China should turn the quest fo resources into a drive for open markets

This (open market trade in ore) is in China’s interest: deep, liquid markets for iron ore are the best guarantee of manageable prices and reliable supply.

China’s choice

Published: June 7 2009 19:27 | Last updated: June 7 2009 19:27

The abandonment of a large investment by Chinalco in Rio Tinto leaves the Chinese state-owned group smarting and a question mark over the Beijing government’s strategy of scooping up natural resources around the world. This is a good point at which to affirm a policy in favour of open global markets for commodities.

Putative Chinese investments abroad sometimes face a reaction of knee-jerk nationalism. The west should instead assess them with pragmatism. This is especially true for countries that rely on Chinese money to fund their external deficits. Companies accepting Chinese equity stakes are surely no greater cause for worry than governments depending on Chinese credit lines.

But this does not mean there is no cause for worry at all. China’s government is making a co-ordinated effort to buy up resources while they are cheap. While there is nothing inherently reprehensible in that goal, the question is whether the world – and the Chinese – will benefit from the way it goes about this. Most fundamentally, China must decide whether it will help strengthen markets or undermine them.

The Chinalco-Rio Tinto saga has turned a spotlight on how the world’s second-largest commodity by value is traded and priced. For decades, secretive negotiations between the world’s main buyers and the three largest miners – Rio Tinto, BHP Billiton, and Vale – have set “benchmark” iron ore prices. China’s extraordinary import growth has recently helped create a spot market. But the Chinalco deal would have increased China’s influence on Rio Tinto’s production and sales – and having a seat on both sides of the negotiating table could have cooled China’s interest in market trade over bilateral deals.

Instead, Rio Tinto is entering a joint venture with BHP Billiton, combining the companies’ mining in Pilbara, Australia, where a large share of the world’s iron is mined. BHP Billiton has expressed support for more market trading – but its strengthened muscle may increase the attraction of staying with the benchmark trade.

That system, by which access to an indispensable commodity depends on bargaining between a handful of entities, should end. This is in China’s interest: deep, liquid markets for iron ore are the best guarantee of manageable prices and reliable supply. China must do more to reassure the world that it is a defender of open markets, not an obstacle to them. Then it may gain the trust that eluded it this time.