The meltdown of global commodity prices has crunched the value of Australian mining assets and the local companies that own them, throwing the door wide open for a dramatic raid by deep-pocketed foreign businesses.
The shares of many listed miners of iron ore, uranium, coal and natural gas, are now trading at only a fraction of their market worth of a year ago.
While this is not good news for the immediate investment returns of super funds and other investors with money tied up in these businesses, it is likely to raise other issues of potentially greater “national interest”.
Australia’s resources sector is on the cusp of another round of merger and takeover activity that will see some of the world’s premium mining businesses acquired by foreign interests at the bottom of the commodity price cycle.
There’s nothing new in this phenomenon and, in many cases, global market forces are likely to take effect almost unimpeded.
However, it seems inevitable that some of the big takeover plays for the most coveted assets will emanate from companies and investment funds that are owned by foreign governments.
This prospect might produce yet another bout of political neuralgia for the Abbott government, especially when those takeovers involve cash-laden bidders that are subsidiaries of the Chinese government.
China’s impending shopping spree
Notwithstanding slowing global growth, industrialising economies such as China and India have a strategic interest in securing long-term supplies of energy and minerals.
Now that those assets can be acquired cheaply, China’s state-owned investment vehicles have a rare opportunity to wrench some control over the world’s supply of resources.
China has compelling strategic motives, the cash and a stack of free-trade agreements to embark on a shopping spree that could redefine the dynamics of the international commodities trade.
It’s a seemingly inexorable agenda that Australia’s new free trade agreement with China is designed to accommodate.
Rio Tinto, Fortescue are in play
Rio Tinto’s 15 iron ore mines and network of rail and port facilities in Western Australia’s Pilbara region constitute the world’s most profitable iron ore operation.
Rio’s directors last year snubbed a $190 billion merger offer from Glencore, an Anglo-Swiss miner.
Glencore is now believed to be courting Rio’s largest shareholder, the Chinese state-owned holding company, Chinalco, to mount a joint takeover in April.
Australia’s third-largest iron ore producer, Fortescue, is drowning in debt and its share price has tanked by more than 60 per cent in the last year.
The company’s chief executive conceded in January that the company was now a takeover target.
Add to these targets a swathe of natural gas and coal producers who have hit tough times and it becomes obvious that Australia’s resources sector is now an acquirer’s nirvana where the ducks are lined up.
Does it matter?
Economists are divided on whether state-owned Chinese companies should have free rein to buy out local mines, but most seem to be leaning to the view that Australia can no longer afford to marginalise any source of foreign investment.
Under Australia’s free trade agreement with China, the Foreign Investment Review Board will continue to “screen” big-ticket investment applications of state-owned companies.
But big mines are specifically excluded from the definition of Australia’s “strategic assets” in the agreement. Australia’s strategic industries now appear limited to businesses in the media, telecommunications and defence-related sectors.
Recent rises in household gas bills in east coast states provides some evidence for the strategic importance of the local mining sector.
The price rises are attributable to the focus of domestic producers – many of which are foreign owned – on meeting export demand.
That has created supply issues for domestic wholesalers and forced Australian consumers to wear higher retail prices.
According to Rod Campbell of the Australia Institute, this is a risk that may intensify in the long run if foreign investment in coal seam gas projects in NSW is not exposed to greater scrutiny.
Mr Campbell is concerned that more controversial mining projects like the Watermark coal development on the Liverpool plains in NSW will be approved after the Chinese free trade agreement is finalised later this year.
The Watermark development is owned by China’s state-run Shenhua Group and has won planning approvals despite protests from local farmers and environmentalists over the potential effects on groundwater systems.
“There is a strategic imperative for the Australian government to look carefully at the impact on local communities of free trade deals with resource-hungry countries like China,” Mr Campbell said.
More corporate power
Owning a large-scale miner like Rio Tinto could give a Chinese company significant market power that might sometimes be used against Australia’s national interest.
The current strategy of BHP and Rio Tinto to flood world markets with iron ore at low prices is driving smaller iron ore producers in WA out of business.
Both miners have commercial reasons for doing this, but a state-owned Rio Tinto might have other motives for exploiting its size to influence world prices.
These might include supplying iron ore at a discount to Chinese-based steelmakers.
Such behaviour might also affect iron ore royalties paid to the WA Government because they are linked to movements in international prices.
While Mr Campbell holds such concerns, other economists like Dr Stephen Kirchner of the Centre for Independent Studies thinks the fears are overblown.
Dr Kirchner believes that Australian governments and the investment review process have treated Chinese companies unfairly in the last decade.
In a paper published last year, he argues for the removal of obstacles to state-owned Chinese companies investing in Australia.
“It is not the government’s role to prevent foreign or domestic firms from making bad business decisions or second guess the commercial strategies underlying foreign acquisitions,” he stated.
“The proper role of government is to create a non-discriminatory regulatory framework that provides predictability and certainty for both foreign investors and vendors of Australian assets.”
Deakin University academic Margaret McKenzie believes that opponents of Chinese investment sometimes venture into racist terrain.
“There seems to be a public outcry whenever a state-owned Chinese company wants to do something here, but people don’t really take notice when a partly government-owned French company buys out Melbourne’s transport system.”
Ms McKenzie also maintains that “national interest” arguments are difficult to mount in the contemporary global marketplace.
“When you look at the share registers of BHP or Rio Tinto it’s hard to know what really defines an Australian company today,” she says.