Behind Rio Tinto’s Espionage

Rio Tinto spy case told us that the “traitors” in the Chinese steel enterprises are the core reason of why China always encounters failures in the negotiations of iron ore price.

When the negotiation of iron ore price proceeded to the crucial point, Rio Tinto, one of the three largest international mining companies, got trapped in trouble in China.

On July 9, the Chinese Ministry of Foreign Affairs’ spokesman Qin Gang confirmed that Stern Hu, Chief Representative of Rio Tinto Shanghai Office was arrested on July 5 for allegedly stealing state secrets. Meanwhile, three other employees of Rio Tinto Shanghai Office were also arrested in Shanghai.

According to the report, after the exposure of Rio Tinto spy case, most of the steel enterprises in China actively alienated from the mining enterprises by having canceled several scheduled meetings with them. Meanwhile, many senior executives with Chinese nationality of the three international mining giants (BHP Billiton, Vale and Rio Tinto) went to the foreign countries for “business affairs”.

The source said that the “inside traitors” and commercial briberies have been the implicit rules of the Chinese steel industry. Therefore, the relevant workers of BHP Billiton and Vale may not be free from guiltiness.

On July 15, People’s Daily quoted an anonymous source, saying that Rio Tinto bribed 16 Chinese steel enterprises’ relevant executives attending the iron ore price negotiation. It was said that the China Iron and Steel Associations (CISA) arranged the key executives of those 16 enterprises to attend the negotiation and Rio Tinto took this opportunity to acquaint them. Those executives were said to hold sensitive industrial information.

Another report told us that Tan Yixin, General Manager of China Shougang International Trade Engineering Company Mining Import and Export Corporation, was arrested in Beijing for being suspected of commercial crimes. The source said that Tan was in charge of Shougang Steel’s iron ore imports business and had close relationship with Stern Hu.

The Time of Spy Case’s Exposure

When Rio Tinto spy case was revealed to the public, the negotiation of iron ore price between China and the three mining giants were in deadlock. Before this case, China was standing at a nonplus in iron ore price negotiation.

In May, Rio Tinto reached an agreement with Japan-based Nippon Steel Corporation on the initial prices of iron ores, according to which the ore fines’ price went down 32.95% from last year, much lower than the 40% decline China expected. When the other countries’ steel enterprises were forced to accept the price, China chose to continue the negotiation, which has not reached any compromise by now. The three mining giants were not willing to lower the price and stopped exporting iron ore spot goods to China. June 30 was the deadline of the iron ore price negotiation. It was said that the CISA has already stopped the negotiation with Rio Tinto and begun to talk with Vale.

“It is believed that the relevant departments of China have already got the proof of the espionage and chose this time to ‘detonate’ it to give a warning to Rio Tinto,” said He Qiang, Vice President of Anbound Group.

Actually, Rio Tinto has already foreseen that. According to the report from Australia-based Times, Rio Tinto’s iron ore sales team in China held their conferences in Hong Kong or Singapore, instead of Mainland China, because they were afraid of being wiretapped or watched. But the Chinese state security department joined in the investigation, making the proofs of Rio Tinto’s briberies unveiled.

Some people thought that one of the reasons of the Chinese government’s tackling this case in a high profile might be Rio Tinto’s breach of the agreement with Chinalco on the investment. However, the spokesman for Chinalco said that this saying was “nonsense”. He denied that Chinalco had relationship with this case and said excitedly: “People saying this have ulterior motives.”

On July 17, Rio Tinto iron ore department’s chief executive Sam Walsh said in a press release email that the behaviors of its four employees arrested in China “conform to our strict and public employee morality standards.” He pointed out that the report about those four people’s briberies were not true.

Meanwhile, Australian Financial Reviews reported that Rio Tinto withdrew the staff doing the research work of iron ores and steel industry in China on July 15 to show dissatisfaction towards China.

On the same day, Australian Prime Minister Kevin Rudd told the media that this case is closely related with the interests of Australia and China. He said: “There are important economic interests in the Australian relationship with China. But I want to remind my dear Chinese friends that such economic interests can also be seen in the Chinese relationship with Australia.” Kevin Rudd warned that many foreign governments and enterprises are eying close on this case and may reconsider their investment strategies in China.

What Secrets Has Rio Tinto Stolen?

According to the Chinese media, the computers in Rio Tinto Shanghai Office were detected to save the information about the Chinese steel enterprises having long-term agreement with Rio Tinto. The information concerned the detailed purchasing plans, reserves of raw materials and production arrangement of the enterprises. Even the monthly output and sale of the large steel enterprises are also easily available in those computers.

“Rio Tinto knows clearly about the Chinese steel enterprises,” said a source. “They even know better than the enterprises’ bosses.”

A director of a Chinese steel enterprise attending in the negotiation said frankly: “It seems that they prepare carefully for every negotiation and always prevail over us.”

Another state-owned steel enterprise’s executive said that the inventory turnover, average cost of imported iron ores, gross profit of per-ton steal and some other financial information is considered to be confidential and should not be known by the people outside the steel enterprises. In addition, a steel enterprise’s production arrangement, purchasing plans and so on are also important secrets.

“If Rio Tinto knew those information, it could easily gain access to our bottom line in the negotiation,” said the above-mentioned director.

“The mining companies usually get the information about steel enterprises from the insiders of the steel enterprises,” said a source. Take Rio Tinto spy case for example: though Tan Yixin has good personal relationship with Stern Hu, he couldn’t condescend to tell the detailed production and operation information of Shougang Steel to Stern Hu. Hu might get the information from the people who are directly in charge of those matters.

According to a senior analyst in the steel industry, the mining companies prefer to recruit people having working experience in large steel enterprises. Actually, many Chinese employees in the three mining giants were previously the middle and senior management personnel in the Chinese steel enterprises, who know their former employers very much. They can even have easy access to the new production and sale information through their relationship inside the company. “It is quite likely that the mining companies get the information from the ‘inside traitors’ of the steel enterprises.”

Furthermore, the mining companies’ customer-oriented sales strategies are also fully reflected in the real work. Before being captured, Stern Hu and his underlings came to different steel enterprises to make investigations nearly every month. Their destinations vary from the large steel enterprises like Baosteel to the small- and medium-sized enterprises. When Hu and his people arrived, the president or general manager of each steel enterprise greeted them personally.

How Are the Espionages Done?

Hu graduated from Beijing University and once worked for a state-owned enterprise. He worked in Hamersley, an iron ore producer which was acquired by Rio Tinto, for nearly 20 years and was gradually promoted to the Chief Representative of Rio Tinto in China.

The three international mining giants would like to recruit people with both experiences in state-owned enterprises and international visions. Actually, most of the senior executives of the Chinese branch companies of BHP Billiton and Vale have the same experience with Stern Hu.

The three mining giants began to recruit senior steel talents in China from 1998 when the Chinese Ministry of Metallurgy was dismissed. The Ministry of Metallurgy had played an important role in the development and reform of the Chinese steel industry for a long time and had many experts work for it.

When it was dismissed, Rio Tinto and many other mining companies began to engage experienced and skilled people with high salaries. A former department head of the Ministry of Metallurgy joined in Rio Tinto as a senior technique at that time. “This man is one of the most authoritative officials in the Chinese steel industry and had rich experience, knowledge and social relationships,” said an insider. “Rio Tinto then provided him with an annual salary of 300 thousand yuan (USD 43.9 thousand), 10 times of his salary as the government official.”

Apart from the recruitment of professionals, Rio Tinto, as well as BHP Billiton and Vale, also buys off the insiders of the Chinese steel enterprises and sends people to the different Chinese steel enterprises to conduct investigations, with the purpose of knowing the situation of production and demand of those enterprises.

“The mining giants usually send their top management personnel to attend the negotiation. The workers and executives of their Chinese branch offices are mainly responsible for collecting the market information,” said a source knowing Rio Tinto.

The source also said that it has been a long time since the international mining companies began to buy off the insiders of the Chinese steel enterprises. During Beijing Olympics, BHP Billiton invited the heads of Baosteel and some other leading Chinese steel enterprises to watch the Games at day and to enjoy themselves in hotels or clubs at night. A senior executive of BHP Billiton China Office said that this was easier to improve the mutual relationship compared with the serious negotiation.

Source of Spy Case: Iron Ore Purchasing System of China

Since 2003, China has replaced Japan to be the largest importer of iron ores. However, the largest consumer always stays in the adverse situation during the annual iron ore price negotiation with BHP Billiton, Rio Tinto and Vale.

Previously, both sides of the negotiation consisted of three companies or organizations. BHP Billiton, Rio Tinto and Vale formed the supply side and the demand side was previously formed by Baosteel, Nippon Steel Corporation and European Steel. If a steel company at the demand side reached an agreement with one miming company at the supply side, the negotiation was over and the other companies had to accept this price.

Baosteel previously represented all the Chinese steel enterprises to attend the negotiation. But it was said that Baosteel did not care about the other Chinese steel companies’ interests. The iron ore price increased by 96% in 2008 and then the dissatisfaction of the other Chinese steel enterprises with Baosteel could not be eased any more.

Therefore, the Ministry of Commerce chose the CISA to attend the 2009 iron ore price negotiation. A commentator said that this brought no changes. “In truth, this is a competition for power. Baosteel is an enterprise and can not represent the whole Chinese steel industry. CISA is not an enterprise and knows little about the market. In addition, only a few steel enterprises are its members. Therefore, CISA can not represent the whole industry either.”

In truth, the small- and medium-sized steel enterprises in China can not join in the CISA because of the rigorous conditions. According to the survey, there are 1200 steel enterprises in China. Only 200 of them are the members of the CISA. No wonder there are questions in the qualification of the CISA in representing the interests of the entire Chinese steel industry.

Some reviewers pointed out that Rio Tinto spy case exposed a truth that the largest damage to the Chinese steel enterprises’ interests come from the CISA. There have come out more and more voices, asking for a reform to the CISA.

Only 112 enterprises in China have the qualification to import the iron ores. Therefore, the small- and medium-sized steel enterprises have to buy the iron ores from those large enterprises. Those large steel enterprises buy the iron ores from Rio Tinto and the other mining companies and then re-sell part of them to the small enterprises with much higher prices. In that way, the large steel enterprises can earn huge profits.

“When the mining companies like Rio Tinto found this, they would ask for the return from those large enterprises, which may provide some secrets about the Chinese steel industry in addition to the acceptance of the increasing iron ore prices,” said a steel industrial analyst.

According to the latest news, the CISA and relevant state departments are planning to conduct a review about the enterprises’ qualifications of importing iron ores to know where the iron ores imported from the international mining companies go.