China accuses Rio Tinto of serious and wide-ranging corruption

The New York Times summarizes the latest news on the arrest of senior Rio Tinto executives in China:

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

The stunning allegation, published on the front page of China Daily, the country’s official English language newspaper, ratcheted up the stakes in a case that has already rocked the country’s steel industry and threatened to strain relations between China and Australia.

In its report, China Daily, which regularly delivers government messages, said Rio Tinto bribed 16 large Chinese steel companies, all members of the China Steel & Iron Association, to gain access to industry data. The paper attributed the allegation to an unidentified “industry insider” and did not identify the 16 companies.

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Also, an executive at Shougang Steel, one of China’s biggest steel producers, was detained last week as part of the Rio investigation.

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

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Experts blame China’s two-tiered system for purchasing iron ore for fostering corruption. While big steel mills are allowed to negotiate long-term, fixed-price contracts, most small and medium-sized steel mills are expected to buy from the more volatile open market — or what is called the spot 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 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 Zibo Anti Import and Export Company, which deals in the iron ore trade.

Small mills have long complained about being at a huge disadvantage.

The practice violates industry regulations, as well as the fixed contract agreements signed with Rio Tinto and other mining companies, analysts say.

These are very serious allegations and I'm not sure who is at fault. Chinese officials, if their case actually has merit, have some guts to go after one of the largest mining companies in the world. It is unexpected, although not surprising, if a mining giant like Rio Tinto was attempting to profit off bribes. You would think that an iron ore supplier, with decent demand, would have the upper hand in price negotiations but many executives, and the shareholders who back them, are often greedy and cross the line. A lot of senior executives at many large corporations are corrupt and often play very close to the legal line to earn a few more bucks. After all, companies ranging from Enron to Siemens to UBS have run into trouble with the law—these are not some bit players with money-losing businesses. I'm not implying that Rio Tinto is at fault here but just saying that, from my vantage point, I think it's too early to blame either party. It's possible the Chinese government is cracking down on Rio Tinto due to their displeasure with that firm, but it's also possible Rio Tinto actually engaged in illegal activities.