Rio Depends on China More Than Ever as Staff Indicted (Update1)

SHANGHAI, Feb. 12 -- Rio Tinto Group, the world's second- biggest iron-ore producer, has never been so dependent on China as the country prepares to prosecute four of its employees for bribery and obtaining trade secrets.

Shanghai authorities indicted the four, including the Australian head of Rio's iron ore business in China, a day before the world's third-biggest mining company said the Asian nation accounted for almost a quarter of its revenue in 2009.

"For the first year, China became our largest single market," Chief Executive Officer Tom Albanese said in an interview on Bloomberg Television. "In those businesses that are supporting the Chinese market, particularly iron ore, we've never seen stronger demand."

China's relations with major economies have soured over disputes from tackling climate change and arms sales to Taiwan to cyber attacks against Google Inc. At the same time, foreign companies are relying on China to support profits as demand slumps in crisis-plagued developed countries.

Rio gained 3 percent to A$71.82 at 10:27 a.m. Sydney time on the Australian stock exchange. The benchmark index was 0.5 percent higher.

The four's trial may begin within weeks, the Australian Financial Review reported today, citing Graham Fletcher, a first assistant secretary for Australia's Department of Foreign Affairs and Trade. The Chinese government may allow an Australian government representative to attend the trial, the newspaper said, citing Fletcher.

Largest Client

London-based Rio's sales to China overtook North America and Europe in 2009, reaching 24.3 percent of the total from 18.8 percent a year earlier, it said yesterday. The proportion of sales to China, the world's biggest iron-ore consumer, has doubled since 2004.

"Despite the Rio incident, Western miners are still keen on building relationships with their largest client in the world," Xianfang Ren, China-region analyst for financial and political consultant IHS Global Insight, wrote in an e-mailed response to questions.

Prosecutors filed the case with the Shanghai No. 1 Intermediate People's Court, Tao Wuping, a lawyer for one of the detainees Liu Caikui, said yesterday by phone. The proceedings won't be made public because they involve commercial secrets, he said. The four, Australian Stern Hu, Liu, Wang Yong and Ge Minqiang, have been detained for seven months.

‘Very Concerned'

"We are very concerned about the nature of these charges, however as it is part of an ongoing legal process, it is inappropriate to comment any further," Sam Walsh, the chief executive officer of Rio's iron-ore unit, said in an e-mailed statement. Albanese said the company's "concern remains the well-being and care of our colleagues" and Rio is supporting their families.

Rio, which counts state-owned Aluminum Corp. of China as its largest shareholder, was the lead negotiator for iron-ore producers in last year's stalled price talks with Chinese steelmakers, who refused to accept the deal already agreed with Japanese and Korean mills. It was the first time in more than 40-years of talks that a benchmark price wasn't settled.

Vale SA, the world's biggest iron-ore producer, expects to win contract prices this year that reflect a soaring spot market as Chinese demand surges. The spot market is the best indicator of where contract prices are heading, BHP Billiton Ltd. Chief Executive Officer Marius Kloppers said this week.

Social Stability

"We were left in no doubt that BHP would be looking for a 90 percent iron ore price rise for a 12 month contract," Goldman Sachs JBWere Pty analysts led by Neil Goodwill said Feb. 10. The contract price agreed for the fiscal year ending March 31 is about $60 a metric ton and the cash price yesterday was $128.20, according to the Steel Index.

China is also reliant on supplies of raw materials to feed economic growth and create enough jobs to maintain the government's goal of social stability. The country, the largest buyer of metals, overtook Germany as the world's biggest exporter last year.

"China's voracious demand for metals needs to be sated and large diversified miners like Rio Tinto and BHP Billiton are in a position to do so," said Brian Gallagher, an analyst at Dolmen Stockbrokers in Dublin, who rates Rio a "buy."

China accounted for 20 percent of the sales of BHP, the world's largest mining company, in the year ending June 30, 2009.

The four Rio employees were originally detained on suspicion of stealing state secrets, before the allegations were downgraded in August.

"Sentences for infringing trade secrets and commercial bribery can vary from a few months to several years," Richard Cassin, partner of Singapore-based law firm Cassin Law LLC and author of "Bribery Everywhere, Chronicles From the Foreign Corrupt Practices Act," said in an e-mail. "Clemency allows the political authorities to intervene and create goodwill, often in exchange for a political concession. That could happen in this case."

To contact the reporter on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net. Firat Kayakiran in London at fkayakiran@bloomberg.net.

Last Updated: February 11, 2010 19:19 EST