China would buy huge stake in mega-miner Billiton

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Take a look at the iron ore price inflation here....

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China Chasing Stake in Billiton

By Rowan Callick and Dennis Shanahan
The Australian, Sydney
Wednesday, April 9, 2008

http://www.theaustralian.news.com.au/story/0,25197,23509774-601,00.html

Tensions between Australia and China are set to rise as [Australian Prime Minister] Kevin Rudd arrives in Beijing today amid revelations that China is preparing to buy a multi-billion-dollar stake in BHP Billiton.

Sources in Beijing said China was in the early stages of planning to snare a bigger chunk of BHP than the 9 per cent stake in rival Rio Tinto it bought with US-based Alcoa for $15 billion in a stock market raid in February.

News of the plan -- part of an attempt by China to intervene in BHP's takeover of Rio to create one of the world's biggest companies -- follows a warning from the Prime Minister to the Chinese Government and industry that they will have to accept higher coal, iron ore, and natural gas prices and cannot expect intervention from Canberra in the raw materials market.

On Monday, giant South Korean steelmaker Posco said it had agreed to triple the price it paid for Australian coal this year, raising expectations that Chinese steel mills would have to follow suit. The Posco deal also increased the likelihood that China would have to pay BHP and Rio 70-85 per cent more for Australian iron ore -- the other key ingredient in steelmaking -- this year.

As he prepared to travel from London to Beijing on the last leg of his 17-day world tour, Mr Rudd said that at times China got good deals and at other times Australian producers were better off.

"That's life in a commodities market," Mr Rudd told a 1,000-strong audience at the London School of Economics. "Our challenge is to make sure that it is conducted on market principles and in the overall framework of long-term security of what's supplied, as we have over many decades with our friends in Japan.

"Sometimes the buyers see the market prices as too high and sometimes the producers see them as too high. China did well out of the LNG contract with Australia, while iron ore is the reverse."

China and its state-owned steel companies are deeply worried about the effect of the $400-billion merger between BHP and Rio on iron ore and coal markets.

The plan to buy into BHP means foreign investment and regulatory controls are likely to become a crucial agenda item in Mr Rudd's talks with Chinese President Hu Jintao and Premier Wen Jiabao this week. The price of raw materials, climate change, China's role in Tibet, and the chaos engulfing the Olympic torch relay also loom as potential controversies on Mr Rudd's four-day visit.

The plan to buy a stake in BHP is under development, with Chinese authorities yet to determine which state-owned financial institution or steel mill -- such as the largest, Baosteel -- might take the lead role in seeking sellers within BHP's diverse shareholder base.

It is unlikely to be Chinalco, the aluminium giant that led the raid on Rio, complicating BHP's protracted takeover bid.

The plan reflects the strong view among China's planners that its steelmakers should become ever more deeply entrenched partners of global iron ore producers. The [Chinese] government is likely to use Mr Rudd's visit to check whether Canberra is contemplating strengthening or relaxing Foreign Investment Review Board procedures that relate to sovereign wealth funds or other state-owned enterprises.

This issue has already become the subject of intense lobbying in Australia in recent weeks.

While China wishes to ensure that its government-owned companies can operate without fear or hindrance within Australia, questions are also being asked as to the consequences of having state-owned firms pursue Chinese government policy inside Australia.

Australian firms also remain severely constrained in investing within China, where the resources sector provides only limited scope for foreign involvement.

Despite Wayne Swan's decision earlier this year to clarify Australia's foreign investment rules as they relate to government-backed sovereign funds -- a move viewed by some as a warning to Beijing -- China has been given freedom to pursue resources deals in Australia. The mid-west region of Western Australia, in particular, is becoming an area where Chinese interests are beginning to dominate.

Mr Rudd's visit comes as Chinese buyers and Australian producers battle over prices for iron ore, coal, and natural gas, which the Chinese believe are too high but the Australians maintain are fair, given the booming world commodity market.

Each side has accused the other of underhanded tactics in manipulating spot prices for iron ore and coal, by boycotting Australian suppliers or by deliberately delaying shipments to create shortages.

Mr Rudd said China was obviously interested in the long-term demand for energy and resources.

"We understand that. We are also operating in a free market, so there are some states in China that don't have access to energy and resources as market prices are regarded as too high," he said.

Speaking in London, the prime minister said Australia and China had a long-term strategic relationship, and Australia's largest trading partner -- and now the world's biggest source of greenhouse gas emissions -- had to be included in development and action to fight climate change.

On climate change, Mr Rudd said it was vital to get the US, China, and India involved in curbing greenhouse gas emissions. "I will do whatever I can to get China on the bus," he said.

If China did not become involved, the impact on climate change was "too horrible to imagine," he said.

Mr Rudd, a former diplomat in China, said dealing with the country on human rights issues and Tibet was difficult and "always has been."

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