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China Spy Charges Against Rio Tinto's Hu Relaxed

Posted by: Frederik Balfour on July 20, 2009

The case involving Chinese allegations of espionage against four Rio Tinto employees, including Australian Stern Hu in Shanghai appears to have taken a new turn that may help diffuse tensions [see more on this in BusinessWeek’s cover story this week ] between China and Australia. Bloomberg reported that Australian foreign minister Stephen Smith told Australian Broadcasting Corporation Radio at the weekend the charges against the four were likely to be downgraded to commercial crimes from the far more serious crimes of theft of state secrets in relations to ongoing negotiations between Rio Tinto and China over 2009 Iron Ore contract prices.

That would make it easier for Rio Tinto to move ahead with negotiations with China, the largest steelmaker in the world and largest buyer of iron ore. While both Korea and Japan reached agreements for annual iron ore contract prices with the world’s principle iron ore producers Rio Tinto, Vale Brazil and BHP Billiton, China has been buying iron ore on the spot market since March 31, the final day on which the 2008 contracted prices were valid.

As the world’s largest exporter of iron ore, Rio Tinto has taken the lead in multilateral price negotiations with China, although it is common for bilateral talks with other producers to take place on the sidelines as well. Jessy Xia, Asia Steel Editor at Platts [a sister company of BusinessWeek’s in the McGraw-Hill stable] said the allegations that the Rio Tinto employees managed to obtain details on the negotiating strategy and “bottom line” offer of state-controlled iron ore buyers could give Rio considerable advantage at the bargaining table.
At least one Chinese employee of Shougang Iron and Steel has been arrested for allegedly sharing information with Rio Tinto.

The case against Hu and others could drag on for months and months. While it has clearly added a new dimension to ongoing talks with Rio Tinto, negotiations will undoubtedly conclude long before the accused learn of their fate. China has said it hopes to wrap up negotiations on a contract price this month.

Meanwhile there has been renewed discussion of substituting the annual contract price setting with a quarterly process. Reuters cited a CLSA report today saying that iron ore producers would likely stand to benefit more than buyers from quarterly contracts.

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