Home' Trinidad and Tobago Guardian : July 5th 2015 Contents The world's biggest con-
sumer of commodities is
no longer simply an insa-
tiable buyer of everything
from coal to gold. A rich-
er, slower-growing and
choosier China is becom-
ing an exporter as well as
It also is using its clout to change the way
commodities are traded, bringing markets
closer to home and drawing up rules that suit
its needs instead of those of producers and
This week, for example, Chinese regulators
gave the go-ahead for foreigners to trade crude-
oil futures in Shanghai. When that starts,
probably by November, it will be the first time
that outsiders have been allowed to buy and
sell a listed Chinese futures contract.
This is part of a clear plan to change the
way commodities are traded, said Owain John-
son of the Dubai Mercantile Exchange. The
exchange in Dalian, a port through which
many commodities enter China, has become
the world's biggest trading center for iron ore
in less than two years, and Shanghai has devel-
oped big markets in nickel and copper.
Many expect more gold trading to move to
China too. Allegations of rigging have rocked
the current hub, in London. China, the world's
largest producer of bullion, announced on June
26 that it would launch a yuan-denominated
gold contract in Shanghai by the end of the
China is reaching "critical mass" in its influ-
ence on commodity prices, said Grant Sporre
of Deutsche Bank.
This is a much more sophisticated way of
wielding clout than in the past. A 2010 attempt
by China to corner the market in rare earths,
17 exotic metals used in tiny quantities in
many modern devices, failed spectacularly.
China, which at the time produced 97 per
cent of the ores for rare earths, banned exports
in the hope of bringing the business of pro-
cessing these deposits onshore. Rare earths
proved not so rare, however: Companies else-
where revived old mines and ramped up pro-
duction, and by late 2011 prices had plunged.
The goal now is to seize control of price
formation. The main global benchmark for
crude oil, Brent, relies on data compiled by
price-reporting agencies about deals done
during a short "window" in the middle of the
State-controlled Chinese oil companies have
been playing an increasingly active role in that
process; but, from the Chinese government's
point of view, bringing the trading closer cuts
costs and reduces the impact of events in far-
away places from which the country imports
"They ask, Why should a Norwegian oil
workers' strike affect our economy?,'" Johnson
As the world's biggest importer, China wants
its own benchmark instead, based on trans-
parent and comprehensive data, priced in its
own currency and governed by its own laws.
The Shanghai oil-futures contract aims to
achieve that goal.
As exchanges in mainland China grow, rivals
are feeling the squeeze. The Shanghai Futures
Exchange is impeding efforts by Hong Kong
Exchanges and Clearing to expand its met-
als-trading business, following the acquisition
of the London Metal Exchange in 2012. In
March the Shanghai exchange threatened to
sue its Singaporean counterpart for copying
a futures contract.
Several obstacles lie ahead, however. Out-
siders will not be eager to bear the exchange-
rate risk of trades denominated in yuan. The
security of the English legal system in case of
disputes will be hard to match. Confidence
has been dented by a scandal involving Chinese
commodity warehouses, in which metals were
used as collateral for letters of credit to get
around foreign-exchange restrictions.
China is putting a fresh imprint on com-
modity markets in other ways. As its economy
slows and investment gives way to consump-
tion as the mainstay of growth, the country's
needs are changing.
Demand for primary products used mainly
in housing and infrastructure, such as coal,
iron ore, steel and aluminum, is slowing. China
already has hit "peak coal," and consumption
is falling amid worries about air pollution.
Peak steel is not far off, with growth of only
one per cent to three per cent likely after a
dip last year. Even copper is fading a bit: Con-
sumption used to grow faster than GDP, noted
Colin Hamilton of Macquarie, a bank, but now
A related headache is that China, once a
sponge for raw materials, is becoming an
exporter of things such as stainless steel and
aluminum, thanks to cheap and abundant
power, growing technological capabilities and
a glut of smelting capacity.
Instead exporters must look to other com-
modities for growth. Richer Chinese consumers
are stoking demand for dairy products, meat,
chocolate and jewelry. That affects both those
items directly and the commodities used to
While imports of iron ore wane, for example,
demand for soybeans, which are used mainly
to feed livestock, continues to grow rapidly.
That is partly because China has paved over
many soy farms, but it's mainly because meat
consumption is up.
It is not certain that this trend will persist,
of course. The average Chinese already con-
sumes more calories than the global average,
and almost 85 per cent of the American level.
A healthy switch from pork to chicken would
cut demand for agricultural commodities,
noted Capital Economics, a consultancy. Her-
shey, the American candy company, has had
to trim its forecasts for sales growth in China.
Whether China adopts old Western habits
or opts for thriftier, healthier ones will shape
the commodities industry, but its impact on
trading is even more immediate. As every good
capitalist knows, the customer is always right.
China is using its buyer's clout to ensure that
commodities are traded the way it wants.
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
China tries to
corner the markets
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JULY 5 • 2015
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