Pricing power

Copper prices have been on a tear

Perhaps it is perplexing that a country so determined on fighting speculators was reported to have at least 63 futures markets housed on its commodity exchanges as of February this year. Participants can punt on a wide range of prices, including unlikely items like eggs and apples. Some large firms do need to hedge their trading risks but the huge majority of activity comes from individuals that hold the contracts for a few hours, the China Futures Association adds, which makes for more volatile trading too.

Yet Beijing’s battle cry against market speculation is getting louder, all the more so since producer prices rose more than 9% in May in the biggest climb in factory gate inflation in 13 years. The fear is that these increases will soon be passed onto consumers, hence the focus on clamping down on improper trading of industrial commodities like iron ore, copper and coal.

Warnings last month from Li Keqiang, the Chinese premier, against “malicious speculations” took the familiar line that peaks in pricing don’t reflect the realities of supply and demand. Domestic steel mills and trading houses have been ordered to rein in bullish bets and the regulators are reviewing the books of the country’s largest state enterprises in a bid to stop them taking speculative positions offshore. The National Development and Reform Commission, the top economic planning agency, has also been enlisted to bring order to commodity price indices.

Some of these commodity indices are “not scientific and distort market views”, Wang Guoqing, a director at the Beijing Lange Steel Information Research Centre, told the Global Times.

There was recognition that market fundamentals have some bearing on the price hikes, when the National Food and Strategic Reserves Administration announced that it would be releasing a portion of its stockpiles of copper, aluminium and zinc into the market.

The state media was soon reporting that the release of the reserves will bring metals prices back into “a more reasonable range” but commentators outside China have needed more convincing that the plan will be quite so effective.

The levels of these stockpiles is often a state secret but the best guess is that the sales won’t account for much more than a few percentage points of China’s annual demand for the commodities in question, which won’t be enough to have a significant impact on prices.

The counterargument is that Beijing is trying to talk down prices and hoping that a bit of bluster will take some of the heat out of the market. When Li Keqiang ruminated against soaring prices in May there were some declines and iron ore fell sharply again this week on news that regulators have launched another probe into hoarding and speculation in the spot market.

There’s a strong argument that softer prices in recent days are as much a result of the Federal Reserve’s hawkish turn as anything that the Chinese have been able to achieve. Analysts claim further that the focus on shadowy speculators misses the more fundamental point that Beijing cannot boss the commodities market around. Although China is the largest buyer of many raw materials, it hasn’t been setting the pace in this year’s price rises. Instead the market is moving on a tide of demand from Western economies flooded by fiscal stimulus.

The situation is a mirror image of the aftermath of the credit crunch in 2008, when spending from the Chinese was the key factor in getting the global economy going again. A massive build-out of roads and railways and an accelerated urbanisation of its population fuelled huge demand for energy and raw materials. Today the stimulus is flowing in a different direction, with another $1 trillion of spending ahead in the US. That will lift commodity prices again, while longer-term trends in sectors such as renewable energy and electric vehicles are going to bolster demand for huge amounts of industrial metals for years to come.

“Intervention can help alleviate the pressure but it’s hard to change the trend,” Hao Hong, head of research at Bocom International, told Bloomberg. “Commodity inflation is driven by global demand growth, rather than by China. China is only a price taker.”

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