A bitter pill

Should we feel sorry for Aluminum Corp of China (Chinalco)? The company’s initial investment in Rio Tinto way back in February 2008 was a daring raid intended to put the Australian mining giant beyond the clutches of rival BHP Billiton. A year later Chinalco came calling again, and this time the board of debt-ridden Rio Tinto welcomed Chinalco’s proposed US$19.5 billion investment with open arms. Unfortunately for Chinalco, the welcome was short-lived as Rio’s shareholders and Australian citizens quickly began to voice objections. Concerns were raised about a Chinese state-backed company gaining a) too large a foothold in Australia’s lucrative mining industry, and b) too much sway over the pricing of commodities that it and associated interests purchased in such large quantities. There has been a sad inevitability to the demise of this deal in recent months – not unlike, one is tempted to suggest, the demise of the Nanjing government official whose love of luxury cigarettes (Nanjing 95 Imperials) thrust him first into the spotlight and then on to the scrap heap. Just as Zhou Jiugeng was branded "super-expensive cigarette director" so – thanks partly to militant Rio shareholders – Chinalco became an investment pariah. Chinese regulators have tried to prevent Zhou-like behavior by banning cigarette purchases using public funds; and Australia’s regulators were already casting a wary eye over Chinalco before the Chinese firm pulled out of the deal. But the underlying irony is that, utimately, the rug was pulled out from under Chinalco at least in part by China itself. The recent spike in global commodity prices is tied to expectations of ongoing stimulus-backed demand from China; Rio’s share prize was carried upwards by this tide and suddenly Chinalco’s original offer became less attractive. Rio will now move forward through a rights issue and a joint venture with, low and behold, BHP Billiton. Chinalco executives might find Nanjing 95 Imperials easier to swallow.