Why Rio Tinto and China are at loggerheads

Why Rio Tinto and China are at loggerheads

China does not like to feel jealous of Japan. But in the case of iron ore it has plenty to envy. Back in the 1960s, when Japan was building up its steel industry, the world’s supply of the stuff was so fragmented that Japan could play off producers in Australia and Brazil against each other. China, now the world’s biggest steelmaker, does not have that luxury. Though it imports 70% of the world’s iron ore, most of this comes from three companies that in the intervening six decades have become titans. They are Rio Tinto and bhp, two Anglo-Australian firms, and Vale, a Brazilian one. They have brought about consolidation in the industry. They benefit from high barriers to entry. None is keen to undercut the other two. That puts them in a far stronger position vis à vis Chinese customers than their predecessors were with the Japanese.

China wants to change that. It is in the odd position of having world-leading technology companies but barely a toehold in one of the most basic industries of all, iron-mining, at a time when prices above $100 a tonne are throttling its steel mills. It has long hoped to alter the balance of power by backing the development of a vast iron-ore deposit in Guinea called Simandou, in which Rio Tinto has a joint venture with Chinalco, China’s state-owned aluminium producer (and Rio’s biggest shareholder). For years, Rio has subtly thwarted China’s ambitions by keeping the west African project on the back burner. But since last year a China-backed consortium in Guinea has upped the ante by pledging to push ahead with its own $14bn project to develop Simandou’s two northern blocks. Rio and Chinalco control the southern ones.