Steel bars behind Rio jail terms
By Olivia Chung

HONG KONG - Four Rio Tinto executives were handed lengthy prison sentences after a Chinese court found them guilty of bribery and stealing commercial secrets in a trial that threw a spotlight on China's demand for iron ore.

Australian Stern Hu, the mining giant's former general manager of China sales, was jailed for 10 years, while three Chinese colleagues were sentenced to between seven and 14 years in jail. Wang Yong was handed 14 years, Ge Minqiang was given an eight-year jail-term, and Liu Caikui seven years. Chief Judge Liu Xin announced his decision in the Shanghai No. 1 Intermediate People’s Court on Monday.

Hu and his three Chinese co-workers pleaded guilty to charges of taking bribes in a three-day trial held last week. Their pleas on stealing commercial secrets were unknown as those hearings were closed and lawyers said they were barred from commenting in public.

The trial raised concerns from the foreign business community in China and Australian diplomats who complained about a lack of transparency in the legal process after they and other foreign observers were barred from the parts of the proceedings dealing with commercial espionage charges. Hu was the company's lead negotiator in talks last year with Chinese steel mills that broke down without setting a price for China's purchase of iron ore from Australian mining companies.

The court heard that the iron ore price negotiations between Australia and China last year had been seriously hurt by the misbehavior of Hu, who was sentenced to seven years in prison on charges of accepting bribes and five years on charges of stealing commercial secrets.

During the trial, the defendants admitted taking bribes, but disputed the amounts involved, their lawyers said. Hu acknowledged accepting two large bribes, which prosecutors said were worth a total of US$935,000. Assets worth more than 50 million yuan (US$7 million) were confiscated from him and he was fined the same amount.

"Due to his guilty pleas, his total sentence of 12 years will be reduced by two years," the court said. Wang's 14-year sentence reflected the 70 million yuan of bribes he accepted, the court said. Under China' laws, they can file an appeal within 10 days.

The length of the sentences came as a surprise as some observers believed the admissions of guilt meant the court would be more lenient.

"A slap on the wrist might have been expected, with both sides trying to put this behind them as soon as possible, but this is far longer [sentencing] than we thought," Paul Bartholomew at Steel Business Briefing told the BBC.

Hu Kai, an analyst with Umetal, a steel and raw material information provider, said China's short supply of iron ore was the main reasons Hu and his colleagues took the bribes. "The private steelmakers have been desperate for iron ore supplies," he told Asia Times Online.

Yong, one of the Chinese defendants, was accused of receiving $9 million from Du Shuanghua, the founder of the Shandong-based Rizhao Steel, which was taken over by state-owned Shandong Iron & Steel in 2008. Du was China's second-richest men in 2008 and 41st in 2009, according to Hurun's 2008 China Rich List.

According to written testimony from Du, he paid $9 million in bribes to Wang Yong, one of the accused, to ensure his privately owned steel mill would be allocated iron ore by Rio. It is unknown whether Du is under detention.

Rizhao Steel, the most profitable steelmaker in Shangdong, produced 4 million tonnes of steel in the first half of 2009, earning 1.8 billion yuan in profit. Du said in his written testimony that "his company would not have today's success without help from Wang Yong."

Investigations into corruption behind usually long and controversial annual negotiations over the key commodity for steel making aren't limited to Rio Tinto. At least two senior executives from major China steel producers are under investigation for their roles in the case involving Rio and the theft of commercial secrets.

Wang Hongjiu, an executive with the Laigang Group, China's sixth-largest steel mill, based in in Laiwu City, Shandong province, was taken into custody by police investigating the Rio case in July 2009, the Securities Daily reported.

Tan Yixin, a senior executive of Beijing-based steelmaker Shougang Group, China's eighth largest steel mill, was arrested in July for alleged "commercial crimes" concerning the case. Tan is said to be close to Stern Hu.

The two Chinese steel executives were believed to "have offered commercial secrets" to Rio Tinto's Hu. Tan and Wang were top officials in China's state-owned steel firms that were part of the iron ore price negotiations.

Australia has sought more transparency regarding the case, but court proceedings related to commercial secrets are a closed affair under Chinese law. Australian Prime Minister Kevin Rudd had expressed concern, saying before the trial opened that "the world will be watching".

Chinese Foreign Ministry spokesman Qin Gang said the case was just an individual business case and should not be politicized. Relations between Canberra and Beijing soured last year after Australia-based Rio rejected a $19.5 billion investment from state-owned Aluminum Corp. of China, but have since improved with the companies jointly investing in an iron ore project in Guinea.

The detention of Rio's workers was probably related to the 2009 iron ore price talks, Australian Foreign Minister Stephen Smith said last July 24, according to Bloomberg News. Chinese steelmakers, the biggest buyers of iron ore, last year failed to agree to annual prices with Rio after rejecting a 33% price cut on the year-earlier agreement as insufficient, Bloomberg said.

Talks to settle this year's iron ore prices with Rio, Vale, and BHP Billiton, the three biggest suppliers, are expected to drag on beyond the April 1 annual deadline. Chinese steelmakers had opposed a demand by suppliers to increase prices by as much as 90%, the China Iron & Steel Association said on March 16, according to Bloomberg. Imports of iron ore by China, the biggest buyer, soared 42% to a record 628 million tonnes last year as steel production reached a high, it said.

China - the world's third-biggest and fastest-growing major economy - is seeking once again to convince Rio Tinto, the world’s second-largest miner, and other global suppliers to give its mills lower prices. The Japanese media reported that Japan's steel mills struck a deal with global mining giants last week on a quarterly, rather than annual, pricing basis.

"The possible deals struck between miners and clients in Japan will have put further pressure on Chinese steel mills,'' Du Wei, a Beijing based analyst with Umetals Research Institute, said.

Du was not optimistic over China's stance on the pricing negotiations, saying the negotiations may reach a dead end. China is in favor of continuing with an annual pricing system, but tries to convince the global miners not to link the price to spot prices - that is, the price paid on the open market, and which has surged over the past year. Brazilian miner Vale and Rio are in favor of a quarterly pricing system, while BHP Billiton wants to price its products based on an index.

As negotiations drag on, iron ore prices continue their upward march. Spot prices have risen to over $130 per tonne, including freight, since February. That's more than double the benchmark contract prices of 2009 and largely due to surging demand from China and the global recovery from economic downturn.

Olivia Chung is a senior Asia Times Online reporter.