As Germany and the USA are taking strong measures to curb speculative trading in financial assets, the commodity markets too should not be allowed to be driven by wild speculation supported by flow of low-cost money coming from institutions with soft budget constraints.
Steel prices have literally ceased to be driven by pure consumption, demand and supplies, but, by speculative inventory positions of buyers, rumours and half-baked information about trends in global market, weakly researched reports and now, additionally, the pure speculative trade in futures.
The result of this has been quite predictable. Steel prices have seen massive short-term fluctuations. It is normally difficult to forecast accurately pricing conditions in a volatile and uncertain market.
It is because most analysts will look at the real demand and supply conditions which will invariably leave out speculative forces in play. If one takes them into account, in whichever possible way, the task becomes usually easy.
Speculation has a well set pattern. Behaviour of agents become, in fact, more predictable and they act almost in an identical manner as they all respond to the same volume of information such as widely sold news and analysis.
The current state of steel prices has been well predicted and it will not be difficult to do so in the coming days too.
But, the question here is not how to take a correct position on future prices, but how to curb irrational pricing of this crucial intermediate product and save it from speculators? clutches.
One cannot expect this to happen from the resultant outcome of actions of a very large number of individual buyers and sellers who vow not to get engaged in a game of speculation in the market.
If one has to look for correction, it is only the government laws, regulations and international agreements in the right earnest.
Free run of the commodity markets has brought more distortions instead of the expected gains from a possible price discovery. With huge positions taken on inventory, the industry has lost efficiency.
The ?just in time? management of stock is slowly turning into a thing of the past. Supporters of the existing system advise the players to hedge sufficiently to minimise risks. Everybody cannot do it, as hedging is not an easy thing to understand and use. Not that every position taken right now can be hedged. Also, it has its own risk and prices to pay for.
Raw materials for the steel industry, which are more homogeneous than steel products are, have seen some of the worst of volatility in prices. It started with iron ore spot market and now it is coking coal that has lost market logic in its price trend.
If the annual contract prices of coking coal and iron ore were rigid and irrational through the year, spot prices and the currently developed quarterly prices, reportedly in certain cases to be based on the previous quarter prices of steel, are equally irrational.
For example, if index based pricing is followed, then iron ore prices for the coming quarter will have to be raised by about 30 per cent at a time when steel prices have fallen so too iron ore spot prices by about the same margin from their peaks.
Globally, there is also a need to tax heavy profits from transactions in mining assets which are not yet developed or operational.
The assets, good or bad, are changing hands and each in the line making handsome profits. Most such assets have not been backed by adequate research and due diligence, not to talk about intent of the buyer to develop these properties.
They are surviving on the readily available cash from the banking system meant to support speculative risk.
A ?subprime? crisis could hit the economies largely dependent on mineral resources. There is a need for affirmative and well researched policy actions to bring the real market forces back into action.
(Views expressed in the article are personal)asfiroz@yahoo.com