November 16 marks 30 years since the signing of one of the most important deals for the development of Western Australia's iron ore industry - the Channar joint venture between Sinosteel and Rio Tinto. While Channar is today celebrated as a shining example of Sino-Australian relations, WA's iron ore sector was a very different beast in 1987.
IN the context of 2017, where the world’s biggest miners transport small mountains from the Pilbara halfway across the globe each day, an agreement to buy 10 million tonnes of iron ore each year is not considered to be an especially significant deal.
However, when Rio Tinto, then known as Hamersley Iron, signed a deal for that amount of ore in 1987, it was an industry changing arrangement.
Throughout the mid-1980s, Hamersley Iron was shipping around 40 million tonnes of ore annually from its Pilbara operations, which consisted of two mines – Mount Tom Price and Paraburdoo.
And while a deal for 10 million tonnes of that production was certainly very significant, what made it remarkable was not just the tonnage, it was the miner’s trading partner.
On November 16, 30 years will have passed since China Metallurgical Import and Export Company, now known as iron ore trading house Sinosteel Corporation, finalised its 20-year agreement with Hamersley Iron.
Over that time, more than 250 million tonnes of iron ore have been mined from the Pilbara sites and shipped to ports in China, with the deal subject to two separate extensions.
The arrangement, known as the Channar Joint Venture, is now considered to be one of the cornerstones of the China-Australia trade relationship, being the first large-scale mining initiative between a Chinese state-owned enterprise and an Australian miner.
Initially for a total of 200 million tonnes of ore, the agreement was the result of five years of intense negotiation and was reached with strong support from both the Australian and Chinese governments.
The agreement has also been extended twice, initially when the 200 million tonne threshold was approaching in 2010, and again midway through last year.
Sinosteel Australia managing director David Sun described Channar as a “brave joint venture” and said if it were not for the arrangement, Western Australia’s largest export industry could look drastically different than what it does today.
“At that time, it was huge,” Dr Sun told Australia China Business Review.
“The project opened the door to the Chinese iron ore market.
“Production at Chinese steel mills was not at its highest level and the Chinese government thought domestic supplies were enough, so there was no importing of iron ore.
“People didn’t know whether a Chinese company would fulfil their obligations under the agreement, or whether the Chinese government would just stop trading because they already produce ore.
“These kinds of risks nobody could predict at the time.”
Opening an export avenue created a monster in the Pilbara, with WA now the largest producer and exporter of iron ore in the world, accounting for 38 per cent of global production and 53 per cent of global seaborne exports in 2016.
China accounted for 82 per cent of WA’s 797 million tonnes of iron ore produced in 2016-17, while recent increased demand for steelmaking ingredients in China drove a 35 per cent rise in annual average prices to $US70 per tonne.
Change in China
But it was not only in WA that the Channar joint venture had a transformative effect; the agreement also drove significant change in China’s steelmaking sector, Dr Sun said.
“For the Chinese steel mills, in the past they used local ore, which averaged around 30 per cent ferrous before it was processed to around 60 or 65 per cent,” he said.
“In Australia, the grade is around 62 per cent, with higher alumina content.
“Because their steel mills were built to process local ore not familiar with Australian ore, all of the major steelmakers had to do renovations of their blending system and equipment – they needed to make adjustments to fine tune the system.
“That was a good thing for the Chinese steel milling industry, they adjusted the system to use the Australian ore and found out it was more reliable in terms of quality and quantity.”
At a ceremony celebrating the joint venture’s anniversary earlier this year, Rio Tinto iron ore chief executive Chris Salisbury said the project’s success made it easy to overlook how significant, and risky, Channar was in 1987.
Dignitaries who attended the celebration included Chinese Consul General Lei Kezhong and Sinosteel Corporation president Liu Andong, as well as former Australian prime minister Bob Hawke and WA Premier Mark McGowan.
Mr Salisbury noted there was no precedent for such a significant investment by a Chinese company outside of the country’s borders, while he said the 10 million tonnes per year would have been the equivalent of Rio Tinto announcing a new joint venture to export 100 million tonnes annually to an emerging company with limited international exposure.
He said the most distinctive piece of infrastructure at Channar was a 20-kilometre conveyor belt linking the mine’s ore deposits across several crests and valleys, which was revolutionary at the time due to its curved design.
“It’s a metaphor of sorts, for our 30-year plus relationship with Sinosteel and with China – robust, long, moving forward,” Mr Salisbury said at the ceremony.
“Which is exactly what Rio Tinto and Sinosteel have done.
“Rio Tinto went on to develop its integrated Pilbara system of more than a dozen mines and create the Pilbara blend – now the world’s largest traded iron ore product and the benchmark by which others are measured.”
As well as being a catalyst for Sino-Australian trade, the Channar joint venture has become something of a model for other companies to follow.
In 2001, Rio Tinto signed another landmark agreement to form an iron ore joint venture operation in WA, this time with China’s largest steelmaker, Baosteel.
The agreement’s structure was remarkably like the Channar joint venture – 200 million tonnes in total, averaging 10 million tonnes of ore per year over the 20-year life of the deal.
At Channar, CMIEC took a 40 per cent stake in the project, with Hamersley Iron retaining the remaining 60 per cent.
The 2001 Baosteel-Rio joint venture was a 54:46 equity share, with Rio holding the larger proportion.
Dr Sun said the similarities did not end there, with Baosteel emulating a highly successful Sinosteel employee training program and incorporating it into its joint venture with Rio.
“Each year we have five trainees from China, two from Sinosteel and three from the steel mills which use the ore,” Dr Sun said.
“Baosteel emulated that program, and the joint venture between Woodside and CNOOC also emulated it.
“They think it is a good structure. We are very proud of that because it proved to be successful for us, and they learned from us and it proved to be successful again.
“That’s why sometimes with Chinese investment here, if it’s not going well we feel that it’s a pity, because you can just learn from what we have done for the past 30 years.”
Dr Sun said the one of the reasons his company had succeeded in an industry where others had faced significant challenges was thanks to a conservative approach and a highly selective partner vetting process.
“For a good project, firstly you have to have the right partner, you have to choose the right time and you have to have the right structure,” Dr Sun said.
“A lot of Chinese companies come here to invest, but falling in love with a project at first sight is very dangerous.
“One of the reasons for the success of Channar is a lot of experts from China did two years of research and due diligence before they made a decision.
“Nowadays, people will come here and make a decision within one week, and then they will solve their problems later.”
Dr Sun said investing in Australia, particularly in major mining operations, was vastly different to any other jurisdiction globally.
“You have to do a lot of homework before you spend your money here, before you sign an agreement,” Dr Sun said.
“Some Chinese companies just double the labour costs in China, and they think that’s enough.
“It’s probably even six or 10 times different, then there are also environmental approvals, native title, there are all of these issues.
“In China, it’s not a big issue, they always can find a way to avoid it.
“But here, you have to overcome it by spending money and spending time.”