(NYT) Long before four employees of the British-Australian mining giant Rio Tinto were detained in Shanghai last week on suspicion of stealing state secrets, people working in China’s steel industry were complaining about bribery, deceit and a system turned rotten, The New York Times’s David Barboza writes.
One of the tricks is widely discussed. Big government-owned steel makers used their import licenses to buy more iron ore than they needed. Then they profited by illegally selling excess ore to small producers that lacked licenses to import iron ore, a critical ingredient to make steel.
This practice, described in detail this week by analysts, traders and industry experts, was part of a system that they say violated industry regulations and bred a culture of corruption.
Small steel producers are not supposed to buy supplies from big steel makers that have signed long-term contracts with volume discounts. They are supposed to buy on the iron-ore market, where prices can be volatile. Small producers have long complained that the system favors big state-owned companies.
The incentive was there, the small producers said, to cheat by what people in the industry here call “rent seeking,” or bribing larger competitors and buying their excess iron ore.
“Rent seeking was everywhere,” Ren Qiang, general manager of the Zibo Antai Import and Export Company, told The Times. “Some steel makers set up companies independent from their group to do this selling; others joined cooperative projects with smaller mills to sell their excess iron ore.”
Industry officials and people with direct knowledge of the government investigation into the four Rio Tinto employees told The Times that the inquiry has now widened to include some of these activities.
In the past week, China has questioned or detained at least 10 steel executives, including shipping agents, traders and members of the country’s steel association, according to the state-run news media and interviews with industry officials.
The Chinese government has offered no evidence to show whether Rio Tinto or its employees were party to any of these back-room dealings. But last week, Beijing accused the four Rio Tinto employees of espionage, stealing state secrets and harming the nation’s economic interests.
A government-controlled Web site went into more detail, alleging that state investigators have evidence that the Rio Tinto employees bribed steel executives to get access to confidential government documents that showed production and inventory levels at state-owned steel mills.
Such data could presumably have given Rio Tinto an advantage in its annual iron ore price negotiations with Chinese steel mills.
Rio Tinto officials have complained about the lack of formal charges against the employees and insist that the company has tough ethics codes that forbid any bribery. On Tuesday, the company declined to comment further on the case. The Australian government is pressing Beijing for more information about the detention of the four employees, including Stern Hu, an Australian citizen who is Rio Tinto’s top iron ore executive in China.
While Beijing has not formally charged the employees, China’s state-run news media reported Tuesday that computers seized from Rio Tinto’s Shanghai office last week showed the existence of confidential government data.
China’s state secrets laws are vague and can apply even to the commercial secrets of state-owned companies, legal experts say.
On Tuesday, China Daily, the country’s official English-language newspaper, reported that the government was reviewing iron import licenses held by steel mills and trading companies because of concerns over “speculative trading.”
“The big steel mills saw this as a license to print money,” Jim Lennon, a longtime steel analyst at Macquarie Securities, told The Times. “They said, ‘Why don’t we set up a side business to do trading.’ ”
The market was particularly chaotic in 2007 and early 2008, experts say, when many big steel makers began hoarding iron ore supplies because of soaring global demand and then selling it to smaller competitors. Traders say that last year, companies with long-term contracts to buy iron ore at $100 a ton often sold some of that ore on the black market for nearly $200 a ton, or slightly below the spot market price at the time.
Desperate for iron ore, many small mills bribed industry officials to get those supplies, experts say.
“There are 112 enterprises that are qualified importers,” Xu Zhongbo, a professor at the Beijing University of Science and Technology and an industry expert, told The Times. “But China has thousands of small mills, all of them waiting to get iron ore. So that gives big steel makers a great chance to arbitrage.”
Several big steel makers declined to answer questions about their business on Tuesday, The Times said.
But Li Yu, general manager of the Weida Trading Company in Guangzhou, told The Times that the government had been trying to stop small steel producers from importing ore or buying it on the black market. He said the program had not been successful.