The Deal Is Simple. Australia Gets Money, China Gets Australia

Every third Wednesday, Michael Box gets up at 3:30 in the morning to catch a flight out of Perth. Isolated in the south-west of Australia, Perth (pop. 1.6 million) is 1,700 miles from the next large city, Adelaide, which isn't even that big. Box and about a dozen co-workers fly two hours north to a yet more remote section of Australia, the Pilbara, a 193,000-square-mile hump of territory arcing into the Indian Ocean. They will land on this patch of iron-rich red earth and spend the next two weeks sending as much of it as they can, about a million tons a day, to China.

The Pilbara—the word is Aboriginal for mullet, a type of fish running in the mountain creeks—is both the end of the earth and the wellspring of Australia's future. The desolate region was home to indigenous people for millennia, then to the stockmen and adventurers who populate fantasies of the outback. It is the last place you would expect to find a businessman from China, let alone several thousand native Chinese.

Here, representatives of Chinese companies Chinalco, CITIC, Sinosteel, Ansteel, and China Metallurgical Group work alongside employees of BHP Billiton (BHP) and other mining companies, like Box's employer, Rio Tinto (RTP), in which China has an interest. Among their jobs—which include building power stations, desalination plants, and other infrastructure around the mines—is overseeing the removal of the iron ore, which is loaded onto 325-yard-long bulk carriers waiting by purpose-built wharves 500 yards long. (Construction has begun on a still larger installation, including a 1.1 mile long jetty.) About eight of these massive ships leave every day.

The red earth here contains an estimated 24 billion tons of iron ore. In the 1970s it left in smaller quantities and returned to Australia in Toyotas and Mazdas; now the dirt is going offshore forever, to house and transport workers in the cities of China. In this earth lies Australia's miracle economy, which has seen its gross domestic product grow 3.2 percent in the last year.

If you were searching for someone who has handled as much of this dirt as anyone in the past 40 years, you would find Box, 53, one of the 45,000 Australians who live and work in the Pilbara region. Everyone calls him "Boxy," as he is named on his navy-blue overalls and dayglo vest. "Call me any other name, I won't know who you're talking to," he says.

As a teenager in the 1970s, Boxy came up here to work for Hamersley Iron, building the town of Paraburdoo to support workers in the Pilbara mines. For 92 cents an hour he was one of "a tribe of dogsbodies," as he calls manual laborers, "carting sand and rocks, planting lawns, building retaining walls, then moving into the mine, crushing and screening iron ore, then loading it onto the trains."

Thirty-five years later Boxy is still here, now earning A$145,000 ($129,000) a year as a truck operator for Rio Tinto, his waist thickened by his love of beer, his eyesight aided by thick-rimmed glasses, and with a "hole in my hair that grew as big as my head."

By 7:30 a.m. he is in his room in a three-bedroom prefab donga in the miners' camp. A donga is a rudimentary shack, dusted with red dirt but fitted out with flat-screen TVs, sophisticated communications, and creature comforts. After breakfast and a change, he arrives at the West Angeles mine, one of a cluster of mega-mine sites in the Hamersley Ranges. By 8:30 he's at work.

In his time, Boxy has done "just about every job in mining," but his great love is driving big trucks. "After 11 years, I got to drive a 100-ton Wabco truck, working with loaders and bulldozers," he remembers. "We were just like boys in a sandpit." He now oversees a test project of driverless Komatsu trucks that cart out 300 tons at a time, moving 80,000 tons over two 12-hour shifts. When the drilling is good, he says, they can shift 120,000 tons in 24 hours. Without drivers, the trucks are more reliable, with radar sensors stopping them from crashing. They roll 24 hours a day.

While it's a complex industry, at the basic level mining is dead-simple: Dirt is dug from the ground, loaded onto trucks, taken to trains, then put on boats. It is the scale that stuns, particularly in this operation. The trucks are two stories tall. The trains are two miles long, and they pour like rivers down the mountains to the coast, where the carrier ships await. The million tons of ore the ships carry away each day is up by 70 percent in the past five years, and most of it is bound for China.

As large as the Pilbara project is, it is just one of many China has funded in a boom that has both enriched and troubled Australia. The Chinese aluminum company Chinalco owns about 9 percent of Boxy's employer Rio Tinto, which has been transformed by China's demand for iron ore into the second-largest miner in the world. Rio Tinto, which had a net income of $1.4 billion in 2003, now earns more than $10 billion a year, and 70 percent of those profits are from iron ore. Until last year, China was trying to buy more of the company, a move resisted by Rio, which would have had its largest customer even more involved in decision-making.

China buys A$22 billion worth of iron ore from Australia each year. In 2009, according to the Australian government, nearly a quarter of the country's exports, A$42.4 billion worth, went to China. The year-on-year growth was 31 percent.

The billions pouring in from China have helped Australia escape the global recession and enjoy a national unemployment rate of just 5.1 percent, about what it was before the financial crisis crushed many other economies.

"A 20-year-old off the street can come up to the Pilbara and earn A$92,000 a year," says Boxy. The median household income in Australia is A$67,000. "He can fly in and fly out 17 times a year for two-week stints, like I do, and he'd be silly not to."

The benefits for Australia in becoming China's quarry are quantifiable and visible, says Tim Harcourt, the chief economist for the government trade organization Austrade. "Our economic relationship with China adds A$3,400 per annum to every Australian household through exports, imports, and foreign investment," he says.

The greater part of China's interest in Australia lies in the ground. Chevron's Gorgon natural gas project at Barrow Island, off the northwest coast of Western Australia, will cost $37 billion to build and employ 6,000. China has committed to buying gas from the project for 20 years. Chevron (CVX) is also developing a liquefied natural gas (LNG) project at Wheatstone in the same area that will produce an estimated 8.6 million tons of LNG annually. As a consequence, property prices in central Pilbara rose by 230 percent last year, according to RP Data.

Chinese resource investment comes in three main forms: In the year leading up to July 2009, Australia saw A$42.4 billion in export demand, A$3 billion of direct investment in Australian companies, and more than A$4.9 billion in other project financing. More than 60 new direct Chinese investment projects have been approved this year by Australia's Foreign Investment Review Board and are expected to total A$23 billion over their lives. Huge mining projects need the type of capital that is not easily available within Australia, and 99 percent of current Chinese investment in the country is in the resources sector.

Direct investment has been politically charged, with Chinese bids to take over or increase their shares in miners such as Rio Tinto and Oz Minerals blocked by management and the government, respectively. (A portion of Oz Minerals was purchased in June 2009 for $1.35 billion, however.) The Australian Foreign Investment Review Board has issued guidelines suggesting that Chinese direct investment in Australian companies remain below 50 percent, but no such law has been passed. This has not harmed Chinese financing. In June the China Development Bank signed a $1.1 billion loan facility for the $1.8 billion Karara iron ore project in Western Australia, developed by Australia's Gindalbie Metals and China's Angang Steel, as well as deals to fund Aquila Resources' A$5.8 billion West Pilbara iron ore project and Fortescue Metals' various Pilbara iron ore projects.

The consequences of a A$6.6 billion trade surplus with China are evident on Australia's streets as much in what is unseen as what is seen: There are no dole lines, no rash of real estate foreclosures, and little of the social unrest that has followed economic downturns elsewhere.

Politically, China treats Australia as a serious partner. Three of its politburo standing committee members have visited Australia in the past 15 months, including Vice-President Xi Jinping in June, who noted the "advancement of the China-Australia relations at large." Talks are under way for a free-trade agreement, and an annual Australia-China Strategic Dialogue has been inaugurated.

Economic and diplomatic advances, however, have not fueled a warm national glow. Australia's proposal to increase taxes on mining became a national issue, precipitating a three-month barrage of anti-government campaigns paid for by the mining industry, which in part led to the removal in June of Prime Minister Kevin Rudd, a Chinese-speaking former diplomat. In the August federal election, the ruling center-left Australian Labor Party lost its majority due in large part to massive swings against it in the resource-rich states of Western Australia and Queensland. Supporters of the tax argue that the resources are not coming back and that Australia should participate more fully in the outsize profits. Those against include the mine operators and the many who work in the mines; mining salaries are, on average, Australia's highest, according to the Australian Bureau of Statistics.

The countries' diplomatic ties were also strained in early 2010 with the opaque trial and imprisonment in China of Stern Hu, an Australian convicted of accepting bribes and spying while working for Rio Tinto. He is to spend 10 years in prison. Hu was arrested a month after Rio Tinto rebuffed state-owned Chinalco's attempt to double its stake in the company.

Mining executives and other Australian businesspeople dealing with China were reluctant to comment on the Hu case. The Chinese embassy in Australia did not respond to a request to make a spokesman available.

China's hunger for Australian resources has aggravated the deepest divisions in Australian society over population size, immigration rates, taxation, and infrastructure. Bob Kinnaird, formerly of the Department of Immigration and Citizenship and now a private consultant, warns: "The huge growth of the Chinese presence in Australia, through the mining boom, students, tourism, and permanent migration, has been mismanaged to an incredible degree. The industries involved have urged extraordinary growth, but there hasn't been the infrastructure support to cope with it, and the result is that large numbers of Australians in the cities are worried that while the economic indicators are going one way, their real living standards feel like they are going the other."

Public opinion reflects this ambivalence. In new polling conducted by the Lowy Institute for International Policy, an Australian think tank, 73 percent of Australians say Chinese economic growth has been positive, but 57 percent say there is now too much Chinese investment. Economic power has brought fear, too: 46 percent believe China will pose a military threat within the next 20 years.

Fergus Hanson conducted the polling. "In some ways," he says, "these polls repeat what was happening with Japan two decades ago. In 1988, 70 percent of Australians said we had too much Japanese investment, even though they thought it had been good for Australia. The difference now is that the ambivalence over the future comes with fears about the motivations of an authoritarian central government."

In the markets, speculators, unable to bet on a yuan pegged to the U.S. dollar, use the currencies of China's main trading partners instead. That has helped make the Australian dollar the fifth-most-traded currency in the world—after the U.S. dollar, the yen, the pound, and the euro—even though Australia is the 18th largest economy. It has also made it more volatile. In May it fell by almost 10 percent in one day when traders sold it as a proxy for China, after Chinese growth forecasts were downgraded.

It's in the towns, however, where the boom is most powerfully felt—and least trusted, especially as projects are prepared for and sometimes abandoned. In Ravensthorpe, in the Pilbara, the shelving of a nickel mine cost a projected 6,000 jobs. ("When I first went to Paraburdoo in the Pilbara in the 1970s," remembers Box, "the place was only half-built from the 1960s boom. It had been shut down when the boom ended.")

Wandoan, a hamlet of 300 homes in outback Queensland, on the eastern side of Australia, is hanging by a Chinese thread right now. Life there has become contingent on decisions in steel towns in China or at the headquarters of Mainland-based multinationals. Mining giant Xstrata, to take one example, has been planning a A$6 billion coal mine that is part of a A$150 billion complex of projects in central Queensland to export coal and LNG to Asia.

Ray Mortimer is a local real estate agent and head of the town's business chamber. "The mine's been on the drawing board for a long time," he says, "and people feel like they're being strung along. Xstrata has bought 70,000 acres of the most beautiful grazing land for seven mines. Forty families were coming to grips with whether to take the money or stay where they've been for generations and didn't really want to leave. When they did leave, it caused the local supermarket to close down. Then Xstrata stopped buying. Then two months ago it was on again, but now it's up in the air again."

The consequence, in the small towns whose livelihoods hinge on those decisions, is a sense of helplessness.

"There are deeply mixed feelings over the mine," says Mortimer. "Older people have no sense that this is going to be good for the district, because all they see is their communities being decimated. For the businesses who are meant to profit, whether it's mine mechanics or hardware or all the small businesses in the towns, they don't know from one week to the next whether they're going to have a job or not."

Dina Fraser, whose family has owned the local pharmacy in Wandoan for 40 years, says the mine project has been anything but a blessing. "A lot of people have lost their properties to acquisitions by the mine and some have left town," she says. "If the mine doesn't happen, the town might just fade away. There's great upheaval about it and a happy farming community has been turned into something else, and you could say a lot of people wish the resources were somewhere else."

Unpredictability brings anxiety and hope in equal measure to the 8,000 Aborigines in the Pilbara, who hope their third-world living conditions might be raised by the China boom. Tony Wiltshire, an indigenous mechanic who runs a guild of Aboriginal businesses and tradesmen in the Pilbara, says the mining boom's benefits could sidestep the local population.

"The reality is that industrial discrimination against local people is huge," he says. "The big corporations fly workers in and out, and see these mines as short-term projects."

Charlie Williams, a 55-year-old Aboriginal electrician who had worked on the east coast all his life, decided to fly west and try his luck three years ago. "I went to Perth and qualified as an electrical contractor," says Williams, who now works on electrical maintenance in BHP Billiton's rail yards at Nelson Point, on the Pilbara coast. "My main aim is to get Aboriginal apprentices into work," he says. "There's a terrible cycle of poverty for Aboriginal people, and the mining industry can either break that cycle or it can pass us by."

Williams, a graying, bespectacled, and fair-skinned Aboriginal man, has Chinese blood on his mother's side. Chinese immigration to Australia started in the 1850s gold rushes, and that diaspora spread through the country, including to north Queensland, where Williams' people come from. "I'm color-blind on these things," he says. "China is just a customer, and if they can bring us jobs, that's what China means to me."

But if it's just a customer, what are its obligations to the supplier? Tony Wiltshire asks a question that is a perennial for citizens of a land that is used as a quarry: "Are they just here to make a buck and go, or build something sustainable? The question is whether we're going to have mines with towns, or towns with mines."

That question speaks to the rest of Australia. In June, Wiltshire was one of many locals surprised to see the Sino mine project in the Pilbara advertise for riggers, crane operators, and fitters who speak Mandarin. As an unhappy union official named Joe McDonald put it: "The only bloke I know who can speak Mandarin is Kevin Rudd."

John Sutton, the national secretary of the Construction, Forestry, Mining and Energy Union (CFMEU), the biggest representative of Australian mine workers, voices a widely held concern: "As more Chinese investment comes in, it's inevitable that they'll want to bring in their own workforce, with lower costs and conditions than the locals. Why else would a company advertise in a way that shuts out pretty much every Australian job applicant?"

Or, as Kinnaird puts it: "We've seen it before in the 1980s, when Japanese companies brought in Japanese-speaking workers. When the Japanese economy busted and they pulled out of Australia, they left nothing for the local workforce."

It is all a jarring turnaround in a long relationship. For most of the 20th century, Australia had an immigration policy that was biased against non-Europeans. Although Australia recognised the People's Republic of China in 1972, ahead of many Western governments, trade with communist China was minimal until this decade. A precedent existed, however, in Japan, which went from Australia's No. 1 military threat to its biggest trading partner in the space of a generation.

With such an unexpected and rapid windfall, from a country with a suspect record on human rights and unknown intentions for its trading partners, it is perhaps normal for many Australians to look for a catch. Fergus Hanson's polling shows a recent pushback against China. "Record numbers of Australians support our alliance with the USA," he writes. "Part of that is the popularity of Barack Obama, but a bigger part is fear of China." These findings were backed up by a survey of 2,000 investors in January 2010 by Fairfax Media newspapers, in which only one in five had positive feelings about Chinese investment. Others were worried by China's human rights record, or that China's state-owned enterprises would act against Australia's interests.

At street level, there is little evidence of ethnic tension. Chinese businesses are long-established not only in Australian cities but in small rural towns. "Chinese immigrants were here very soon after the Europeans," says Kinnaird, "They've long been a part of Australian life."

There has been no recent reporting of race-related violence against Chinese in Australia, as compared with the well-publicized attacks on Indian students in 2009, the riots directed at Middle-Eastern immigrants in 2005, and national anxiety over asylum seekers from South Asia. Says Kinnaird, "The tension you do see is related to labor markets specifically, through workers coming in from China on short-term visas, rather than a broader social phenomenon directed at Chinese-Australians."

For union leader Sutton, it boils down to what the Chinese companies build and leave here. "The big mining companies have tended to see themselves as visitors to an area, flying in and flying out," he says. "What's needed is for governments to insist on them contributing to the building of schools, roads, hospitals, permanent housing, all the things that are going to leave these towns better than before. As long as the companies aren't doing that, the fear for Australia workers is that Chinese companies will just be building camps to fly in and fly out Chinese workers on temporary visas, to work for less pay and worse conditions, and deprive Australians of the benefits that they are due."

One of the local councils in the Pilbara, Shire of Ashburton, recently refused permission to Rio Tinto to expand its camp around the Tom Price mine. Instead the company has been asked to invest in facilities that will remain after the mine is closed, to spend $247 million on housing, an air strip, and other infrastructure at the town of Pannawonica. This kind of investment, and the employing of locals, is the only move that is going to convince skeptics like Tony Wiltshire.

"We were at a town meeting the other day when a representative from a mining company said, 'Come on, we're all up here to make a dollar.' The locals in the room looked at each other and thought, 'What?' We live here. We can cope with the hot summers. We're here for the long term. We are actually better for the multinationals than the contractors they fly in and fly out. We just need them to wake up to the fact that they, and we, are all in it for the long haul."

Like many miners making money off the boom, though, Michael Box is optimistic.

"I'm a simple man, but I've had a good life," he says. "My total salary and superannuation is A$145,000 a year, and when I'm in the Pilbara I don't have to put my hand in my pocket. I have a house in the city and an investment property and a 1972 Falcon pickup. I couldn't have had this life without mining."

And though he has seen booms go bust, his confidence stretches as far over the horizon as Australia's economy seems to. "When my 18-year-old son Christopher was wondering what to do with his life, I showed him everything I've got from driving trucks and carrying dirt," says Box. "He's decided to study mining engineering. I'll be proud as punch if he ends up being one of my bosses."

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