Rio Tinto's Disgraceful Performance

The distortion of China's so-called judicial processes by all concerned has seldom been more apparent than in the case of the Australia-based Rio Tinto mining giant and its China-based executives, who now face jail terms of seven to 14 years for corruption and theft of commercial secrets.

But at least the mainstream media seem willing to comment on these issues rather than be cowed by contempt and other actions that continue to give Singapore's kangaroo courts a veneer of credibility. Even the Hong Kong-based South China Morning Post, owned by billionaire Robert Kuok. with his massive investments on the mainland, chose to headline its comment on the Rio case: "Sham trial does more harm than good, again".

Maybe China will learn from the Rio experience that it should also follow the Lee Kuan Yew example and go after any foreign media that sets foot in its territory after commenting so critically on these politically inspired show trials. Maybe the Chinese princelings will likewise one day go after the Financial Times, which on the day of the Rio verdict ran a full page feature on the massive wealth accumulation and prime positions of various sons and daughters of past political leaders. This is the same newspaper that two years ago groveled before the Lee family for daring to mention that the chief executive of Temasek Holdings was the wife of the prime minister and daughter-in-law of Lee Kuan Yew.

But it is not just China that looks bad as a result of this episode. Rio's chief executive Tom Albanese seems to have been in a huge hurry to patch up commercial relations with China even perhaps at the cost of more years in jail for his former employees, Australian Chinese Stern Hu and his three mainland underlings.

Albanese sacked the employees and criticized their "unacceptable conduct". He thus appears to accept the validity of their confessions to receiving bribes even though the trial was conducted behind a wall of secrecy and was prejudiced by the fact that the defenants had been effectively declared guilty by Wen Jiabao some months ago. And anyway, does the Public Security Bureau ever lose?

Albanese's groveling followed just a couple of days after delivering a speech in Beijing lauding the China-Rio commercial relationship, and after a recent agreement between Rio and Chinalco allowing the latter a major stake in a huge iron ore project in Guinea in West Africa.

Albanese may just be being pragmatic. All these moves may be part of an orchestrated charade aimed to satisfy all parties. Perhaps after a short interlude Stern Hu and his colleagues will be quietly amnestied. But it doesn't look that way now, particularly given the severity of the sentences. Whether or not he actually committed the alleged offences, the jail term is clearly designed not so much to punish Hu but to serve as a warning to foreign suppliers not to play commercial hardball with Beijing.

From that perspective, Albanese must take quite a lot of the blame. His abysmal judgment in acquiring Alcan for US$38 billion at the top of the market in 2007 started the rot. The resultant debt pile forced Rio into accepting a deal with Chinalco that gave them a big stake and management influence in various mines. But Rio subsequently reneged on that in the face of shareholder opposition and political criticism in Australia. That infuriated China. So too did the combined Australia/Brazil grip on the one major mineral China most needed – iron ore.

It was then that China launched its counter-attack – the arrests of Hu and colleagues. Nationalism was also added to the pot, with China claiming that "commercial secrets" had cost it billions of dollars. That seems a curious charge given that smaller producers, local and foreign, have mostly been selling at higher, spot, prices.

Cash prices have more than doubled in the past year, Bloomberg reported Tuesday, saying that BHP, Rio and Fortescue Metals Group Ltd. may be missing out on about US$20 billion of sales a year by selling at contract prices instead of spot prices, quoting Goldman Sachs JBWere Pty on March 1.

China, the largest buyer of iron ore, is still in price talks with the three biggest producers, Luo Bingsheng, vice chairman of the China Iron & Steel Association, told Bloomberg. Chinese mills oppose a demand to increase prices by 90 percent, the group said March 16. Some Chinese steelmakers have privately reached deals with the suppliers though official talks are ongoing, Deng Qilin, general manager of Wuhan Iron & Steel Group, said this month.

The iron ore business in China is sometimes assumed to be especially corrupt because of competing interests between numerous steel producers and an importing system that has always favored the giants controlled directly by the central government. Others have been forced to rely more heavily on the spot market where prices have mostly been higher than those under annually fixed price contracts with the big three foreign suppliers, Rio, BHP and Vale of Brazil. The scope for payoffs at various levels is huge.

Given the secrecy of the proceedings it is impossible to know whether or not the specific allegations against Hu and Co were valid, or the identities of the parties (steel executives, ministry bureaucrats etc) on the other side corruption or sale of secrets.

What is for sure is that this was a show trial. If China were seriously interested in cracking down on corruption it could start by investigating the instant billionaires who keep Macau's gambling halls in business or leave with suitcases of cash to buy Hong Kong apartments. But like most high profile corruption cases in China, this says much more about politics than anything else and shows that China is as far as ever from having a judicial system that is not an arm of the party.