Iron Hand
Bloomberg Businessweek Middle East|16 August, 2018

How A Mysterious Hack And Four Arrests Transformed A Mining Giant’s Relationship With China.

Kit Chellel, Franz Wild, And David Stringer

For eight years, Stern Hu rose every morning at 6 a.m. in Qingpu Prison near Shanghai. He and the dozen men who shared his cell would blearily pull on their blue-and-whitestriped uniforms and line up in front of their bunks for the day’s first duty: greeting the guards. “Good morning, officer!” they’d shout. “Thank you for taking care of us, officer!”

Everyone in Brigade No. 8, the foreign prisoners unit, knew Hu. The quiet 61-year-old stood a head taller than the rest. Chinese-born, with an Australian passport and a shock of white hair, he’d been a star at Rio Tinto Group, one of the world’s largest mining companies, before being sent to prison in 2010 for stealing trade secrets and taking bribes. The Chinese government said his actions had cost the country’s steel industry as much as $100 billion.

To the members of Eight Brigade, Hu was also the guy who ran the library. After a breakfast of rice gruel with a spoonful of pickled vegetables, he’d take his post at a small desk next to some bookshelves at one end of the common room. He was supposed to keep track of who borrowed the books, but a former fellow convict says he let people do as they pleased. Most of his day was spent translating things for the guards. At 9 p.m., when the automatic lock on his cell door clanged shut, he’d lie on a thin mattress and listen to his bunkmates snore or cry out in their sleep.

Hu also completed self-denunciation classes, writing out long scripts apologising for his actions. His reward for this, combined with his library service and reputation for good behavior, was to have his sentence reduced from 10 years to eight. On July 4, Hu, one of the most senior Western executives to see the inside of a Chinese prison, was set free.

As Rio Tinto’s chief representative in Shanghai, Hu had once helped the company ride China’s economic miracle to record profits. Hundreds of millions of tons of iron ore, supplied by Rio and sold by Hu, were forged into steel for cars, bridges, and skyscrapers. Then, in 2009, the relationship soured, and Hu and three of his colleagues were arrested as part of what highly placed sources describe as a targeted campaign—one they say involved a major hacking operation and cost the company more than $1 billion.

What happened to Rio has never been reported in depth. The company declined to comment for this article, and the Chinese government denied any knowledge of a targeted campaign. Over the course of three years, however, more than 20 sources—including current and former government and intelligence officials, current and former Rio Tinto employees and executives, and private security consultants—revealed details of Hu’s incarceration, the company’s interactions with Chinese officials, and the hacking allegations. They asked not to be identified because of the matter’s sensitivity. Many said the experience had been unforgettable, even traumatic. One former executive called it the most nightmarish period of his career. Taken together, their accounts portray one of the first and most devastating instances of China’s now-famous hackers spying on a Western corporation, and a cautionary tale about the country’s ability to influence global trade.

Sixty years ago, Mao Zedong predicted China would become the world’s top steel producer. His plan to have rural communes build thousands of humble “backyard” furnaces produced some memorable propaganda but little steel worthy of the name. At the start of the 1950s, annual output in China was about 160,000 tons, sufficient for a few skyscrapers. But after economic reforms opened production to the private sector, the figure rose steeply. By 2003 the country was churning out 200 million tons of steel a year, enough to erect 3,000 Empire State Buildings.

This boom took place even though China has little quality iron ore, which is superheated, purified, and mixed with oxygen to make steel. Instead, it relied on a handful of exporters, especially Rio Tinto. Formed in 1873 by London financiers seeking to buy the Rio Tinto copper mines from the Spanish government, the company grew into an international conglomerate with operations in Africa and the U.S.—an apex predator of mineral deposits, selling everything from diamonds to talc. Its transformation was secured in 1966 by the opening of an iron ore mine in the Pilbara, a remote region of northern Australia where the dirt itself is the color of rusted metal.

By tradition, iron ore markets were orderly and only modestly lucrative. The biggest buyers and sellers in each region negotiated the price annually. This worked fine during the 1990s, when Japanese mills were the biggest customers and the price held steady at $10 to $15 per tonne. But Chinese demand changed everything. In 2005 the global benchmark price doubled. When Rio sent negotiators to China to hammer out a deal, they found something very different from the market in Japan.

China by then had some 4,000 steelmakers, from stateowned behemoths to scrappy family-owned mills. These ore buyers, it turned out, were acting like traders, snapping up shipments under one-year contracts and flipping them for a quick gain on the open market. Word spread among Rio executives that the son of iron ore head Sam Walsh had been approached in Australia, where he was working for a separate business.

A Chinese classmate from his MBA programme sat down in his office and offered the market price, plus a few million dollars, if he could arrange for a Rio shipment to be sent to a particular port. The offer was declined.

Throughout the mid-2000s, 2-kilometer-long trains loaded with iron ore rumbled to the Australian coast to fill cargo ships headed for Qingdao and Tangshan. In August 2006, Rio held celebrations at its global offices to mark 40 years of exports from the Pilbara. A marketing executive named Stern Hu arranged a fireworks display over Shanghai’s Bund waterfront district, watching in awe as the pyrotechnics danced with the skyline’s neon glow. That year, Rio announced a record second-half profit, driven, in part, by $1.8 billion in sales to China. But a crisis was coming that would threaten the company’s existence.

In May 2007, Tom Albanese became Rio’s chief executive officer. A New Jersey native, he’d gone to college in Alaska so he could devote his spare time to mountain climbing; he spent his school holidays carrying rocks down slopes for geologists. When he first started working for Rio in the ’90s, he turned up at its headquarters in London’s Aldermanbury Square wearing his best Alaskan jacket, a bold plaid. He was directed to the nearest tailor.

Within months of Albanese’s appointment as CEO, rumors began to circulate that Rio’s biggest rival, BHP Billiton Ltd., was planning a takeover bid. In November the talk became reality with a $150 billion offer, then the largest in corporate history. Rio rejected BHP’s overtures, the bid turned hostile, and Albanese’s focus shifted to survival.

A few months later, he was on a monthly call with about 100 employees when news flashed on computer screens that state-owned Aluminum Corp. of China, known as Chinalco, had staged an overnight raid on Rio’s shares. Without warning, the Chinese government had effectively acquired 9 percent of the company’s stock and become its biggest investor. The move was widely seen as an attempt to stop BHP’s takeover, lest the combined entity choke Chinese factories in a monopolistic grip. (Chinalco didn’t respond to a faxed request for comment.) That same afternoon, Albanese and another executive met Chinalco President Xiao Yaqing at Rio’s headquarters. After some stiff handshakes, Albanese welcomed Xiao to the company. Anyone who could help ward off BHP was a friend.

Around the same time as the Chinalco raid, however, Rio executives noticed their computers were acting strangely. Keyboard commands were taking a long time to register onscreen. Emails opened and closed by themselves. Alarmed, Rio’s board contacted MI5, Britain’s domestic spying agency.

The security service didn’t seem interested at first. Rio sold metal and rocks. But a few weeks later, according to two people familiar with the conversation, a company representative was summoned to an unmarked building near London Bridge. He was asked to surrender his phone, belt, and watch. Then he went upstairs to meet a man who didn’t provide his name.

Your communications are insecure, the official said. What does that mean? the employee asked, incredulous.

Data? Emails? Phone calls? Text messages?

Yes, the official replied. Six sovereign states can see them, he specified.

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