Randomly Noted

You’d think China Inc. might have learned from its manipulative missteps of recent months – ill-conceived moves which forced Beijing to reverse its Green Dam web-filtering decision and reduce charges against the Rio Tinto four; these are just some of the about-faces we’ve documented in earlier blogs. But now comes news that the Beijing government is pumping money into a weak Australian miner called Fortescue Metals Group in exchange for securing a mere 3% iron ore price discount for the rest of the year. Fortescue provides only 7% of the world’s iron ore output, all of which will now go to China, which will in turn extend loans of up to $6 billion. Now in hock to Beijing, Fortescue has relinquished pricing leverage over its customer, China, which continues to negotiate prices with the world’s three most powerful miners – Rio Tinto, BHP Billiton and Vale – representing some 70% of global output. It’s a futile effort by China and a desperate move by Fortescue’s impetuous CEO, Andrew Forrest. Moreover, it will only aggravate foreign firms’ concerns about doing business in China. Overseas investors should now assume Beijing can at any time pit them against each other in unpredictable ways, and by extension should view their Chinese investments as riskier than they were, say, last week. All this follows China’s biggest fiduciary misstep of the summer – its decision to prolong iron ore price talks with the big miners even as spot market prices rose, forcing Chinese steel companies to pay more as the weeks passed and “giving iron-ore miners little incentive to lock in cheap prices,” as my colleagues report today. Supporters of the Fortescue-China deal argue it will alter the dynamics of the iron ore negotiations in coming months and years. But this hinges on Fortescue’s ability to expand fast and effectively enough to deserve a place at the bargaining table with Rio, BHP and Vale. The loans of $5.5-$6 billion from China will certainly help but they don’t guarantee world-class production in short order. And as Chinese interests continue scouring the globe for resources firms to buy, the Fortescue pact will only foster suspicion among target companies and governments that China’s priority is securing the lowest-possible prices for domestic consumers – not ensuring the health of acquired companies, their employees and shareholders. It all comes down to this: A state attempting to manipulate the shape of global commerce is folly and will fail.

I’d like to think the Beijing government is embarrassed by the latest twist in the China/Rio Tinto saga.  Here’s what happened: Over the weekend, a local Chinese state-secrets official accused miner Rio Tinto of having committed espionage over several years; the allegations appeared on a website linked to the national agency in charge of protecting state secrets. Specifically, Jiang Rujin, an official in the Jiangsu province secrets bureau, claimed Rio’s alleged actions had resulted in Chinese steelmakers overpaying $102 billion for iron ore imports from 2003 to 2008. You’ll recall that Chinese state security officials detained four Rio Tinto employees on July 5 for alleged theft of state secrets. On Monday, Jiang told my colleagues he hasn’t been involved in the Rio case and culled information for his essay from state media and industry reports. Meantime,  the state secrets administration’s propaganda department said Jiang’s views didn’t necessarily represent the central agency; moreover,  no one was authorized “to release comments…It is his own essay,” the official said. As these folks were backing away from Jiang’s allegations, his article disappeared from the website – China Secret Protect Online – and access to the site was disrupted at least twice. All this added up to a messy muddle ensnaring central and local Chinese officialdom.  From the start, there’s been minimal transparency or due process surrounding the detentions of the four Rio Tinto employees, including Australian passport holder Stern Hu. No charges have been filed despite the prodding of the Canberra government. Moreover, a stream of anti-Rio Tinto by state-run media has heightened tensions. Rio has denied government media allegations its employees engaged in bribery. Innocent or guilty, Rio and its employees would seem to deserve a less retrograde form of treatment by China’s police, judicial and administrative apparatuses. As I’ve written before, it’s not clear this episode will have a chilling effect on foreign companies’ calculations about investing in China. The country’s growing too fast. That said, this will serve to increase multinationals’ cost of doing business in China, and give foreigners much more to mull before diving in. As my colleagues write, the real of state secrets is completely murky, with most evidence deemed “confidential” and trials “held behind closed doors.”

DJN has just reported that the Obama administration is looking into supposed anti-competitive issues in the agribusiness industry. Government officials will hold “listening” sessions across the countryside as they examine whether purported concentrations of farm-related businesses violate antitrust laws. ” The WSJ’s Scott Kilman reports on our wires: “Philip J. Weiser, a telecommunications law expert who was recently named deputy assistant attorney general, told a farmer gathering here that federal antitrust regulators are ‘committed to examining’ the level of competition in several agribusiness sectors, such as marketing of genetically modified seeds, dairy processing and meatpacking.” This is the latest in a litany of business practices and alliances Obama’s Department of Justice is reviewing. Some are less spurious-sounding than others; or to put it another way, some issues cry out for antitrust probes; some don’t. Take agribusiness. Exactly who’s getting hurt by the structure and composition of U.S. agribusiness? Not consumers. Americans have enjoyed gloriously low food prices for years. But of course it’s not supermarket patrons the DOJ’s worried about. It’s family farmers – moms, pops and kids living on farms in the midwest, Great Plains and South who have trouble making a living while seed, grain, dairy and livestock distributors and processors rake in all the dough. The Jeffersonian strain in our country’s collective consciousness means every few years we wring our hands over the plight of the family farmer. We need to get over it. The U.S. (and European) contemporary economy just can’t support and sustain small farms without massive taxpayer subsidies. This has been the case for at least 25 years. Continue reading…

China’s efforts to create a monolithic domestic steel industry with the collective clout to effectively stifle price competition in the iron ore market could eventually wind up before the World Trade Organization. Consider this: The Beijing government is engaged in a broad push “to assert greater control over the pricing of iron ore, a crucial material” that goes into steel production, colleagues Gordon Fairclough and Chuin-wei Yap report. (See link below.) China’s already huge appetite for steel has been stoked by the country’s vast economic stimulus program. What China’s government wants is for its “smaller steel companies to work with bigger ones to negotiate iron-ore prices,” the reporters say. To ensure that smaller players don’t go off and make side deals with global iron ore miners- which some have apparently done – China “is considering reducing the number of companies allowed to import iron ore” in the first place. In essence, China appears to be trying to re-engineer its steel industry – and rejig its iron ore import regulations – so few remaining companies get better – that is, lower – prices from global miners than do steel industry competitors in other countries. Will Australia, the U.K. and Brazil – home of the world’s biggest miners – lodge a complaint with the WTO? That would be risky, given China’s clear willingness to play hardball and retaliate: the detention of four Shanghai-based Rio Tinto iron ore employees – is evidence enough. (Not to mention the detention of an official with midsize domestic steel company Shougang.) That said, the Western countries may find a way to work the WTO angle quietly and obtain a desirable resolution. Stay tuned.

Here’s the story: http://www.dowjonesnews.com/newdjn/mainframetop.aspx

CSX Corp. is one of those companies that offers a good glimpse into the health of the U.S. economy. And based on their earnings earlier today, things aren’t great. They got hit with the double-whammy.

The volumes of product shipped across asset classes was pretty bad in the quarter – chemical volumes were down 20% year-to-year; emerging markets down 20% year-to-year; forest products off 29%; metals off 53%; fertilizers off 18%, and food products off 11%. The only category that wasn’t a disaster was agricultural products, which were off 2%.

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While four Rio Tinto employees languish in Chinese detention, in Russia ArcelorMittal faces threats from regional authorities afraid it might cut jobs at Siberia coal mines. This hasn’t been a good week in emerging markets for two of the world’s biggest resources companies. In Siberia, authorities are threatening to revoke licenses for two ArcelorMittal coal mines if the company moves to shut them down and many lose their jobs. One is reminded of the public tongue-lashing Prime Minister Vladimir Putin recently gave the industrial oligarch Oleg Deripaska for daring to reduce cement plant employment amid Russia’s economic crisis. Similarly, President Dmitry Medvedev has threatened to fire regional bosses who fail to somehow fix unemployment, DJN colleagues Jacob Gronholt-Pedersen and Jeffrey Sparshott report. The ArcelorMittal case is the first time a foreign company has been targeted over job losses, Jacob and Jeffrey write. It won’t be the last, and frankly bullying of foreign companies (plus the occasional domestic one) has become Russia’s modus operandi in the past few years. What is ArcelorMittal’s CEO, Lakshmi Mittal, to do? As with China and the risks of doing business there, it’s a matter of dollars, cents – and sense. If the perils and costs outweigh the profit opportunities, for some foreign companies it may be time to exit Russia.

The saga of four Rio Tinto employees detained in China continues without a glimmer of transparency from the Chinese government. Yesterday’s statement from the foreign ministry lacked a certain specificity: The four are being held for allegedly stealing state secrets for a foreign government – actions “which hurt China’s economic interests and economic security,” a foreign ministry spokesman said. There were no other details. One might think this disturbing incident would dampen foreign companies’ appetite for doing business in China. But this and previous unpleasant encounters with China’s arbitrary officialdom never do – foreigners keep coming back for more, factoring such scary episodes into the cost of doing business there. Rio Tinto itself certainly won’t exit China, its biggest customer. Will the mining company shift some employees to locations outside China to avoid similar detentions in future? Quite possibly. In fact, some of Rio’s key negotiators – in iron ore price talks with China – reportedly remained outside China in recent weeks, to ensure their phone calls and emails weren’t intercepted. Look for more companies to quietly shift certain vital personnel off-shore. *** Here’s an analysis by WSJ colleague James Areddy: http://online.wsj.com/article/SB124710009614915527.html. Also an interesting blog about state secrets laws by colleague Sky Canaves:  http://blogs.wsj.com/chinajournal/2009/07/09/murky-state-secrets-laws-at-issue-in-rio-tinto-case/

The war against speculation in oil trading that is being launched by regulators and politicians in the U.S. and Europe is wrong for a number of reasons.

One is the age-old social justification for trading or speculation: that it adds liquidity to markets. That allows commercial interests to lay off or “hedge” risks inherent in their business. If there were no speculators there would be few people on the other side of trades.

The second problem is definition. Everyone speculates, now and again. How is speculation different from trading? Length of position held?

The dictionary says speculation (definition four) is “engagement in business transactions involving considerable risk, but offering the chance of large gains.”

Isn’t that why anyone participates in any market? To make large gains? And given each investor’s different goals and ability to withstand risk, it would be a msitake to try to define speculation as separate from investing by measuring the degree of risk. Someone with little financial margin for error could be seen as “speculating” even if his investments were in securities considered generally safe.

The frustration of government officials with high and widely swinging oil prices and the astonishment of citizens pulling up to high-priced gasoline pumps is understandable.  Oil prices do have a significant impact on the real economy and changes in price aren’t always based on obvious fundamental developments.

Markets do swing away from fundamentals. But trying to tone down markets or  limit the characteristics of certain trades will create a lot of unintended consequences. Better to live with the markets’ price setting ability and sometimes stew at the results.

All the talk on both sides of the Atlantic Ocean about the need to curb speculators in oil is part of a larger trend we’ve seen since the onset of the credit crisis and this deep recession: governments want to control more aspects of economies and markets.

The elected leaders of France and the United Kingdom teamed up on an op-ed piece in The Wall Street Journal today to decry oil price volatility. The argument of Gordon Brown and Nicolas Sarkozy is that oil is too important to be left to the short-term profit seekers who inhabit markets.

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The U.S. has launched a World Trade Organization complaint against China on the grounds that Beijing unfairly helps domestic makers of steel, aluminum and chemicals, among others, by effectively blocking overseas exports of raw materials (eg. the ingredients that go into steel, aluminum and chemicals.) In essence, the complaint alleges that Chinese steel, aluminum and chemical companies get first dibs on raw materials – at ultra-low prices – from domestic producers, and are therefore more potent when competing against overseas companies. For their part, non-Chinese steel/aluminum/chemical makers have to buy raw materials in the open market, and arguably at higher prices because a lack of Chinese output limits the available supply. Here’s what USTR boss Ron Kirk said today at a Washington, D.C., press conference: “And we are most troubled that this appears to be a conscious policy to create unfair preferences for Chinese industries by making raw materials cheaper for China’s companies to get, and goods more economical for them to produce.” The EU has filed a similar complaint. As often happens with WTO matters, this spat might get resolved during a consultation period in which the parties discuss, debate and negotiate. But the dispute has been going on for a couple of years and it’ll take many more months to sort it out. In the meantime, China will keep doing what it’s doing – and, frankly, it can’t really afford to pull back from its preferential quotas and export duties at this point. That’s because Beijing’s huge economic stimulus plan has launched a wave of infrastructure projects across that vast country, all of which need the very products (especially steel) which are helped by the allegedly unfair practices. Continue reading…