Beijing's metal move is bad timing for Rio

CHINA'S embrace of profound re-engineering of its sprawling metals processing industry by 2011 could yet create complications for its current international champion Chinalco, as its $US19.5 billion Rio Tinto deal winds slowly through Australia's Foreign Investment Review Board.

On Monday, China's ruling State Council endorsed a plan to manufacture between three and five mega-metals corporations and to deliver overwhelming market power to the country's top 10 producers of copper, aluminium, nickel, lead and zinc.

Needless to say, the ambition is grand and commercially very sensible. But the timing of the annunciation of the policy could hardly have been worse if you are Chinalco and Rio Tinto, and the masters of your immediate shared fate are FIRB and a politically vulnerable Treasurer.

The object here is to create no more than five super customers which will be able to, at worst, match it with the world's major resources houses and, at best, engineer similar strategic alliances as that being planned by Chinalco and Rio.

Body: As bold and logical as that outcome might be, there is no question the policy announced on Monday will re-ignite debate over the strategy underlying China's investment in the Australian resources sector.

Given everything that is afoot, Chinalco is very likely to be one of China's biggest five. After all, it cannot be any sort of coincidence that the push for reform comes only months after Chinalco's former chairman Xiao Yaqing joined the ruling council.

Under Xiao's direction, Chinalco was a first mover in consolidation in China's aluminium sector and the engineer of its boldest move on the international stage: the plunge into Rio.

Chinalco will almost certainly become an even bigger customer for Australian miners across a far wider range of raw materials.

It is unarguable that the planners of China's still boisterous economy have properly decided the global financial crisis has delivered it with motivation and opportunity enough to force further reform on the inefficiency within its manufacturing base.

China's metals processors account for about one-third of global production but that doesn't mean they are anything like as efficient, either financially or environmentally, as their Western counterparts.

The State Council has endorsed a plan to change that situation, calling out improved economics and reduced environmental footprints as major targets of the planned reforms.

Absolutely explicit in the State Council directive is that these new majors are to be platforms for investment in international mining, either directly of through partnerships with existing operators.

The Government will "encourage" foreign investment by providing access to new equity and foreign exchange.

It is expected the consolidation push will focus initially on the smelting side of the metals industry.

In some sectors, such as the already quite concentrated nickel business, the task will be relatively painless, but in others, where there is still distracting geographic and technological diversity, it might be quite fraught.

It is estimated there are only about 40 copper smelters across China with average capacity of 80,000 tonnes a year and 97 aluminium smelters with capacity averaging 150,000 tonnes (30 per cent of which is accounted for by Chalco, a child of Chinalco).

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