Wayne Swan Approves Chinalco Investment in Rio Tinto (ASX: RIO)

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Now that the Olympics are over, let the real games begin. All the medals have been handed out. No more swimming, diving, juking and jiving. We can finally get back to the real international competition that matters: the race for ownership of the world’s tangible assets.

This is a multiplayer game, being played at the highest and humblest levels. It’s played in Melbourne boardrooms, Beijing backrooms, and even in your living room! Big fish chase big fish. Sharks circle in the water. And the little fish watch it all hoping to catch a wave, and not get eaten.

Australian Treasurer Wayne Swan announced this weekend that Chinalco is more than welcome to 11% of Rio Tinto (ASX:RIO). He made it sound like there were some caveats, provisos, and addendums. But at the end of the day the Treasurer said, “I have decided to raise no objections under Australia’s foreign investment policy.”

Okay. There are just two conditions that apply, though. Chinaclo has to reapply for Federal permission if it wants more than 15% of Rio and Chinalco said it won’t ask for a seat on Rio Tinto’s board. Does it even need one?

It depends on what Chinalco (and China Inc.) wants from the whole deal. Does Chinalco simply want to own a big enough stake in Rio Tinto that it can block the merger with BHP Billiton and prevent the formation of an Asia-Pacific iron ore titan? Or does it reckon that in order for the merger to go through with the regulators, Rio will have to carve itself up into various base metal pieces, aluminium being the juiciest?

Besides, there’s always the chance that a Rio Tinto – BHP Billiton merger will be thwarted right here at home by the Australian Competition and Consumer Commission (ACCC). On Friday the ACCC raised some doubts about the whole OPEC-of-Iron-Ore vision.

The ACCC said that, “To the extent the proposed acquisition lessens the competition in the global seaborne supply of iron ore, it would be likely to have the effect of increasing global iron ore prices, which would in turn increase prices paid by steelmakers in Australia.”

Hmm. Well, isn’t that the whole point? BHP Billiton wants to shift pricing power in the resource sector away from the consumers (China) and towards the producers (Aussies). Global ore prices are going up because steel production and consumption are going up. Does the ACCC want to favour Australian steelmakers over ore sellers? And if so, on what grounds?

And another thing. Has the Treasurer really sorted out what’s in Australia’s best interests? For example, he delayed by 90 days a ruling on Sinosteel’s bid to takeover Murchison Metals (ASX:MMX) in the Midwest. While delaying a takeover, the inaction also pummeled Murchison’s share price, not exactly a desirable result for Murchison shareholders.

And what was the point of the delay anyway? Was it to hope that Sinosteel would somehow change its strategic objectives by sending it to the corner for 90 days? Or does the Federal government have any idea how to confront the reality that many foreign interest are keen to take ownership of Aussie mineral deposits are willing to pay for it?

Is Australia for sale or not? And if not, who’s going to develop all those mineral deposits and turn them into wages, income, capital, and rising standards of living? If not now, when? We’re headed out to Geraldton tomorrow to give a speech on the state of play in the Midwest. We’re also sticking around for a day to hear from miners who have projects in the region. We’ll let you know what we find.

As you can see, we have more questions than answers this morning. But now that China has emerged onto the global stage with a splash, the simple question is “what next?” One way of looking at it is that you’re seeing what happens when demography and geology collide.

China’s extraordinary growth rates have thus far been driven by a huge advantage in cheap labour. But that growth is resource intensive. If China (and India, and Brazil and other emerging economies) keep increasing per capita incomes, they’re going use more energy and resources than ever.

For example, today’s Wall Street Journal reports that the average American consumes the equivalent of 7.82 tonnes of oil per year to meet his energy requirements. By comparison, a single Chinese man uses just 1.4 tonnes of oil per year to meet his total energy requirements.

Rising standards of living are resource intensive. One good thing is that more developed economies tend to use energy and resources more efficiently. But is there enough oil in the world for six billion people to live at the same energy intensity as homo Americanus? We doubt it, which will make watching geopolitics and the great contest for energy very interesting over the next ten years.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Every debt gilled homeowner in Australia is backing Swan to flog off the mine, the farm, and the grandkids in order for him to hold the AUD up. The current account is funny like that isn’t it?
    Any more AUD to TWI deflation and then import price inflation will deal the final telling blow to those on the edge of their ability to make mortgage payments, or to those looking to flog off their retirement bastion mcansions to fund their fuel and ETS bills.
    All those that thought they could borrow their way to the good life want bailing out and Wayne & Glenn & Ken are there to serve their compadres of the generation that stuffed the nation. And Costello, Howard, Keating & Hawke warrant the long rest in the same small unmarked ditch.

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  2. Australia will always be dependant upon selling its raw materials and primary produce. No problem. What is bizarre is that we have to import large numbers of immigrants to allow BHP, Rio, Xstrata to do it. Such is the pace of development and demand for labour that tradesman’s wages have been elevated across the country. This in turn led to a huge demand for investment houses and apartments to negatively gear and thus lower the tradie’s tax obligations. There has been a masssive over production of holiday apartments in North Queensland, for example, which has put pressure on hotels and particularly motels. Many motels in Cairns are offering rooms at the same price as 25 years ago. Meanwhile, with immigration above 200,000 per year, the strain on infrastructure, schools, hospitals, ports is telling us that the economy has been driven harder than it is capable of sustaining. This has all been driven by the extraordinary growth in money supply – something that has always happened when money or credit creation has no limit set upon it such as a gold standard. The same goes for agriculture. There is no doubt that this country can produce a lot of food – but at what cost? The salinity problems in the West Australian wheat belt and the state of the Murray Darling system are not a testament to sustainable agriculture. Look at what has happened to the Tuna fisheries and the Orange Roughy fishery. This is not to say that we should not develop mines or primary production. Our population needs to earn a living and pay for its imports. The trouble is we do not appear to be doing that. Most of the last 5 years has seen monthly deficits when our terms of trade have been as good as it gets. The problem is that we do not save enough to develop this country ourselves. Instead we are on the debt treadmill – we may have gained jobs (too many if we have to import labout) but we have fallen into the trance of consumer culture and believe that spending (consuming) drives our economy. In the short term it does but in the long term we need capital accumulation to pay for the development of Australia. We have taken the short cut of importing capital so that most of the fabulous earnings from the great ore bodies of WA, Qld and SA are going overseas. The Reserve bank has been trying to encourage saving with higher interest rates but most people are still in thrall to the idea that houses are a great investment and so the political pressure and consumer pressure to lower rates is immense. (Pretty tough on the pensioners, who rely on fixed interest, to live on. Unfair, too, because they were the people who drove this country forward after the War.) The truth is, houses are not a great investment over time and have historically just about kept pace with inflation. In reality, they are just a necessary cost of life. Given the space and the length of the coastline of this country, it is truly astonishing the value that a population of only 21 million people has put on a single quarter acre! And borrowing to do so, too. Truly, the ball and chain is self-imposed.

    Nick Marshall
    August 26, 2008
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