Q+A-Why did China arrest Rio Tinto staff? What's the fallout?

Wed Aug 12, 2009 3:00am EDT

(Reuters) - Chinese prosecutors have formally arrested four employees of Anglo-Australian miner Rio Tinto on suspicion of obtaining commercial secrets and bribery, the Xinhua news agency reported on Wednesday.

Rio has said the four did nothing wrong.

WHO IS BEING HELD?

Stern Hu, Rio Tinto's head of iron ore marketing in China, and three other members of the Shanghai-based iron ore team were detained in early July.

Hu, a Chinese-born Australian citizen, was accused of obtaining and passing on the Chinese industry's negotiating position, sources have said. The three Chinese nationals arrested with Hu are Liu Caikui, Ge Minqiang and Wang Yong.

Rio's China team carry out some negotiations and manage details of term contracts for iron ore, used to make steel, as well as tracking market information.

Xinhua also reported that prosecutors had approved the formal arrest of the Chinese steel executive or executives suspected of providing commercial secrets to Hu. An iron ore executive from China's eighth-largest mill, Shougang, has been detained, Chinese media reported earlier.

WHAT IS SIGNIFICANT ABOUT THE TIMING OF THE ARRESTS?

They come at a contentious time for the sector, which has yet to resolve the price that Chinese steel mills will pay to global miners including Rio Tinto for iron ore imports that this year will account for half the world's trade in the commodity.

Some Chinese steel mills had reportedly given in after protracted annual iron ore price negotiations. At the same time, the steel mills' official representative, the China Iron and Steel Association, is holding out for cheaper prices given the depth of the global economic slowdown. Steelmakers in Japan and South Korea had already agreed to a 33 percent cut in prices after prices rose five-fold in the past six years.

Traditionally, steel mills accept whatever deal is settled first between any mill and any of the big three iron ore miners, Rio, BHP Billiton and Brazil's Vale.

WHY WERE THE EXECUTIVES ARRESTED?

The four were arrested on suspicion of obtaining commercial secrets under Article 219 of China's Criminal Code. This is a broad provision that covers obtaining commercial information through "improper means."

Under this provision, courts can sentence people to up to 3 years' jail, or up to 7 years in "especially serious" cases.

Earlier reports had indicated the Rio Tinto staff faced accusations of violating state secrets, a sweeping charge that could potentially attract even harsher sentences if convicted.

WHAT ARE THE BROADER IMPLICATIONS OF THE CASE?

Australian Prime Minister Kevin Rudd has warned China it had significant economic interests at stake in detaining Hu and that the world was watching how it handled a case that has highlighted the risks of doing business in the world's third-largest economy.

However, Australia has insisted the case would not harm trade relations with China. China is Australia's biggest trade partner, worth $53 billion last year. Australia exported $15 billion worth of iron ore to China in 2008, accounting for 41 percent of China's iron ore imports in that period.

There are also hard feelings between China and Rio Tinto after the collapse of a deal by Chinese state-owned aluminum firm, Chinalco, to increase its stake in Rio earlier this year.

WHAT HAPPENS NEXT?

The arrests mean Chinese prosecutors have given police more time to investigate the suspects on the charges. The decision brings the case closer to a possible trial, but it does not amount to a formal decision to go to trial, and it could take some time for authorities to reach any decision on that.

The investigation also raises the specter of a wider purge in China's steel sector, which could deprive the industry of some of its more savvy executives and widen the rift between the mills and the steel association.

But trade will go on. Top iron ore consumer China needs Australia's high quality, reliable supply of ore, used to make steel that goes into everything from bridges to skyscrapers to washing machines. And top exporter, Australia, needs China's steel mills to keep buying.

Source: Reuters

(Writing by Chris Buckley, Lucy Hornby and Gillian Murdoch; Editing by Dean Yates)