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Recent difficulties at the Rio Tinto Group (Rio Tinto) provide an excellent case study of a large corporation trying to mitigate the risks associated with geopolitical tension between two countries in an increasingly volatile economic environment. After a , held by the Melbourne Mining Club on 5 August 2022, the Anglo-Australian miner’s chief executive for Australia, Kellie Parker, was asked by reporters to comment on China’s recent decision to consolidate the country’s iron ore imports through a new centrally-controlled organisation called the China Mineral Resources Group.

This move by China, a country which accounted for approximately 70.1% of international iron ore imports in , has been widely seen as an effort to improve its bargaining power vis-à-vis suppliers. The Global Times, one of China’s main state-owned media outlets, openly in its celebration of the organisation’s launch that ‘the new behemoth will shoulder the historic task of improving the bargaining power of China's steel industry’, an industrial sector currently reliant on Australian iron ore.

Moreover, in Rio Tinto plc’s , the miner noted that prices for the commodity have fallen recently amid growing fears of weakening demand from the Asian giant:

‘Iron ore Platts CFR prices trended downwards to $120/dmt at the end of the second quarter, even though the average prices were just below $140/dmt year to date. The downward pressure was driven by extended COVID-19 restrictions that impacted China's downstream steel demand to a greater extent than steel production and iron ore consumption.’

This is not good news for Rio Tinto, as Chinese imports made up of the group’s consolidated sales revenue during the first half of 2022, down from 59.9% in during H1 2021, and has contributed to the group’s rather pessimistic appraisal of its business success in the near future, so tied as it is to the Chinese market:

‘The economic outlook is weakening due to the Russia-Ukraine war, tighter monetary policy to curb rising inflation, and targeted COVID-19 restrictions in China. Prices for our commodities decreased in the quarter, amidst growing recession fears and a decline in consumer confidence. Trade disruptions, food protectionism and the global focus on securing energy supplies continue to put pressure on supply chains, which will need to be significantly eased before inflationary pressures subside.

China's industrial activity troughed in May amid COVID-lockdowns. June recovered but uncertainties remain given the potential for ongoing outbreaks. Economic stability is a focus, but headwinds are considerable from restricted labour and goods movement and a slowing external environment. There has been a more accommodative policy stance to support growth, and more easing measures are expected to support the property, infrastructure, and consumer sectors.’

Although Parker mentioned during the luncheon that Rio Tinto was appreciative of the ‘thawing relationship’ between Australia and China over the past few decades, her comments leave unsaid that this relationship has become decidedly frosty in recent years. Cordiality between the two countries has deteriorated considerably, after the Australian Government called for an independent investigation into the initial coronavirus (COVID-19) outbreak in China. Perhaps unsurprisingly, this call was immediately followed by the imposition of bans and tariffs on Australian exports by China, as well as various unpleasant and sabre-rattling comments from Chinese state media outlets.

This deterioration in relations has not gone unnoticed by Rio Tinto. The effect of geopolitics on the group’s trade or investments is one of Rio Tinto’s principal risks in its , with the group stating the following:

‘Increased trade tensions may undermine rule-based trading systems and lead to trade actions (increased tariffs, retaliations, and sanctions) potentially impacting our key markets, operations or investments. Current material threats include the potential development of further sanctions between Australia and China and the evolving situation of the coup in Guinea and, more broadly, the tensions between the US and China.’

Rio Tinto’s , published when the deterioration in relations between the two countries was still a fresh memory, is even more candid in relation to the group’s approach to managing geopolitical risk in an increasingly volatile international trading environment:

‘Tensions between the United States and China have become more structurally ingrained, reaching beyond trade into broader issues such as technological leadership and access to data. The pandemic has also accentuated concerns about security of the global supply chain, including for critical minerals, and self-sufficiency. Still, the economies of the United States and China remain closely intertwined and, despite growing talks of decoupling, this new era of competition will be shaped as much by how and where both countries agree to co-operate.

Other countries, including many in which we operate such as Australia, face the conundrum of how to position their economic and foreign policies towards the United States and China, knowing that how they do so will have implications for global growth and trade, both of which are critical to the outlook of the mining sector.

For Rio Tinto, balancing the relationships we have with our host country governments, as well as other stakeholders, alongside those we have with China as a key customer and supplier, market, technology partner and shareholder, is one of our top strategic priorities.’

In both Rio Tinto’s 2020 and 2021 Annual Reports, the impact of geopolitics on trade and investments is considered a ‘High’ albeit ‘Unlikely’ risk faced by the group. It is noticeably missing from the , the threats posed by the group’s reliance on Chinese imports being gathered under the principal risk of ‘Market forces’.

With one foot in the Western security camp and the other in the Chinese economic camp, Australia is keenly aware that it is forced to tread a careful line between abandoning its allies and biting the hand that feeds much of its economy. Any political move that the country makes on the international stage therefore may have severe ramifications for its industries, and by extension companies that operate there.

Similarly, companies like Rio Tinto are fully aware of the possible economic fallout from upsetting its main client base. For instance, during her luncheon speech Parker carefully worded her reply to a question from the audience on Australia’s responsibilities in the global market:

‘I think the geopolitical situation that we find ourselves in here in Australia. [pause] We have been working very hard with our customers and our biggest shareholder [(Shining Prospect Pte. Ltd, a subsidiary of the Aluminium Corporation of China ‘Chinalco’)] in China. We have a good relationship with our customers and our shareholders, and we certainly would like to meet with them face-to-face when the borders come down in China.’

It will be interesting to see in the coming years if Australia, as well as the corporations that operate within it, prove successful in pulling off this balancing act.