Q+A: Why is China detaining Rio's mining executives?

(Reuters) - Australia's prime minister Kevin Rudd has raised the stakes over China's detention of an Australian mining executive on suspicion of spying, warning China on Wednesday that the world is watching how it handles the case.

Here are some questions and answers about the latest developments:

WHO IS BEING HELD?

Stern Hu, Rio Tinto's head of iron ore marketing in China, and three other members of the Shanghai-based iron ore team were detained in early July for "stealing state secrets."

Hu, a Chinese-born Australian citizen, was accused of obtaining and passing on the Chinese industry's negotiating position, sources said.

Rio's China team carry out some negotiations and manage operational details of term contracts for iron ore, a key ingredient in steel making, as well as tracking market information.

An iron ore executive from China's eighth-largest mill, Shougang, is also in custody, Chinese media reported. Executives from other big Chinese mills are also being questioned.

WHAT IS SIGNIFICANT ABOUT THE TIMING OF THE ARRESTS?

They came at a sensitive time, as Chinese steel mills had reportedly given in after protracted annual iron ore price negotiations, while their official representative, the China Iron and Steel Association, held out for deeper cuts than those obtained by Japanese and Korean steelmakers.

Traditionally, all steel mills accept whatever deal is settled first between any mill and any of the big three miners, Rio, BHP Billiton and Brazil's Vale.

WHY WERE THE EXECUTIVES DETAINED?

Rio's employees are being held on accusations of stealing state secrets -- a strategically vague phrase which covers the possession or dissemination of a wide array of information deemed sensitive by the authorities.

It's possible that the case is exactly that -- illegally obtaining sensitive information -- but the timing and the targets have also given rise to other explanations.

Some steel industry observers see the developments as an attempt by the steel association, which had vowed to the central government that it would achieve a better deal on iron ore prices, to reassert control and save face after the Chinese mills' reported capitulation.

There are also a lot of hard feelings between China and Rio Tinto, after Rio ended a buy-in by China's flagship aluminum firm Chinalco last month.

The Sydney Morning Herald said it could reflect a structural shake-up of China's economic management in the wake of the global financial crisis, as the Communist Party's nine-member standing committee, led by President Hu Jintao, exerts more control over economic decisions at the expense of the State Council, led by Premier Wen Jiabao.

WHAT FALL-OUT HAS THERE BEEN?

Rio Tinto and BHP Billiton have had little public comment on the case.

On Wednesday, Steel Business Briefing, an industry journal, quoted traders as saying both miners had stopped taking spot orders for China, their biggest customer.

Rio Tinto said shipments were running normally while BHP declined comment.

Sources say both miners have signed interim deals with major mills, at the same rate as their Japanese and South Korean rivals.

The case has strained Australia-China ties, and put pressure on Australia's Mandarin-speaking prime minister Kevin Rudd to show he has pull with Beijing.

It highlights the risks for foreign businesses in China, a country run by a single party with no independent judiciary.

Reinforcing perceptions of China as an opaque, and unpredictable, place to do business, it highlights the risks of foreign companies' reliance on mainland-born Chinese with foreign citizenship to run their China operations.

"Returned Chinese" are far more vulnerable than foreigners to Chinese charges of spying.

WHAT HAPPENS NEXT?

The investigation raises the specter of a wider purge, which could deprive the steel industry of some of its savvier executives and widen the rift between the mills and the association.

The future of Hu and his colleagues is uncertain. Under Chinese law, detainees may be held for some time without being charged, and interrogated without access to legal counsel. Once charged and formally arrested, the judicial process can begin.

But at the end of the day, the trade will go on.

Top iron ore consumer China needs Australia's high quality, reliable supply of ore, used to make steel that goes into everything from bridges to skyscrapers to washing machines.

And top exporter, Australia, needs China's steel mills, which consume half the world's ore output every year.

Source: Reuters

(Writing by Lucy Hornby and Gillian Murdoch; Editing by David Fox)