Some of the commentary in favour of approving proposed Chinese investments in Australian iron ore producers has hearkened back to the Hawke-era Chinese investment in the development of CRA’s iron ore deposit at Mount Channar in the Pilbara.
This was project was a great step forward in the Australia-China relationship, but the reasons for that need to be seen in the light of the circumstances of the day and they have only limited bearing on the current proposals.
The question of direct Chinese investment in an Australian iron ore mine first arose during the March 1983 visit to Australian by then Premier Zhao Ziyang. A Chinese evaluation team from the Ministry of Metallurgical Industry (MMI) was in Australia at the same time, seeking an investment opportunity in an Australian iron ore project. It visited all of the proposed new projects, spoke to the companies involved, and in due course settled on CRA’s Mount Channar project as the preferred target.
Zhao Ziyang’s visit was followed in 1984 by a visit by the Minister of Metallurgical Industry, Li Tongye, who visited the sites and the companies.
The strategic significance of these developments is that they came very early in the process of what the Chinese Government called “opening to the outside world”, a process that began in 1979 with important agricultural reforms sponsored by Zhao Ziyang and then General Secretary Hu Yoabang, who himself visited Australia in April 1985 and stood with Bob Hawke atop the Channar deposit.
Those of us who were involved in the Government to Government discussions of the project (which were very intense and drawn out) realised that this first major offshore direct investment represented a fundamental departure from the traditional “economic autarchy” thinking of centrally planned economies, under which the country should be self-sufficient in all important products. Under this model, importation of foodstuffs and steel-making raw materials was seen by the more doctrinaire as a stop-gap measure pending the country reaching the level of economic maturity that would make it self-sufficient in all important respects. This model was underpinned by national security doctrine as well as economic doctrine.
Thus while China was already a regular and important purchaser of Australian iron ore, there was no assurance of how long that would continue. As a result of self-sufficiency thinking, internally China undertook energy intensive magnetic separation processes that beneficiated “ore” containing 27% iron up to 52% - less than the 54% cut-off grade below which Pilbara producers did not even stockpile ore for potential future use, as they did with ore in the range 54-63% iron.
The proposal to invest in offshore facilities was a first step away from the economic autarchy doctrine, one which was marketable to the traditionalists within the Chinese central bureaucracy because it involved a level of State ownership of the resource, even if the resource itself were offshore. A couple of times during the two-year process that brought the investment into being I observed to the MMI officials that security of supply could be assured simply by signing a long-term contract with an Australian mining company, but this was not the real issue - the strategic issue was “opening to the outside world”, integrating China into the world economy, truly revolutionary thinking at the time, and this investment was a key part of it. A lot was at stake; China has never been very forgiving of those who made “mistakes”, which is why there was a lot of discussion at Government to Government level, a lot of high level visits in both directions, a lot of confidence building over a couple of years before the end result was achieved.
These considerations are absent from the current proposals – China has many resource investments in many countries, it is fully a part of the global economy, and the current round of investment proposals does not represent the breaking of new doctrinal or policy ground.
It should be noted also in relation to Mount Channar that China was seeking only to establish a joint venture in a mine, not to purchase equity in a major mining company as the Chinalco-Rio Tinto proposal does.
None of this is means automatically that the current proposals ought not to be approved (the Fortescue Metals one already has been) – simply that there were different issues at stake in the early 1980s.
In State-owned is not the main problem I have argued that the Treasurer should decline to approve the Chinalco investment, on grounds centred on the undesirability of having major customers sitting on both the buyer and the seller side of the table, and in Time to calm down about China I have argued that the Treasurer was right to have national security concerns about granting a Chinese enterprise access to the Woomera Prohibited Area. In the latter piece I also acknowledged that respectable arguments could be constructed against both of these viewpoints, and that it should not be beyond the wit of man to find a mutually acceptable solution to the problem of the Prominent Hill mine within the prohibited area (as seems to have happened).
Whatever the outcome on Chinalco, Channar is not much of a precedent and I doubt that it will play much of a role in the Treasurer’s thinking.