fortunate to work for and with many people over the years that always strived to be the best and to help those around them be the same. For that I am very grateful and lucky.
In the years especially since the early 2000’s, the market seems to have been a lot more volatile than previously. Relationships seem to have taken second place to price. Is that how you read the changes? If not, how has the market evolved, and why?
-It depends on your perspective. The market was not very volatile prior to the early 1980’s because there was little competition and plenty of raw material (GPC) to calcine. Since then and after 2000 demand has grown worldwide with the growth of smelting and at the same time many new calciner competitors entered the market, including oil companies that decided to add value to their GPC. This caused a lot of volatility as demand, supply, and prices were affected by to much calcining capacity and events such as the mid 1990’s Aluminium MOU.
At the same time there was a fundamental shift of Aluminium capacity growth towards lower cost areas of the world, which also affected demand. Hence later the rapid increase in CPC prices in 2007 and 2008 in order to meet record demand. Since 2000, major suppliers began consolidation and primary competition emerged from China and India, for which the smelters needed evaluate and adjust to this new supply scenario. This included the acquisitions of the two largest merchant calciners, GLC and CII, in 2007.
Relationships are still very important as supply security is necessary to ensure smooth smelter operations, but at the same time if the smelters’ profitability is not sustainable then costs must be reduced in order to compete and survive, and as we know some did not make it. It may be synonymous with burning the deck chairs to fire the ship’s boilers during a storm, but action needs to be taken to make it thru.
The markets will adjust and stabilize for a period, but recent volatility helped drive home the point that at the 2008 level of demand there was not enough anode grade quality GPC or enough CPC to meet that demand. As a result the industry producers and buyers will have to develop a strategy to deal with the present as well as a return of demand in the future. Relationships are the best way to deal with this but my advice as noted in a Steven Spielberg movie is to ” Choose Carefully”.
20 years ago, there were predictions of a shortage of anode grade coke for the smelter market. In recent years, the same predictions have been getting a lot of airplay. Are these predictions finally coming true, or do you think the market will evolve its way out of the problem?
Relative to my earlier comments these predictions about shortages of anode quality GPC and CPC came true in 2007 and 2008 and were a fundamental reason for the rapid price increases. With the current slackening of demand the pressure has been taken off temporarily but the fundamentals are still there and specifications and volatility in the Aluminium industry will continue and resurface as demand returns and oil refineries process more sour crudes.
In the same vein, what do you make of the calls for increased use of Non-Traditional Anode-grade Cokes (NTACS)? Surely the smelter market simply cannot afford to reduce the quality of its anodes?
-NTAC’s have been used for many years to fill the shortage of anode grade quality GPC. Smelters’ anode quality has been affected but many have adjusted and will continue to adjust by investing in anode plant process improvements that can help stem the deterioration that could occur as more NTAC’s are used.
When did China first come onto your personal radar? When did you first start to take notice of what was happening here?
GLC was the first western calciner to utilize Chinese GPC to produce CPC commercially for the Aluminium industry in the early 1990’s. This was done through a cooperative effort with Pechiney and then was followed by further additional separate initiatives to assess the best possible sources of Chinese GPC and CPC after which sustainable commercial relationships and a supply chain was established.
How has the China market evolved since that time? Is it heading in the right direction? Is the China supply market truly a part of the global market, or are they still operating on their own terms?
Since that time China has evolved through its own rapid growth in Aluminium smelting and oil refining such that they have become a player in the global market. All the major calciners, with the exception of some integrated producers, have actively pursued GPC supply from China, and all major Aluminium producers have initiated procurement strategies within China including purchase of carbon anodes and cathodes.
Although the Chinese are part of the global market, they are still influenced by their long trading history and past commercial practices with raw materials and in many cases the supply chain security required in the west still has many questions to be answered.
Many thanks Bob.
Thanks for the opportunity to make a few comments and offer my opinion. I would like to thank the many people I have met as customers and producers over the years and perhaps I will see some of them during my consulting ventures. I have visited 87 different smelters during my career around the world. Maybe I will see a few more ?
The following article appeared in today’s Australian Fairfax newspapers. It supports the theory that the Stern Hu case has nothing to do with iron ore or State secrets, but is all to do with the Central Committee of the Communist Party finally taking some steps to clean up official corruption.
One has to be here to fully understand the level of corruption at an administrative level. One client of ours spent US$50 million building a factory here. When it was ready to start operating, the local fire brigade was called to give final approval for occupancy. Their response - the normal approval takes 90 days, but it you pay US$10,000 you can have it in 14 days, and $20,000 will get you approval within a few days. It was the same for electricity connections, gas connections, and so on. The more valuable the deal, the more money changes hands under the table.
Here is the article.
John Garnaut, Beijing
July 25, 2009
UNTIL recently, the most powerful figure in Guangdong was arguably not the top official, Wang Yang, an ally of Chinese President Hu Jintao, but a man who was officially only a political adviser.
Chen Shaoji, or “Uncle Ji” to use the Cantonese title reserved for gangsters and officials whose power far exceeds their formal position, owed his strength to an unusually long tenure on the province’s legal affairs committee. That job gave him control over the security apparatus and therefore much of the under-the-table revenue that flowed through Guangdong, which now boasts an economy bigger than Taiwan.
Uncle Ji was widely known to be financing a mistress, Li Yong, a young, flamboyant and glamorous television reporter.
He had dealings with electronics magnate Huang Guangyu, who Forbes magazine last year listed as China’s richest man, worth $US8 billion ($A9.8 billion).
And Huang did business with Xu Zongheng, the ambitious mayor of China’s most prosperous city, Shenzhen, and apparently also with Xu’s reviled, gangster-like anti-corruption chief, Wang Huayuan.
One by one, all five have “disappeared”, locked away in a Communist Party detention centre on corruption allegations. Media sources say Beijing Discipline Inspection officials made a point of backgrounding newspaper editors and then telling them not to report what they had heard — ensuring that lurid details were circulating widely within days.
Nobody knows which wealthy and powerful party member or business person will be next. It is no exaggeration to say that much of the province is quaking in fear.
“Uncle Ji was the most powerful figure in Guangdong … so many officials here owe their jobs to him,” said an official who works in one of Chen’s key power bases.
Of all China’s murky channels of justice, none are more arbitrary, more secretive and more unpredictable than the “discipline inspection” system that applies when the Communist Party decides to go after its own. Last week, Guangdong Governor Huang Huahua virtually pleaded with party investigators to call off the attack dogs. He said Guangdong was going through its “toughest year”, thanks to the financial crisis and corruption probe of Chen and Xu.
The Southern Metropolis Daily reported him asking discipline inspection investigators “not to make everyone feel insecure and not to keep everyone in a state of anxiety”.
Regulations give the investigators the power to summon suspects at a specified time and place, a power abbreviated as “shuanggui”.
But shuanggui has since evolved into a form of extra-legal detention, or perhaps authorised kidnapping.
Scholar Flora Sapio, in a paper titled Shuanggui and Extralegal Detention in China, writes that suspects can face food and sleep deprivation, or be told that their families have betrayed them and subjected to round-the-clock interrogations.
The process is designed to extract confessions because, according to Ms Sapio, they “lack the human and financial resources” to gather evidence in a more professional way.
And shuanggui is specifically designed to avoid open court trials, so as to control the public flow of information. The result is that thousands of officials and bemused journalists are asking: who are the real targets and who will be next?
“This is something from the top, I don’t think Guangdong rocked its own boat,” says Bo Zhiyue, an expert on Chinese politics at the National University of Singapore.
In Guangdong, the most common theory is that forces aligned with President Hu are taking a swipe at his predecessor and rival, Jiang Zemin, ahead of the 18th Party Congress in 2012. One Guangzhou journalist says the investigation is about the President “pushing back” at China’s security chief, Zhou Yongkang, who has grown in power over the past 18 months. The possibility that the five were just exceptionally corrupt is rarely considered.
A third theory, and perhaps the most persuasive, is that Hu is reasserting central control over the provinces and lending a hand to his Communist Youth League factional ally, Wang Yang.
Last night I had the chance to talk to some extremely well-connected people regarding this case. These people are involved at a vice-ministerial level.
The view they put to me was that this case was nothing to do with Stern Hu. We foreigners are focusing on this man because he is an Australian citizen, but the case needs to be looked at from within the headquarters of China’s Communist Party.
According to my sources, the real message behind the arrest of the people, and more importantly the arrest of the Chinese negotiators, is that the days of bribery and corruption under the guise of guanxi or mianzi (relationships and “giving face”) are now over. My source tell me that the central committee of the Communist Party have delivered a clear message to cadres right down through the Party, that giving and taking of bribes is to stop.
My sources told me that the actions of arresting these people involved in iron ore is nothing to do with external affairs and international relations. It is another step by President Hu Jintao to steer the Party and the country to a more conservative footing. After all, this is the same central Party committee that recently had several senior Guangdong province bureaucrats arrested and jailed for corruption. I will post a separate story on that.
While this version of the story is quite plausible, and even promising, it still ignores the fact that Stern Hu is being treated as a Chinese, despite his citizenship.
The folllowing article was quoted widely around the world. It appeared in yesterday’s China Daily.
As usual, the Chinese have completely missed the main points about this case. IMHO, deliberately so.
Stern Hu is an Australian citizen. If I were accused of breaking my host country’s laws, I would want my local embassy fighting to see me and to check on my health and welfare. The Australian authorities have already acknowledged widely that Chinese law prevails, and that they are only concerned after the expeditious treatment of the case. Second, and more importantly, by stretching the bounds of belief to include commercially sensitive information as a State Secret, the Chinese authorities are showing their real hand. This has nothing to do with Stern Hu. This is all about removing all the key players in the current negotiations, so that the real objective can be pursured - a single buying authority that can wield much more power on China’s behalf.
Once China has achieved its objectives, Hu and the others will quietly be released and sent back to Australia.
I could be wrong, I admit. But if time will tell, it will also show how the rest of the commercial world reacts to these tactics.
Here is the article.
By Zhu Qiwen (China Daily)
Updated: 2009-07-23 06:48
A senior Chinese diplomat Wednesday urged Australia to respect the judicial sovereignty of China in handling the espionage case involving Anglo-Australian mining giant Rio Tinto.
“The Australian side should look at it as an individual case and treat it properly,” said Deputy Foreign Minister He Yafei.
He made the remarks during a press briefing in advance of strategic and economic talks between the US and China, which will be held in Washington July 27-28.
Chinese authorities earlier this month detained four employees of Rio Tinto - Australian Stern Hu, head of Rio Tinto’s Shanghai office, and three Chinese - on charges of spying and stealing State secrets.
Since their arrest, Australian opposition politicians have pressured Prime Minister Kevin Rudd to do more to resolve the situation.
Australian Foreign Minister Stephen Smith, however, Wednesday acknowledged that the dispute would not be settled quickly.
Smith, who was attending a conference in Phuket, Thailand, said he hoped to meet his Chinese counterpart, Yang Jiechi, the next day. Smith dismissed suggestions, though, that failing to meet would represent a setback.
“The Stern Hu matter,” Smith said, “is not going to be solved by one phone call or one meeting, as I’ve seen people suggest.”
Smith said he hoped the investigation would be “conducted expeditiously” and that if charges are filed against Hu, “this is done expeditiously”.
He said Wednesday that he briefed Smith on the case during a conference in Egypt last week. “I told him we have ample evidence showing that some individuals involved acquired Chinese national secrets through illegal means,” He told reporters.
“The case will be handled in accordance with the law, and should not affect the normal trade relationship between China and Australia,” said He.
Zhu Guangyao, an assistant finance minister, said at the press briefing Wednesday that the US and China next week will discuss ways to respond to the global financial crisis and revive economic growth.
“The aim is to send out a positive signal that China and the United States are working together to overcome the difficulties,” Zhu said.
The Chinese hope that the US will adopt responsible fiscal and monetary policies to ensure the value of the US dollar and protect the safety of Chinese assets in the United States, said Zhu.
Here is an article from the UK’s The Guardian. Most commentators now seem to agree that the Stern Hu is not about him or his colleagues. It’s a much bigger picture involved - to do with the way China goes about buying iron ore and other resources. The move towards a monopsony (thanks to the reader who gave me the correct English term) seems to be moving along. Meantime, the treatment of Stern Hu as a Chinese first, and an Australian second, despite his nationality, seems to be being ignored.
Here is the article.
When Chinese police detained four Rio Tinto employees – including an Australian national – for allegedly stealing state secrets, a chill ran down the spines of many foreign investors.
Given its timing shortly after Rio aborted plans to take a £12bn investment from Chinalco, the state-owned metals producer, many initially suspected it was retribution for that debacle. Australia was quick to suggest it could affect the international business community’s perceptions of the world’s third largest economy.
Today the latest round of a war of words between the two governments over the spying allegations deepened as it emerged that China has told the Australian government that it has “sufficient evidence” to support the accusations.
He Yafei, China’s vice-minister of foreign affairs, said: “I stressed that we have sufficient evidence showing that the individuals involved obtained China’s state secrets using illegal means. The case has entered the judicial process and I requested the Australian side to respect China’s judicial sovereignty.”
Rio has denied the claims that its employees have been involved in any kind of spying or bribery in China.
Integrity
Canberra said that it would “take some time” to resolve the crisis, which has seen Rio’s top iron ore executive in China, Australian Stern Hu, held for 18 days along with three colleagues. Stephen Smith, the Australian foreign minister, said he still hoped to meet his Chinese counterpart to discuss the matter.
China is Australia’s biggest trade partner, with trade worth $53bn (£32.3bn) last year. Last week Simon Crean, its trade minister, warned that the case was “important as a signal to all people seeking to do business in China” and called for the matter to be handled quickly.
With the case still under investigation, no one can be sure of the precise details of the allegations; still less of whether they have foundation. Rio Tinto has stressed that it believes its staff “acted at all times with integrity and in accordance with Rio Tinto’s strict and publicly stated code of ethical behaviour” and denied claims that they bribed steel companies.
But most now believe the issue is in effect an inquiry into the operations of a complicated and often shady steel industry rather than any espionage or national security matters. The problem is that in China, the distinction is not so clear. The case centres on negotiations between Chinese steelmakers and iron ore producers, led by Rio Tinto, and the information used in those talks. Because so many Chinese companies are partly government-backed, and because steel is a strategic industry, it has become far more than a purely commercial matter.
“This case illustrates some of the uncertainty of getting involved in business in China,” said John Frankenstein, assistant professor of economics at the City University of New York. “A Chinese lawyer once told me ‘basically, the state can legitimately intervene in any deal at any time under any pretext’.”
“There are a lot of multinationals who came to China and have a fact-finding, commercial information arm. For those people it’s certainly worrying,” added Tom Miller, of the Beijing-based economic consultancy Dragonomics.
“If you are in the kind of business where you think there might be an overlap between commercial information and state secrets, you would be concerned. The problem is that Chinese law on this is very, very oblique and frankly no one knows what a state secret is.”
The worst fears of foreign investors appear to have been mitigated by the emerging details of the Rio case.
“I don’t think it’s as alarming as it looked on day one,” said one business adviser who asked not to be identified; several people were reluctant to speak on the record, or had been instructed not to do so by their companies, in a sign of the case’s sensitivity.
“There is obviously a degree of political motivation; it’s impossible to say it’s pure coincidence.”
But he pointed out that the inquiry had expanded with the investigation of executives from steel firms, suggesting that the authorities were not simply targeting Rio Tinto and that they were concerned about the “notoriously corrupt” industry and its possible skewing of development. “Using legal means to intimidate or pressurise companies in business negotiations at lower levels is not at all surprising; it happens quite a lot. But to happen on that sort of stage would be unusual,” he added.
The case is so sensitive that it was reported that president Hu Jintao personally approved the decision to press ahead. But Steve Dickinson, a partner at the law firm Harris & Moure in Qingdao, believes the issues it raises are not new.
Executed
“The old notion used to be that foreigners got a free pass – the worst that would happen was that you would be told to go home. That is not the rule now,” he said. “People who conduct industrial espionage and bribe people and obtain information illegally should not set foot in China.
“One guy said to me ‘everyone does that in China’. But people also go to jail and get executed for doing this in China. People do it and think ‘see, nothing happened’. The only time things happen in China is when things go sideways.”
Many complain that the market for illicit information has been created by China’s failure to establish legally compliant information agencies. “Government and enterprises should realise that by [providing] publicly available information, they can to a large extent satisfy the demand for commercial intelligence … and reduce the space available for corruption and espionage,” the Beijing-based economic consultancy Anbound said.
Dickinson acknowledges many clients chafe at obeying laws that they can see competitors flouting. “Foreigners have pressure to get information through improper means … [But] If you can’t do things any other way – go home. It’s not worth being arrested for,” he added.
Whether companies take his advice remains to be seen. “I doubt this will put them off coming. Most of the world economy is still in the doldrums; China is one of the bright spots,” said Miller, speaking days after new figures showed that GDP growth rose to an unexpectedly high 7.9% in the second quarter.
Experts also play down suggestions that an increasingly mighty China is brushing aside the firms it used to woo. “There’s anxiety that China is not interested in foreign investment any more,” pointed out Professor Li Wei, of the Cheung Kong Graduate School of Business in Beijing and the University of Virginia.
“I would discount that. It doesn’t care much about financial resources foreign companies can bring, but access to foreign markets remains important. I don’t expect major changes.”
The Black China Blog can confirm that Rio tinto has ordered all foreign staff out of China. “There are no expats left in China” one Rio executive told me.
The same order has also apparently been given within the ranks of BHP Billiton, although we have not been able to confirm this.
We understand also that both companies are presently conducting urgent reviews of their internal security, with everything from email accounts being checked to meeting rooms being checked for listening bugs. We understand Rio has ordered senior executives not to use mobile phones for any important discussion.
It seems that the other, and perhaps real objective from the Chinese side is for the formation of a single buying entity for iron ore and similar resources. China resented the recent various attempts of BHP Billiton and Rio Tinto teaming up, accusing the two countries of monopolistic behaviour. Now, the Chinese themselves are forming a monopoly on the buying side. A single entity will be responsible for all buying.
With China being the world’s largest customer for iron ore, coking coal, alumina and so on, it’s hard to see how they cannot be accused of the same behaviour.
The stakes are getting higher.
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