Why Chinalco's Buying Into Rio Tinto

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By bringing Alcoa into the deal, the Chinese may be trying to prevent a protectionist backlash against Beijing. China certainly would like to avoid a repeat of the reaction that scuppered China oil and gas player CNOOC's (CEO) attempt to purchase Unocal in 2005 for $18.5 billion, when congressional critics claimed the purchase of the U.S.'s sixth-largest petro player by a Chinese state-controlled entity was a threat to U.S. strategic interests. San Ramon (Calif.)-based Chevron (CVX) ultimately prevailed, buying Unocal for less than CNOOC had offered.

Steadying the Supply of Resources

The Chinalco purchase is just one of a flurry of deals by Chinese companies buying resources overseas. Companies are buying because they want to lock in a stable supply of raw materials needed to fuel China's high-powered growth. Beijing, meanwhile, is encouraging this overseas shopping spree to help reduce its excessive foreign exchange reserves, which are $1.5 trillion. And with the steadily strengthening Chinese yuan, up 6.5% in 2007, overseas prizes are looking more and more like bargains (BusinessWeek.com 12/3/07).

Last year, for example, Zijin Mining Group, a Hong Kong-listed company based in the southeastern province of Fujian that in 2006 earned $236.8 million on $1.5 billion in sales, took a controlling stake in London-based Monterrico Metals, which has extensive gold, silver, and copper resources throughout Peru, for just under $190 million. And on Jan. 31, a subsidiary of Shougang, the Beijing-based company that is one of China's largest steelmakers, bought a 19.73% stake in Australian iron ore miner Mount Gibson Iron for close to $363 million. The deal is still awaiting regulatory approval in Australia.

Meanwhile, on Feb. 4, shares in Australia's iron ore producer Fortescue Metals Group shot upward following unconfirmed reports that the company was in talks with potential Chinese investors interested in taking a large equity stake. Chinalco too is already active in Australia, with a $2.5 billion investment it made in 2006 in a bauxite mining and aluminum smelting project in the Aurukun region of Queensland—the largest investment Down Under by any Chinese company.

Roberts is BusinessWeek's Asia News Editor and China bureau chief. Tschang is a correspondent in BusinessWeek's Beijing bureau.