Chinese mountain now biggest iron-ore mine

NEWMAN, Australia —

Here in this land of searing heat, scrub and eucalyptus, a land so vast that road signs warn the next gas station is 600 miles away, Mount Whaleback was once 1,500 feet high. Today it's a hole, the biggest open-pit iron-ore mine in the world — an entire mountain crushed, sold and shipped to China.

Trucks with tires twice the height of a grown man cart thousands of tons of raw ore to a processing plant, where it is separated and poured into the longest and heaviest train in the world — 336 freight cars pulled by six locomotives. It chugs 300 miles to Port Hedland, where it is loaded onto ships bound for the unquenchable steel mills of the People's Republic.

Ton by ton, including more than 300 million tons of ore per year and vast quantities of liquid natural gas, China is buying Australia. One of the world's most staggeringly huge transfers of natural resources has both enriched and alarmed Australia, prompted a determined response from Washington and illustrated both China's savvy and ungainliness as it aggressively expands its influence in the world.

A surging China has become Australia's No. 1 trading partner. It has pumped $40 billion worth of investments into the Australian economy in the past 18 months alone. China's 70,000 students help bankroll Australia's education system, and a half-million Chinese tourists a year keep Aussies employed as lifeguards, blackjack dealers and real-estate brokers. Chinese trade and investment have insulated Australia from the global financial crisis more than any other developed nation. Australia is even speaking Chinese: Prime Minister Kevin Rudd is the first Western leader to speak fluent Mandarin.

"China is remaking the social and political fabric of this country," said Chen Jie, a senior lecturer in international relations at the University of Western Australia who immigrated to Australia from China 20 years ago. "China is intruding into society itself."

But all those ties haven't bought China much love Down Under. Opinion polls over the past five years show Australians are increasingly wary of the behemoth to their north. Rudd, while embracing Chinese trade, has moved to balance relations with Beijing by bolstering military and diplomatic ties with Australia's longtime superpower ally, the United States.

In April, Rudd's government announced Australia's biggest military buildup since World War II, and a report by the Ministry of Defense made it clear that China was the reason.

"As our trade ties with China grew closer, we believed it was necessary to hedge quietly," said Andrew Shearer, who served as national security adviser under Rudd's predecessor, John Howard. He said China's rise was a key factor in the decision — initiated under Howard but continued under Rudd — to pull even closer to the United States. Added Shearer: "We're seeing that thinking now across Asia."

Australian ambivalence has largely befuddled the Chinese.

"When Mr. Rudd was elected, there was an expectation that a more intimate relationship between the countries would result, because he knows China so well and speaks Chinese," Zhu Feng, a Chinese analyst, told an Australian newspaper. "But it has remained just at the commercial level."

No city better illustrates the China boom than Perth, the capital of Western Australia, a state five times as big as Texas that holds the bulk of Australia's mineral wealth. The state's average income has jumped $10,000 in five years to more than $70,000, thanks to China's purchases of iron ore, natural gas and other resources. In Perth, the median price for a home just broke $500,000. Its unemployment rate is a measly 2.6 percent; the national rate is just 5.5 percent and predicted to drop this year — thanks mostly to China.

Beyond the numbers, Perth looks Chinese, with a skyline filled with skyscrapers and cranes. The city is bristling with more than $1 billion in new construction, including a hospital, museum, highways, offices and a vast indoor entertainment and sports complex. More than 110 people move into Western Australia each day, making it the fastest-growing state in Australia, and there's still a labor shortage. Truck drivers working in the mines are paid $100,000 a year. A gate attendant at a mine makes $80,000.

Statewide, projects worth more than $95 billion are transforming the economy of the region and contributing to a historic shift in power from "old Australia" — around Victoria and New South Wales in the southeast, to the resource-rich Australia in the north.

"Manna from heaven"

Chinese investors are bullish on Australia and say they're learning to work the system.

Lai Cunliang is the Chairman Mao-quoting chief of operations for a Chinese coal company that acquired an Australian competitor for $3 billion during the global financial crisis. "We've got capital, we've got talent, and now," he said, "we're coming out. We are driving change."

A steel company from China's Hunan province sank $580 million into Fortescue Metals Group last year, turning the company's chairman, Andrew "Twiggy" Forrest, into Australia's richest man. Chinese firms also snapped up a uranium mine, gold and coal mines, off-shore natural-gas fields, real estate and wineries. This month, an Australian mining company announced a $60 billion deal to ship 30 million tons of coal a year from a proposed mine in Queensland.

"The numbers are so big it's deceptive," said Sam Walsh, who runs iron-ore operations for Rio Tinto, the Anglo-Australian mining giant in which a Chinese firm, Chinalco, tried unsuccessfully to buy an 18 percent stake last year. "No one has seen this before. It is manna from heaven."

The growth has been so robust that Rio and its old competitor BHP Billiton now want to merge their iron-ore operations, allowing them to extract an even higher price from the Chinese. Spot prices for iron ore are already more than $100 a ton, and officials from both companies predict that in a few years their total production could hit 1 billion tons a year.

"Slice it, dice it, whatever you want, it's staggering," said Ian Pearson, the acting general manager of BHP's mine at Mount Whaleback.

Despite its economic inroads, China has made blunders that have infuriated, and occasionally amused, many Australians.

Being Australia's primary market for iron ore, the Chinese assumed last year that they would be able to get a good deal on the price. So China rejected as too high a benchmark price that had been accepted by Japanese and South Korean firms. That decision cost China dearly when the spot price of ore rose 90 percent in the past year.

"The Chinese thought they'd be in the driver's seat on this," said Kenneth Lieberthal, a China expert at the Brookings Institution. "Who knew they'd find themselves in the trunk."

The Chinese government and its state-owned businesses were enraged at their failure to push down the price. In July, a month after the Tinto and Chinalco deal collapsed, Chinese security agents detained Stern Hu, a Rio Tinto executive in China, on suspicion of espionage. Australian newspaper commentators speculated that Beijing was punishing the mining giant for the high price of iron ore, further increasing public skepticism. Last week, Chinese prosecutors charged Hu with accepting bribes.

Troubling developments

And it's not just ore that has Australians worried.

Last year, Chinese diplomats demanded that a film about a Chinese dissident be pulled from the Melbourne Film Festival. It wasn't, and although it was an obscure movie about an obscure topic, hundreds flocked to the premiere. Chinese diplomats also ordered Chinese students in Australia to participate in anti-Tibetan protests in the run-up to the Beijing Olympics in 2008.

In June, Defense Minister Joel Fitzgibbon resigned in part because he had failed to report that he'd taken trips to China, paid for by a woman with ties to the Communist Party. The incident underscored the increasingly close ties between pro-Chinese business interests in Australia and its political class. Money from businessmen and women with ties to China has been flowing into the coffers of all of Australia's main political parties. Rich Chinese are now serving on corporate boards and advisory groups with Australians such as former Prime Minister Bob Hawke and former Foreign Minister Alexander Downer.

"It's no longer that we're begging for your assistance," Chen said. "Now we are on corporate boards together. We are in the room."

Even among China's supposed allies in Australia there is unease about what the relationship with Beijing portends.

Chinese investment has made Graeme Rowley, the outgoing executive director of Fortescue Metals Group, a formidable player in the Australian mining industry.

Last year, Rowley said, Fortescue provided favorable ore prices to a major Chinese steel company in return for a promise of billions of dollars in investment. But the Chinese firm reneged at the last minute. He said that was a sign of things to come.

"Either the Chinese will have to learn to honor contracts or we will have to learn how to operate in a system with less clarity," he said.

"They are an enormously powerful nation," Rowley added, his back to the Perth skyline with its frenetic cranes and glistening new towers of glass. "The world hasn't woken up to the fact that they are going to replace America. But it's how they're going to do it that's the question."

Information in this article, originally published February 14, 2010, was corrected February 19, 2010. A previous version of this story incorrectly stated that an Australian mining company announced a $60 billion deal to ship 30 tons of coal a year. The accurate number is 30 million tons of coal a year.