China's Mining Pit

If you're ever in the australian outpost of Port Hedland, make sure you've got a high limit on your credit card. The dusty downtown of this isolated hamlet of 20,000 may be a few deserted streets lined with bank branches, the local cultural scene confined to drinking halls and pool tables. But when the bills come, you'd think you were in Beverly Hills. A brunch of two scrambled eggs, toast, hash browns and a Coca-Cola at a greasy diner comes to more than $20. A local hotel with rooms that are little more than sunbaked concrete cubes charges $300 a night. Taxi fares are outrageous enough to embarrass a Tokyo or London cabbie. The front window of a real estate agent's office is plastered with flyers advertising one-story, three-bedroom homes — the kind found just about anywhere in Australia — on sale for more than $1 million. Why would anyone pay such crazy prices to stay here? "China needs its iron ore," says Tony Swiericzuk, a local resident and a general manager at Australian mining outfit Fortescue Metals.

That explains everything. Favorably located on the northwestern coast of Australia, Port Hedland is the point through which the iron ore, copper and other resources dug up from the wastelands of the interior get shipped abroad — more and more to the voracious Chinese economy. Last year 70% of the exports from Port Hedland were bound for China, up from 45% in 2005. That surge has turned Port Hedland into an indispensable part of Australia's economy and a hot destination for mining executives. The port can barely keep pace with Chinese demand. Its capacity has tripled over the past eight years, and Lindsay Copeman, acting chief executive of the Port Hedland Port Authority, expects it to double again by 2016. "It's a very fast-evolving process," Copeman says. "Instead of being a gentle growth curve, it's an exponential curve, and we're almost at a vertical wall." (See pictures of Chinese investment in Africa.)

All of Australia has been enjoying that climb. The Chinese-driven boom at Port Hedland is symbolic of the growing giant's impact on the entire Australian economy. Chinese demand for Australian exports, especially raw materials, was one big reason Australia didn't fall into recession after the 2008 financial crisis. Since China will get even hungrier for natural resources as its economy roars ahead, Australia is likely to become more and more dependent on the Middle Kingdom. Ben Hunt, an economist at the International Monetary Fund, estimates that roughly 12% of Australia's GDP growth during the past 10 years can be attributed to trade with China; over the next decade, that share could reach 35%. Colin Barnett, premier of Western Australia, Port Hedland's home state, says China has been "probably the single biggest factor" behind the region's strong performance during the Great Recession. "China's almost insatiable demand for natural resources continues to drive our economy," he says.

That's good news in many ways. China is becoming the largest customer for just about everything, from cars to meat, and the countries able to tap into that surging Chinese wealth will be rewarded with more jobs and faster growth. As China's economy grows ever bigger, more and more companies, industries and economies will be sucked into its orbit, just like Australia. China's resilience helped lift Japan, South Korea and other Asian neighbors out of the recent downturn and boosted commodity exporters like Brazil, while Chinese money is building roads and creating jobs across Africa. What's going on Down Under is a glimpse into the future for everybody.

That future also leaves many nations a bit queasy, however. Heavy Chinese influence has become a source of public ire and political debate in Zambia and elsewhere in Africa, while Brazilian officials grumble that Beijing's trade practices stifle local industry. Australians, too, are becoming concerned about the potential downside of their growing reliance on the rising giant. "Australia's economy is becoming frightfully dependent on the function of Chinese policymaking," says Scott Ludlam, a senator from Western Australia from the opposition Greens party. "We're setting ourselves up for vulnerability." In a survey conducted this year by the Lowy Institute for International Policy, a Sydney-based think tank, 57% of respondents said the Australian government allows too much investment from China in the country, and 65% thought China's aim was to dominate Asia. "There is almost a subconscious concern [about China] that is creeping into the Australian psyche," says Michael Wesley, Lowy's executive director. (See "Another Deal Blown, Where Will China Invest Now?")

The more important China becomes to Australia's economy, the more wary Australians become about China. They've woken to how China's political values sharply contrast with their own — highlighted by the opaque Chinese court proceedings that led to the 2010 convictions of four employees of British-Australian mining giant Rio Tinto for accepting bribes and obtaining commercial secrets — and Australia's government has jousted with Beijing over human rights. Australian leaders, concerned about China's expanding military power, have also strengthened their nation's strategic alliance with the U.S. even as economic ties to China intensify. Prime Minister Julia Gillard has attempted a delicate balancing act, charming Washington with pledges of friendship in March while inking agreements to boost trade and tourism during a trip to Beijing in April.

The contradictory sentiments can even be found within Australia's mining industry, the sector that has benefited the most from China. China gobbled up 37% of Australia's mineral exports in the past fiscal year, up from a mere 5% a decade earlier. That demand is encouraging a surge of investment in the sector. Mining companies invested more than $40 billion in Australia in 2010 — nearly triple 2005's amount. Another $140 billion worth of mining and energy projects are under way, estimates the Australian Bureau of Agricultural and Resource Economics and Sciences, almost seven times as much as six years ago. "Australia is about to embark on its biggest mining-investment boom since the 1850s Gold Rush," Australian Treasurer Wayne Swan recently boasted.

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Nowhere has China's impact been greater than in Western Australia. The state accounts for two-thirds of Australia's exports to China, and that's resulted in faster growth and lower unemployment than in the nation overall. While much of the rest of the developed world struggles to find jobs for millions of unemployed, Western Australia is worried about a labor shortage. The local Chamber of Minerals and Energy expects another 33,500 jobs to be created in the sector over the next 18 months, on top of today's 85,000. The mining boom will also have a spillover effect to other industries, spawning jobs for waitresses, cabdrivers and hotel clerks. Over the next decade, tens of thousands of new workers may be needed in the state each year. With a population of only 2.3 million, Western Australia will likely be flooded with immigrant job seekers, reshaping the entire society there. "Our links to Asia are becoming increasingly important in every aspect of society," says Barnett, the premier.
The mining boom is also generating worries. Some Australians fear that roaring Chinese demand for natural resources is turning the economy into little more than a mining pit for China's factories. "An economy that becomes too dependent on any one sector takes too big a risk," Gillard recently warned. Most of all, Australians are nervous about losing control over their natural wealth to China, and that's thrown up hurdles to Chinese investment into the sector. Citing national security, the government blocked state-owned China Minmetals from acquiring Australian mining outfit Oz Minerals in 2009 because one of its assets, Prominent Hill, was too close to a sensitive military facility. (A revised deal without that site was eventually completed.) "When you are dealing with Chinese corporations, you are dealing with entities that are closely connected to the strategic interests of the [Chinese] government," Ludlam says. The Chinese "are not afraid of using their economic clout for political purposes." (See "China Broadens Its Strategy in the South Pacific.")
Chinese money has already had a dramatic impact on Australian mining. New customers and investors from China have opened opportunities for entrepreneurs and small firms to thrive and challenge the nation's biggest mining corporations. The most prominent of these newcomers is Andrew Forrest, 49, chief executive of Fortescue. Eight years ago, Fortescue was an unlikely start-up attempting to crash into an industry controlled by Rio Tinto and BHP Billiton. Today, it is Australia's third largest iron-ore company, with revenue estimated at $5.5 billion this fiscal year. Forrest, who announced June 1 that he'll leave the CEO post to become chairman, has a stake in the firm worth $6.8 billion.
Forrest can thank China. Almost all of Fortescue's ore heads for China, while Chinese money has been a source of financing. Hunan Valin Iron & Steel purchased $360 million (at the historical exchange rate) of new shares in Forrest's firm in 2009. To meet unending Chinese demand, the company's board approved $8.4 billion of investments in November with the aim of quadrupling Fortescue's current output by 2013. "Because of the growth, mainly in China, we have the wind in our sails and we can expand at an unprecedented rate," says Forrest, as a massive machine scoops precious iron ore onto a conveyor belt at his feet.
Yet even Forrest harbors concerns about his company's relationship with China. He is striving to diversify his customer base to reduce his dependence on China, but most of all, he wants to protect the independence of his management from excessive Chinese influence. "China has a control mentality that I don't think serves them well in the long run," Forrest says. In 2004, three Chinese firms that had agreed to build Fortescue's railway and other facilities demanded a majority stake in the fledgling firm as part of the deal. Forrest refused, forcing him to find funding elsewhere. (Since then, Forrest says he has "forged good relationships with Chinese industry and government on the basis of deep mutual trust.") (See pictures of China's infrastructure boom.)
Perth-based Mount Gibson Iron has also discovered that China brings challenges as well as benefits. Since late 2008, Gibson has been trying to collect money from Chinese steelmaker Rizhao Steel, which refused to pay for iron-ore shipments it was contractually bound to accept. Rizhao has even ignored a settlement awarded to Gibson in arbitration. Alan Rule, Gibson's chief financial officer, believes there are certain Chinese companies that don't have the same attitude toward international business as those in the West. "The minute &contractacute; is not working well for them, they walk away," he says. (Rizhao didn't return repeated phone calls and e-mails seeking comment.)
The bad feelings run both ways. Beijing is just as wary of becoming too dependent on Australia as Australia is of China. In iron ore, China has been at the mercy of a handful of mining firms — Rio and BHP and Brazil's Vale — which in Chinese eyes leaves their economy vulnerable. So China is striving to tip the balance of power in its favor by securing its own sources. Its companies are fanning out around the globe looking for new deposits. In Western Australia, two iron-ore projects are 100% owned by Chinese firms.
However the countries feel about each other, China's roaring economy can't do without Australia's resources, and Australia's prosperity can't do without China's roaring economy. Australia, simply put, is facing the realities of the great shift of economic influence to the East. "That's where the growth is," Barnett says. Australians will have to find a way of accommodating a more powerful China, whether they like it or not — and so will the rest of us.
— with reporting by Jessie Jiang / Beijing

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