Master of the Universe

June 17, 2008

By John Garnaut

Indeed, people close to BHP have been arguing that “the Ruskies or Chinese” will grow to dominate the world’s mining industry if BHP Billiton and Australia do not do so first. A similarly crude and improbable argument has been heard emanating from inside Australian ministerial offices, if not so poetically expressed.

“Don Argus has argued very persuasively to both the Howard and Rudd governments that the merger will deliver a national champion too big to be taken over,” says Max Suich, a former Sydney Morning Herald editor who previously reported on the early Australia-Japan resources trade from Tokyo. “The line is that it will preserve influence and profits for Australia,” he says. “The silence from Canberra on the merger suggests tacit approval and that Argus has won the argument.

“The last time we heard about national champions was from Rex Connor,” he says, referring to the notoriously protectionist former treasurer and prime minister.

Robert Macklin, who was Jack McEwen’s media adviser in the late 1960s and is now writing a history of BHP, says the company has always been an exceptionally powerful lobbyist.

“They always wanted protection of some kind,” he says. But Macklin believes Rudd has a “broader vision of Asia” and he has been captured by BHP.

Professor Peter Drysdale of the Australian National University warns the Rudd Government to learn from Australia’s mistakes during the commodities booms of the 1970s, which he believes led the country to forego investment and market share.

“In the 1970s prices went through the roof and then we went over the top on interventionism,” says Drysdale, listing Australian moves to renegotiate long term contracts, intervene on foreign investment and introduce government surveillance of price settlements.

“The proper approach is for the government to stand out of the market – we seem to have learned that position in principle but not necessarily in practice, especially on the investment side.”

Drysdale says the argument that China’s state-owned companies should not be welcome investors in Australia is misguided.

“The whole thrust of policy and institutional development is to entrench the market as the driver of Chinese enterprises,” he says.

And Drysdale says it is also wrong to argue – as some close to BHP have been arguing – that a Chinese state-owned company can’t be trusted to charge market prices for Australian resources sold to Australia. He says it is up to regulators like the Tax Office to ensure profits aren’t illegally transferred from Australia to China, just as it does with all multinationals that operate in Australia and might be tempted to transfer profits to holding companies in low-tax jurisdictions.

It is not just China that is nervous about two of the world’s three largest mining companies combing. Japan, Korea and Taiwan are just as worried. Unlike China, these countries rely on Australia for the bulk of their steel-making coal as well as iron ore.

Officials in Japan, Korea and Taiwan are privately dismayed at what they believe is the Australian Government’s blind support for an anti-competitive merger. One senior official in the region says a merger will be harmful to Australia even before international repercussions are taken into account. ”It will produce a monster company that is beyond government control and market competition,” he says.

The official believes the merger will hurt Australia’s international diplomacy and trigger retaliation from key trading partners. ”If the BHP-Rio merger is realised, many countries will think the Australian government has given up the doctrine of free markets,” says the official. “Steel makers of Japan, Korea, China and perhaps the EU may take counter measures like forming their own international import cartel?”

Many buyers and officials in North Asia believe Australian companies have over-played their hand and that steel mills may combine to punish them whenever the market turns in their favour.

Australia has so far failed to generate any serious debate about the BHP-Rio merger proposition and the wider repercussions of a more aggressive marketing stance. Suich is surprised the media and commentators are treating it as merely a stock market story. ”There’s been no discussion about whether this merger is a good idea,” he says.

BHP argues that merging with Rio will enable the two companies to optimize their use of infrastructure and therefore increase exports. There are many investment analysts that agree. But Suich agrees with Asian importers that the merger would only “exacerbate and highlight a cartel that has existed for some time.”

Amid all the international acrimony over the corporate mining wars there is one thing on which the Japanese steel industry and BHP Billiton agree. If the world resources trade is going to be dominated by one player then it may as well be Australian rather than Chinese.

“Do we really want Baosteel to intervene in the BHP take over of Rio Tinto, so we are dependent on China rather than BHP for our iron ore?”, says a Japanese industry official.