Rio Tinto Forced to Reorganize in China

The Australian mining company Rio Tinto, forced by the arrestment of its four employees in China, has to reorganize its business pattern in this country.

After the exposure of the arrestment of four Rio Tinto’s employees because of the illicit iron ore trade in China, this Australian mining giant had to review its operation process and internal control pattern. Meanwhile, it was forced to “reorganize” its business in China, to “prevent the same incidence happening again”.

On April 13, the insider of Rio Tinto said that the company has already started to improve the corporate structure and require the branch in China to review its operation process and internal control pattern.

It is known that Rio Tinto has already rearranged the duties of its employees in China. “Previously, a Chinese was responsible for talking with us on business, but now there is a British taking the responsibility,” said a raw material purchaser from a steel company in Hebei.

In addition, Rio Tinto stopped the cooperation with the Chinese steel enterprises involved in the case. Presently, 20 steel enterprises were reported to be involved in the bribery case of Rio Tinto’s employees. The insiders from Rizhao Steel and Rockcheck Steel Group have confirmed that they have business relations with Rio Tinto at this time.

Systematic Trauma?

Presently, Rio Tinto is engaged in a complete review of its operation system. As one of the most experienced mining companies in the world, Rio Tinto declared that “it has strict policies over its business activities”.

Rio Tinto has already shown its resolution of reorganizing its business in China. “We are going to review all our business activities and defending measures as advised. We will try every means to stop the similar case happening again.”

After the exposure of the bribery case, Rio Tinto never admitted that its staff might be involved in corruption. The experts doubted these words. “The operation process of Rio Tinto decides that nobody, from the ordinary employees to sales managers, has the rights to control a large amount of iron ores,” said an iron ore dealer who had close relationship with Rio Tinto.

According to the reports, there were some corruption cases in the iron ore dealing field in China before the Rio Tinto case. In order to keep its employees away from corruption, Rio Tinto usually sets up two monitoring teams for every deal to conduct surveys and examinations over the progress of deals. One of the teams is in the headquarters of Rio Tinto while the other is in the country where the deal happens.

After the arrestment of its staff, Rio Tinto entrusted the lawyers, accountants to work together with corporate executive to check the relevant contracts, flow of cash and goods, employees’ emails and computer system, but no proofs of malpractice were found. “These people (the arrested employees) commit these crimes outside our system.”

But these illegal activities indeed happened without any interruptions. That exposes the key soft spot of Rio Tinto’s operation system – the insufficient supervision for the underground dealings made by its employees. Therefore, Rio Tinto plans to have stricter examinations over the iron ore deals based on the long-term agreement.

A purchasing manager from a state-owned steel company said that the headquarters of Rio Tinto has deprived the sales managers from the final decision in signing the dealings based on long-term agreement. The sales managers only remain the rights to recommend the customers to sign on the long-term agreement dealing.

In addition, certain changes have happened to Rio Tinto’s spots goods market. Presently Rio Tinto still adopts public bidding in the spot goods market, which is helpful to heighten the price of iron ores when there is a shortage in supply. However, Rio Tinto changed the bidding system in order to make sure that the price and cash flow are clearer than ever before.

“The basic reason is the chaotic market situation inside China. What Rio Tinto can do is within its power. Furthermore, Rio Tinto will not easily give up the previous business pattern that is good for the iron ore sales,” said the source.

“Reorganization” of Business

The bribery case brought about great damages to the distribution network of Rio Tinto, which may endanger the customer base of a mining company.

Therefore, Rio Tinto was forced to reorganize the distribution business in China. An important signal of the reorganization is the appointment of new president of Rio Tinto’s branch in China – Lan Bauert – on February 5, 2010. Tom Albanese said in a report that the appointment of Lan Bauert showed Rio Tinto’s resolution to enhance the long-term cooperation between Rio Tinto and China.

Lan Bauert previously was mainly responsible for the distribution of iron ores in Rio Tinto. He was said to be well informed of Rio Tinto’s iron ore business. His appointment proved that Rio Tinto’s most important market – China – has trouble, and that Rio Tinto is planning to reorganize its business in China.

It is known that the distribution teams of Rio Tinto in Beijing, Shanghai and Guangzhou have been reallocated. After the reallocation, the small and medium steel enterprises and the spot goods buyers in China will be influenced by the reallocation. The business with the large steel companies, however, will not be affected due to the long-term agreement.

A source said that Rio Tinto enhanced the business cooperation with the dealers and small and medium steel enterprises. Its employees’ ability to commit crimes outside the corporate system is closely related with Rio Tinto’s intensive actions of expanding the iron ore sales by attracting more customers. “Obviously, the threshold for Rio Tinto’s long-term agreement customers dropped to its lowest point in these 2 years.”

“Some of our contracts with Rio Tinto have to be modified,” said an iron ore purchaser from a Hebei-based steel company.

Short-term Pricing

At the beginning of April, Rio Tinto was really in a tough time.

It is true! Never did Rio Tinto depend on China so much in the past. According to its financial report, 65% of net profits come from China and half of its products are sold to China.

A senior executive of a state-owned steel company said that Rio Tinto is concentrating itself on resuming its credit in China.

However, Rio Tinto chose the short-term pricing in the iron ore pricing system in spite of the boycott of its Chinese clients.

The source attributed Rio Tinto’s adoption of short-term pricing to the results from the review of its operation system, as well as the changes in the iron ore market. “Rio Tinto thinks that the short-term pricing can make the iron ore price more transparent and respond more timely to market changes, which can leave more limited space for the steel enterprises to arbitrage through annual pricing system.”

Rio Tinto hopes that these measures could change its adverse situation in China.