Labor halts raid by Chinese on Murchison Metals

June 25, 2008

June 25th (The Australian) – THE Rudd Government has signalled a significant toughening of its approach to Chinese investment, formally delaying an attempt by a Chinese company to buy into a West Australian iron ore miner.

The Government has officially prohibited for up to 90 days any move by China’s giant state-owned Sinosteel to acquire “a substantial shareholding” and assets of the $1.5 billion Murchison Metals.

Any move to permanently block Sinosteel would be the most significant foreign investment decision since 2001, when then treasurer Peter Costello rejected Shell’s attempt to take over Woodside Petroleum on national interest grounds.

Although Murchison is a relatively minor player, it is active in a region east of Geraldton that is becoming the new frontier of iron ore development after the Pilbara in the northwest of the state. The Rudd Government, which earlier this year approved Sinosteel’s takeover of Midwest, another iron ore miner in the area, is clearly concerned about any consolidation of Chinese control in the region.

Chinese investment in Australian resources is already a highly sensitive political issue between the two countries and one of the biggest tests facing Wayne Swan, who will have the final say on whether Sinosteel is allowed to move on Murchison.

China, whose state-owned steel mills this week agreed to a massive 85 per cent increase in the price they pay Rio Tinto for Australian iron ore, is increasingly attempting to buy control of resources such as iron ore and gas to feed its growing economy. China and Australia are also attempting to negotiate a free trade agreement.

The federal Government’s decision to put the Sinosteel bid on hold will greatly exacerbate the tension and confusion in Beijing about Canberra’s attitude. As revealed by The Australian earlier this year, at least 10 Chinese companies have in recent months been advised to withdraw foreign investment applications on the urgings of the Rudd Government while it comes to a clear position.

By pressing ahead with its application for a stake in Murchison, Sinosteel, which would have acted with Beijing’s blessing, has brought the issue to a head, setting a deadline for the Government to clarify its position on investment by Chinese government-backed companies.

In February, Mr Swan said any investment in Australia by a state-owned entity of one of the sovereign funds run by foreign governments would be subject to “national interest” tests.

The rejection of any immediate move by Sinosteel was formally made through Canberra’s Foreign Investment Review Board and published yesterday in the Government Gazette. In reality, the move is a political decision coming directly from the Treasurer.

Mr Swan, whose office declined to comment last night, has been working closely with Kevin Rudd, trying to figure out how best to handle the growing appetite of the Chinese for a bigger stake in Australian resources.

But the Government’s insistence on having more time to consider Sinosteel’s application is sending a signal of unease to the Chinese while adding to the uncertainty about how any change will be applied.

In complicated corporate manoeuvrings, Sinosteel is already in the middle of a $1.3 billion takeover bid for Midwest, another iron ore company in the emerging iron ore area east of Geraldton.

Murchison, which also has a 10per cent stake in Midwest, has been simultaneously attempting its own takeover of its rival. But the powerful Sinosteel is clearly interested in getting its hands on both companies in what will become an important region for iron ore development.

The Government has allowed some minor takeovers to proceed recently, such as the Chinese offer for Cape Lambert Iron Ore, which was finally approved this month after being resubmitted.

But the Government has been extremely wary of the strategic aims of Sinosteel all year. The Chinese metals and mineral trader had its application to take over 100 per cent of Midwest approved in early January, just after Labor won office.

This was before the new Government had a chance to focus on the significance of the issue in the midst of a resources boom.

That inattention changed abruptly with the February move by another state-owned company, Chinalco, to lead a share market raid that snared 9 per cent of Rio Tinto.

Mr Swan says he is still considering whether or not to approve the Chinalco holding, even though Chinalco maintains there is no legal obligation for it to get FIRB approval because it bought its shares in Rio Tinto’s London-listed entity.

After negotiations between Sinosteel and Midwest broke down, Sinosteel also made a decision to go hostile – the first such bid by a Chinese company in Australia.

Sinosteel holds 2.4 per cent of Murchison but voluntarily withdrew and then immediately resubmitted its application to go higher mid-last month.

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