No Choice for Chinalco

Aluminum Corp. of China (Chinalco) might as well participate in the $15.2 billion rights issue by Rio Tinto Ltd., the third largest iron ore producer in the world, according to the 21st Century Business Herald.

The newspaper said the China Development Bank was set to provide financing for Chinalco, but no details were revealed. If Chinalco chose not to accept a rights issue, its current 9-percent holding in Rio would be diluted, which is not something Chinalco wants to see happen.

Rio Tinto ditched Chinalco's $19.5-billion cash injection in early June in favor of a rights issue and a 50-50 joint venture with BHP Billiton, the second largest iron-ore producer.

The Chinalco cash injection into Rio was doomed from the very beginning, and accepting a rights issue is the best possible result, Lang Hsien-ping, Chair Professor of Finance at the Chinese University of Hong Kong, said in an interview with Sohu.com.

"Rio Tinto is not an idiot," said Lang. When Chinalco first spent $12.8 billion buying 9 percent of Rio shares in February 2008 at about £60 per share, "Rio was happy about that because the price was high and they knew Chinalco was going to suffer," said Lang.

"But when the price went down to £30, how could Chinalco have expected Rio to let it bottom fish its assets?" Lang said.

Iron Ore Talks Fail

China did not reach a long-term price agreement with major iron-ore producers by the end of June 30, meaning the country will have to buy iron ore in the spot market. It was the first time in decades that a long-term pricing mechanism was broken.

The China Iron and Steel Association (CISA) insisted on a 40-percent price reduction, but iron-ore producers refused. The benchmark long-term iron-ore price for the next year was settled by Rio Tinto and a Japanese steel mill in May with a 33-percent reduction. But CISA did not follow suit, as the price settled upon was higher than the spot price.

CISA had its reasons. China now has an iron-ore inventory of over 100 million tons, which is sufficient for production until August. Meanwhile, the price upsurge last year forced Chinese mills to pay an extra 180 billion yuan ($26 billion) for iron ore. CISA believed it would be fair if the price went back to the level in 2007.

But experts suggested CISA give ground. They feared the fluctuating spot market would spur speculation and Chinese steel mills would face dramatic price changes.

Anti-Dumping Charge

China was shocked by three U.S. anti-subsidy and anti-dumping charges against Chinese steel products in just 10 days.

The Ministry of Commerce said in a statement posted on its website that the charges were an explicit display of increasing U.S. protectionism. It sent the wrong protectionist signals to the international community, and jeopardized normal Sino-U.S. steel trade relations, said the statement.

The United States might levy anti-dumping duties on steel products imported from China if the charges are confirmed. But it would generate a lose-lose scenario, as U.S. downstream manufacturers would have to pay more for iron and steel, experts warned.

China reserved the right to bring the case to the World Trade Organization dispute settlement mechanism.

Experts had expected more such cases to emerge as the global financial crisis drives countries to protect domestic interests by restricting imports.

Airbus Plant

The European aircraft giant Airbus entered a joint venture in China and began constructing a $350-million component plant in Harbin, capital of northeast Heilongjiang Province, on June 30, one week after it delivered its first A320 plane assembled in China.

The plant, in which Airbus holds a 20-percent stake, will produce components for its A350 XWB and A320 families. The rest of the stake is held by a couple of companies in the aviation industry.

Airbus is increasingly tapping into China's fast growing economy and taking advantage of cheap labor in the country. In return, the aircraft giant promised to localize 5 percent of the A350 XWB airframe, which was written in an agreement reached with the Chinese Government two years ago. The joint venture is a result of the Airbus commitment.

Li Jiaxiang, Administrator of the Civil Aviation Administration of China, said Chinese orders for aircraft haven't decreased despite the sweeping financial crisis; China has bought 243 planes this year. Li expects Airbus will take up half of the global civil aviation market in the future.