×

Rio Bribed Virtually Every Chinese Steelmaker, China Says

China stepped up its campaign against the Anglo-Australian mining giant Rio Tinto on Wednesday, saying the company had bribed virtually every one of China’s big steel makers.

The sweeping allegation, published on the front page of China Daily, the country’s official English-language newspaper, further inflamed a case that has rocked the country’s steel industry, strained relations between China and Australia and worried multinational companies doing business here.

The case began more than a week ago, when Chinese authorities detained four Rio Tinto employees, including an Australian national, on suspicion of espionage, stealing state secrets and harming the nation’s economic interests and security.

On Wednesday, high-level officials of both the Australian and United States governments expressed concern. Gary Locke, the United States secretary of commerce, who is visiting Beijing this week, told CNN that he would raise the case directly with top Chinese leaders, including Prime Minister Wen Jiabao.

In its report, China Daily, which regularly publishes the government’s official version of events, said Rio Tinto employees bribed executives from 16 Chinese steel companies, all members of the China Iron and Steel Association, to get access to confidential industry data. The paper attributed the allegation to an unidentified “industry insider” and did not identify the 16 companies.

A Chinese government-controlled Web site said last week that Rio Tinto employees had bribed Chinese steel executives to gain access to government documents that could have given Rio Tinto an edge in its annual iron ore negotiations with China’s state-owned steel mills.

But Wednesday’s report is the first time a government publication has alleged that many of the country’s biggest steel companies may be involved.

steel.jpg

Rio Tinto has expressed shock at the allegations and said that the company has strict ethics policies that forbid bribery. On Wednesday, a company spokesman declined further comment.

Several Australian officials have criticized the detention of the Rio Tinto employees and suggested that Beijing is retaliating against Rio Tinto for calling off a $19.5 billion deal last month that would have given a Chinese state-owned company called Chinalco a large stake in the mining giant.

On Wednesday, the Australian prime minister, Kevin Rudd, warned China to tread carefully in handling the case, suggesting that it could affect international public opinion and foreign investment in China.

“A range of foreign governments and corporations will be watching this case with interest and will be watching it very closely,” Mr. Rudd told reporters on Wednesday, according to Reuters. “And they will be drawing their own conclusions as to how it is conducted.”

Mr. Locke, in a CNN interview, said that American companies operating in China were concerned about transparency and fairness in the Rio Tinto case.

Yao Jian, a spokesman for China’s Commerce Ministry, responded to concerns on Wednesday, saying the Rio Tinto case would not affect China’s investment environment. The government has said it is an isolated case of espionage that seriously harmed the country’s economic security and interests.

Despite the China Daily report, several large Chinese steel companies, including Baosteel, denied on Wednesday that they were under investigation in the Rio Tinto case.

“Baosteel has no executive cooperating with the government investigation or being investigated,” said Meng Haibiao, a company spokesman.

Jinan Steel, another big steel producer, called the China Daily report “fake news,” insisting that no executive at the company was under investigation.

But at Laiwu Iron and Steel, a spokesman who gave his name only as Mr. Liu, said a company shipping executive was cooperating with the Rio Tinto investigation.

In the past week, China has questioned or detained at least 10 steel executives, including shipping agents, traders and members of the China Iron and Steel Association, according to the state-run news media and interviews with industry officials.

More From CNBC.com

  • Rudd Reminds China of Economic Stakes in Spy Case
  • China Should Shift from Export-Led Growth: Locke
  • How China Is Behind Almost Every US Market Positive
  • The 10 Hottest Commodities of 2009

An executive at Shougang Steel, a big steel maker, was detained in the case last week.

Although Beijing says the Rio Tinto case involves state secrets, that has not stopped state-run newspapers from printing details about it. Many of the articles have also described rampant corruption in the trading of iron ore.

More than a dozen industry officials, steel analysts and traders interviewed this week also said that China’s iron ore trade was plagued by corruption.

Experts blame China’s two-tiered system for purchasing iron ore for the corruption. While big steel mills are allowed to negotiate long-term fixed price contracts, most small and medium-size steel mills are supposed to buy from the spot market, the more volatile open market.

The system, analysts say, has created huge arbitrage opportunities, allowing big steel mills with fixed contracts to buy far more supplies than they need and then profitably sell excess supplies to smaller mills on the black market.

“There’s a huge underground arbitrage market in China,” said Ren Qiang, general manager at the Zibo Antai Import and Export Company, which deals in the iron ore trade.

Small mills have long complained about what they see as an unfair system. The practice violates industry regulations, as well as the fixed contract agreements signed with Rio Tinto and other mining companies, analysts say.

The government has repeatedly warned against this type of speculative trading, most recently in a regulation released in February.

But regulators rarely enforced the rules in 2007 and early 2008, when iron ore prices were skyrocketing, experts say.

Analysts say the two-tier system may have even created friction between big ore producing companies, like Rio Tinto, and the government-controlled China Iron and Steel Association, which represents large steel mills in annual fixed contract negotiations.

By locking in low fixed contract prices, analysts say, association members could trade or sell iron ore on the black market.

But in recent years, the world’s big iron ore producers, like Rio Tinto, have battled with the association over pricing.

The two sides failed to reach an agreement last month on prices for this year’s contracts. One of the lead negotiators for Rio Tinto was Stern Hu, an Australian national who was one of the four Rio Tinto employees detained on July 5.

-- Chen Yang contributed research.