Tensions ease as Chinalco, Rio make up

By Zhang Qi (China Daily)
Updated: 2009-08-25 09:29

Aluminum Corporation of China (Chinalco), the world's second largest producer of alumina, says it is willing to further discuss cooperation over bauxite and alumina production with global miner Rio Tinto.

The move indicates an easing of tensions between the two companies.

"Chinalco is still willing to explore the possibility of cooperation with Rio Tinto," said Zhao Zhengang, director of Chinalco's Overseas Exploration Department, in response to comments by Rio Tinto's chief financial officer Guy Elliott.

Elliott said the miner is at the very early stages of talks with Chinalco over a possible bauxite and alumina deal, the Australian Financial Review reported Monday.

Rio's relations with Chinalco reached an impasse in June after it abandoned Chinalco's $19.5 billion capital injection deal that was announced on Feb 12.

Cooperation in bauxite and alumina production was also part of the framework in the previous strategic partnership announced on Feb 12.

"Cooperation was suspended because Rio scrapped the contract, but if there is future cooperation with Rio, the deal will not be set along the same terms as in February. Further cooperation will be based on mutual business demands," Zhao said.

Lu Yongqing, Chinalco's vice-president and spokesman, also said the company had indicated its willingness to talk but declined to further comment, Dow Jones reported.

Rio's Elliott said the talks have only just started and have a long way to go before agreement is reached.

Zhao said he was not willing to comment on Elliott's statement, but said the possible cooperation was in line with Chinalco's president Xiong Weiping's earlier speech regarding Rio.

Xiong said the company was still willing to raise the possibility of further cooperation with Rio Tinto on July 23 when he attended a Sino-Australian investment forum.

Chinalco's strategic objectives of going international and entering into markets for multiple metals remained unchanged, he said.

Rio Tinto's relations with China became rocky after it ended talks with Chinalco and turned instead to an iron ore joint venture with rival BHP Billiton on June 5. Xiong said at the time he was extremely disappointed with the move.

Rio Tinto is also locked in protracted iron ore price talks with Chinese steel mills. Relations with China grew more strained when four of Rio's Shanghai-based employees were accused of bribery and commercial espionage in annual iron ore price talks.

However, analysts believe the restart talks indicate a sign that tensions are beginning to ease. They say negotiations between the two companies are economically sensible.

"Rio has abundant poly-metal resources and most of the poly-metal business is dependent on the Chinese market. If Rio is out of the Chinese market, the business will be seriously affected, which is also against its long term development strategy," said Yu Liangui, research center director at Mysteel.

Rio and Chinalco have adjacent bauxite deposits in the Australian state of Queensland and have held talks on possible cooperation in recent years.

Rio posted a 65 percent profit drop in the first half of this year, its worst ever.

A deal with FMG indicates China is supporting the development of Australia's third largest miner into a competitor to Rio within a few years. That means it is sensible for Rio to act in a friendly way towards Chinalco, Yu said.

The large debt incurred by Rio's 2007 purchase of Alcan at the peak of the commodities boom is causing it problems.

Xu Xiangchun, steel industry director of Mysteel, said Chinalco, as Rio's largest single shareholder, wouldn't like to see Rio's share price plummet. If Rio's business operates well, it would mean Chinalco would receive a good return on its investment, so further cooperation with Rio would seem economically reasonable.