Committee on Financial Investment can or should have the capacity to second-guess the Federal Reserve.
The global demand for resources has been central to Australia’s relative insulation from the effects of the credit crisis. The country has significant reserves of alumina, zircon and tantalum as well as liquid natural gas, nickel and iron ore. Much of it lies in Western Australia. The state is the world’s leading producer of bauxite, rutile and zircon. Western Australia has the largest known reserves of nickel and the second largest supply of iron ore, gold, bauxite and diamonds. The state has been a magnet for inward investment. Between 1998 and 2007, mining operations expanded from
AUS $5bn to AUS $15 billion.64
Chinese concerns have become some of the most
significant competitors to the dominant domestic holdings – BHP Billiton and Rio Tinto, which are dual listed on the London market – and the increasingly important Fortescue Metals Group. China is now Western Australia’s most significant trading partner, both as consumer of its products and provider of inward investment, particularly low metal content iron ore. While the investments to date have generally been structured as joint ventures, the number of hostile bids for medium sized Australian operations has increased.65 There are, of course, clear commercial grounds for such an approach. From the Chinese corporate perspective, synergies produce economies of scale, reduce dependency on the major Australian exporters and minimise the risk of reliance on volatile spot markets. Conversely, the facilitation of inward capital flows may also depress prices in cases where the same entity extracts and uses the resources. The fear expressed in Canberra centres on the fact that this linkage could benefit disproportionately the customers of Australian resources, namely the Chinese. 66
The policy implications have sharpened because of a strategic raid by Chinalco and its (junior) American partner, Alcoa, on the Rio Tinto share register in London; itself the target of BHP Billiton’s audacious attempt to consummate the largest takeover in history. Legal advice to Chinalco held that the AUS $12 billion raid was not covered by either Australian law or policy. As a consequence, there was no requirement to notify or seek prior federal approval. Two weeks after the raid, the Australian federal government attempted to reconcile competing objectives by refining the principles used to evaluate potentially controversial commercial deals. The effect, however, has been to introduce uncertainty in the marketplace.
Under Australian law, foreign investment is evaluated under the Foreign Acquisitions and Takeovers Act (1975). The Act delegates the analytic function to a Foreign Investment Review Board (FIRB), an advisory arm of the Department of Treasury. The principles make clear that the Foreign Investment Review Board retains an advisory role. Ultimate decision-making authority remains with the Treasurer. The
Data supplied by the Department of Industry and Resources, Western Australia.
65 The most significant example in this regard was the hostile AUS $1.36 billion bid for control of iron ore producer Midwest. Opposition to the deal related primarily to the price not the principle; see J Freed, ‘Sinosteel Gets Control But Likely to Have Company at Midwest’, Sydney Morning Herald (Sydney), 8 July 2008 (Online edition). A second bid, for control of Murchison is currently under adjudication with the FIRB. This researcher understands that Sinsteel is under considerable pressure to accept a 49.99% ownership limit in order to gain approval, (Interviews, Beijing, 5 September 2008).
See below n 68 and accompanying text.