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Why Chinese Steel Mills Bribed Rio Tinto Employees
Summary:An industry expert who requested anonymity believed it was inevitable that private steel mills were involved in the Rio Tinto bribery case. Adding that it was all about their disadvantaged position in the domestic steel industry.

By Zhong Ang
Corporation, page 27, Issue 462, March 29, 2010
Translated by Liu Peng
Original article:

The involvement of Chinese steel magnate Du Shuanghua in the recently-concluded Rio Tinto trial, puts one of China's richest men and the founder of what was once China's largest private steel mill, firmly in the spotlight.

Xue Jian, vice-president of Rizhao Steel, which was acquired by the state-owned Shandong Steel Group in September 2009, told the Economic Observer (EO) that the company was operating normally while it awaited the court's decision.

Industry players interviewed by the EO said, like many small-sized private steel mills, Rizhao Steel had long been in a disadvantaged position and its prospects of survival were poor.

During the trial, some Chinese steel makers and iron ore traders, including Du Shuanghua, founder of Rizhao Steel Group, were revealed to have offered bribes worth over 92 million yuan to each of the four accused Rio Tinto employees, including Stern Hu, former head of the company's China office.

In a written testimony, Du said he paid nine million US dollars in bribes to Wang Yong, one of the accused Rio executives, who was found guilty by a Shanghai court of accepting over 75 million yuan (10.9 million US dollars) in bribes.

Du said "If not for Wang Yong's help, my company would never have reached the size it is today."  However, Wang denied that the money was a bribe, insisting that it was a loan procured to allow him to buy shares in Hong Kong.

According to one domestic finance newspaper - The Economic Herald - Du Shuanghua is unlikely to be prosecuted by Chinese authorities, but officials at other small-sized steel mills who were implicated in the case, are likely to be dealt with in a separate trial.

Rizhao Steel has maintained a close business relationship with Rio Tinto over the past few years. Three years ago, the two parties signed a memo of cooperation to construct ports.

In 2008, Mr Du was ranked No. 2 on the Hurun Report's China rich list, with the publication estimating that the mining magnate was worth 35 billion yuan (5.1 billion US dollars).

An industry expert who requested anonymity believed it was inevitable that private steel mills were involved in the Rio Tinto bribery case. Adding that it was all about their disadvantaged position in the domestic steel industry.

Due to limits placed on these private mills in terms of import volume and output capacity, small and medium-sized steel mills have been unable acquire permits to import iron ore and are also unable to sign long-term contracts, which often provide a substantial discount, with any of the three big miners: Anglo-Australian miners Rio Tinto and BHP Billiton along with the Brazilian Vale.

These smaller private mills were forced to turn to large state-backed mills or trading firms for their iron ore needs. These larger firms bought discounted ore via the long-term contracts and sold surplus requirements on to the private steel mills at a much higher spot-market prices.

Sun Ming, an analyst at Lange Steel Information Research Center, argues that during the annual iron ore price negotiations, China Iron and Steel Association (CISA) spoke on behalf of the interests of the large state-backed mills and often neglected the concerns of the private mills.

As a result, these disadvantaged private mills would jump at the chance to sign long-term contracts with any of the large miners.

In turn, Rio Tinto, or the other players, would press the large mills to accept the contract price that had already been accepted with the smaller private mills.

At present, Rizhao Steel, whose output in 2009 exceeded 12 million tons, with sales revenues of 36 billion yuan (nearly 5.3 billion US dollars), needs to import over 10 million tons of iron ores to sustain its operation.

Aside from the iron ore supply, Rizhao Steel also encountered many hurdles in terms of applying for construction land from local government and financing from banks at the beginning of its establishment.

Links and Sources
The Age: Charges unlikely for billionaire briber
Sydney Morning Herald: Risky business in China: it\'s ore or nothing
Wall Street Journal: Court Stenographer at Rio Tinto Verdict
Caixin: Companies Indicted for Bribes to Rio Tinto Staff
Economic Herald: Article about Du Shuanghua (Chinese)
The Economic Observer: Du Shuanghua Bids Farewell to Rizhao

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