Rio Tinto/Chinalco: Rio Tinto is breaking ground in China. The Anglo-Australian miner has agreed a joint venture to explore China's largely untapped mineral reserves with Chinalco, the state-owned Chinese miner that bought 9 per cent of Rio in an overnight raid two years ago. It's a great result for China, which wants to reduce its dependence on overseas markets. The benefits to Rio are far less certain.
The Chinese government roamed the land mapping out resources in the 1950s and 1960s, but lacked the expertise to get much out of the ground. Brute political will helped overcome the handicap a little: China went from producing virtually no silver or gold to being one of the biggest in less than 20 years. Still, China lacks the ability to meet its own needs for iron and copper. It has also started to import metallurgical coal, as its own huge reserves are low in quality and high in sulphur. China is at the mercy of global markets, and the scale of its demand has pushed up prices. Buying foreign producers outright is only a partial solution, since they are often expensive and come with the involvement of fractious governments. The Rio deal looks like an attempt at an organic solution.
Rio will be the junior partner, with 49 per cent of the venture. But the deal should yield plenty of goodwill. Chinalco is Rio's biggest customer, and the pair already has a joint venture in Africa. Contrast that with rival BHP Billiton, which invoked Chinese ire by attempting to merge with Rio to create an iron ore super-producer, and this year bid for Canada's biggest potash producer, on which China's fertiliser needs depend.
Whether the partnership will yield high quality ore is another matter. China's known reserves of iron and coal are of low quality. Foreigners are generally forbidden to explore for higher-end commodities like rare earths, uranium, and restricted on gold and platinum. Still, if that changes, Rio will be in an advantageous position.
The bigger problem risk is that Rio is now "in the net". In previous skirmishes with Beijing - from tensions over iron pricing to the revelation of corrupt practices by Rio employees - China's response has been limited to what it could touch. China protests loudly about tie-ups between global miners, such as Rio's now-abandoned joint venture with BHP, but it can do little to enforce competition penalties while miners have almost no assets in China.
That will change when Rio has significant capital, people and profits in the backyard of its biggest customer. Rio may have won a place in China's domestic resource race, but it's the host that has scored the bigger win.
