By Sameer Manekar and Praveen Menon
Rio Tinto Ltd. said on Wednesday that it would work with its biggest customer, China Baowu Steel Group, to develop an iron ore project in Western Australia for $2 billion. The company wants to boost its production in the Pilbara region.
The deal comes at a time when relations between Australia and China are tense. Australia is the world’s biggest exporter of iron ore, and China is the biggest buyer. A recent push by Beijing to centralise iron ore purchases has caused mining giants like Rio Tinto, BHP Group, and Fortescue Metals to worry that they will be hurt.
Related: Rio Tinto cuts dividends as iron ore prices slump.
China’s direct investments in Australia have been going down steadily since 2016. In 2016, China invested $11.54 billion in Australia. In 2021, China will only invest $585 million, compared to $11.54 billion in 2016.
Rio, on the other hand, said last week that it had formed a strategic partnership with the new state-owned Chinese agency that was set up to centralise iron ore purchases.
RIO said it would spend $1.3 billion to develop the Western Range Project in the Pilbara. It will own 54% of the project, and China Baowu, a state-owned company, will own the other 46% and put in $700 million.
The world’s largest iron ore producer said, “Western Range’s annual production capacity of 25 million tonnes of iron ore will help Rio Tinto’s (NYSE:RIO) existing Paraburdoo mining hub keep making Pilbara Blend.”
Pilbara Blend products are known for their high quality and consistency. According to Rio Tinto’s website, about 70% of the miner’s iron ore products are made up of Pilbara Blend products.
Baowu said on its official WeChat account that the deal with Rio would “strengthen the partnership of mutual benefit and win-win results.”
The deal will only go through if the governments of Australia and China and Rio shareholders all agree to it.
China’s State Administration for Market Regulation, which is in charge of acquisitions, didn’t answer a fax asking for a comment on the deal right away.
A Chinese source who knew about the deal said that it wasn’t likely to run into problems with the government, since Beijing has been encouraging its companies to invest more in overseas resources for a long time.
China Baowu, the biggest steel company in the world, will buy up to 126.5 million tonnes of iron ore from the Western Range project in Pilbara over the next 13 years. This deal was made between Rio and China Baowu.
Related: Asian stocks fall because of bad Chinese trade data and Fed jitters.
“Rio and Baowu already have a joint venture in the eastern range of the Pilbara. “Today’s deal is basically an extension of that in the western range of Pilbara,” said John Mills, an equity analyst at Morningstar in Sydney who focuses on mining.
Rio Tinto said that work on the project will start in early 2023 and that the first product will be made in 2025.