Money Matters - Simplified

Giving China the Silent Treatment

Things continue to worsen in the relationship between Anglo-Australian mining giant Rio Tinto (NYSE: RTP) and the big Chinese steelmakers. The relationship has descended to a cessation of negotiations concerning prices for iron ore -- a key element in the manufacture of steel. The round of negotiations began months ago and now appears to have been brought to a screeching halt.

As you recall, last year witnessed a tremendous run-up for most
commodity prices, only to see them suddenly roll over and plunge back
to earth. While this strange series of events was occurring, the big
three suppliers -- Brazil's Vale (NYSE: VALE), Rio, and BHP Billiton (NYSE: BHP) -- got all they could in levies from the Chinese, who account for roughly half the world's steel production.

But when commodities began to roll over, the shoe was suddenly on
the other foot. And when this year's benchmark iron ore price was being
negotiated, the first deal occurred between Rio and Japan's Nippon Steel.
It represented a 33% decline from last year. Meanwhile, the Chinese
were holding out for a 40%-45% drop. Indeed, even the world's biggest steelmaker, Arcelor Mittal (NYSE: MT), readily accepted a lesser discount.

Obviously, China is trying to get its arms around as many of the world's commodities as possible. Not long ago, Aluminum Corp. of China (NYSE: ACH) was unsuccessful
in upping a stake it holds in Rio. Undeterred, China's buying spree
continued on Tuesday with the news that state-owned Guangdong Nuclear
Power would acquire interest in a uranium explorer, while a different
state-controlled company moved in on a pair of small iron-ore miners.

Complicating matters in the meantime is Stern Hu, head of Rio's iron
ore operations in China, currently languishing in a Chinese jail after
being charged with industrial espionage.
When formal pricing conversations will resume is anyone's guess. Until
that changes, the Chinese are buying Rio Tinto's iron ore on a
"provisional" basis, based on the Japanese discount price.

From an investing perspective, my advice to Fools is to keep a close eye on these unfolding Chinese events.
And beyond that, I continue to look positively on Rio and BHP. As such,
I don't think you can go wrong with positions in either.

© 2009 UCLICK L.L.C.