Chinese Spying Allegations Don't Add Up

At this point we can only wonder how absurd the Chinese allegations against Rio Tinto (NYSE: RTP  ) , the big Anglo-Australian miner, ultimately will become.

Thus far, it's hard to even get the math to work. Here's why: China's state secrets agency has accused Rio of spying on Chinese steel mills during the past six years. According to the agency, the results include the mills paying an extra $102 billion for iron ore. The difficulty there is that it's more than double the nearly $43 billion total amount the Chinese have paid the company during that period.

As you probably know, the accusations have been accompanied by the Chinese having snatched four of Rio Tinto's employees, including Stern Hu, who has charge of Rio Tinto's iron ore operations in China. None have been formally charged. Also, reports indicate that the Chinese are questioning at least five of their domestic steel mills.

All this follows an iron ore pricing squabble between Rio, BHP Billiton (NYSE: BHP  ) , and Brazil's Vale (NYSE: VALE  ) on the one hand, and the major Chinese steelmakers on the other. The miners had been seeking cuts from last year's price closer to 33%, a steeper decline than even ArcelorMittal (NYSE: MT  ) , the world's largest steel manufacturer, accepted for ore. But the Chinese producers are holding out for at least a 40% reduction.

Beyond that, when Rio Tinto was searching for funds to repay a portion of the loan it had borrowed when it acquired Canada's Alcan, the Chinese were willing to make a $19.5 billion investment in the company through their Aluminum Corp. of China (NYSE: ACH  ) . In the end, however, Rio raised what it needed through a rights offering and an agreement to form an iron ore joint venture with BHP. That outcome clearly piqued the Chinese as well.

So the Chinese are demonstrating a willingness to play hardball. One question is what this means longer-term for the likes of Rio, BHP, and even copper producer Freeport-McMoRan (NYSE: FCX  ) , of which the Chinese are major customers.

That's a question that could take a while to answer. My more immediate response is that, today’s slide notwithstanding, Rio's shares have more than doubled since late last year. And since its skirmish with the Chinese is bound to work itself out, I'm betting that there's good money to be made from the company over time.

For related Foolishness on China:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does, however, welcome your questions or comments. The Fool has a steel-toed disclosure policy.


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  • Report this Comment On August 11, 2009, at 1:23 PM, gutone wrote:

    No disclosure? Sounds like Mr. Smith is a bag holder or either RTP or something related.

    Where does not it add up? Stern Hu owns several villas each of which valued at least $10 million. There's just no way he couldn't have earned that much money legally (that is, by ANY LAW). RTP played Chinolco and now gotta burnt. Very fair.

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