China, clumsy commodities giant, making bigger waves

Written by Reuters | Beijing | Updated: Jun 27 2009, 01:56am hrs
For China, the trade dispute raised this week with the West may, in retrospect, seem minor compared to the ructions that await Beijing as its state firms start to punch their weight on global commodity markets. The US and EU complaint to the World Trade Organisation accuses China of unfairly restricting exports of several metals such as zinc, steelmaking ingredient coke and bauxite, the raw material for aluminum; at the same time India and Australia complained about Chinese firms dumping cheap aluminum goods.

Both are the result of China using tried and tested tax or tariff policies to ensure resource supplies and protect domestic industry. But as its domestic demand begins to outstrip its own resource base, those policies will become less effective. For commodity markets, the concern is that Beijing could utilise its growing trade network and strategic stockpiles as its next best lever to protect its economy.

I think the lesson learned over the last two years was that China was very much the price taker, in the sense it was more supply sensitive rather than price sensitive. Hence you have this massive commodity boom, said Mark Pervan of ANZ Bank. I suspect it will be a different in the next 10 years with China much more heavily involved in the global market.

China is effectively the new boy in town, a very big boy, and realising it can throw its weight around. But it needs a major education process and a better regulatory environment to avoid creating massive volatility. Chinas state-owned firms dont have a particularly illustrious history in international markets. An apparently rogue short position on copper roiled the London Metal Exchange in 2005; oil prices fell sharply in late 2004 as the offshore unit of trader China Aviation Oil nearly collapsed under a $550-million trading loss.

But that isnt stopping Beijing from taking action to see that it has some influence on the trade of commodities, allowing it either to soften the impact of its expanding demand or to profit from it. If its steel industry fails to reach a deal in the next week with stubborn miners for lower iron ore prices, it could mark the end of a decades-old system of annual contracts; PetroChina (0857.HK) has hired traders in Houston and London and this week closed a $1 billion acquisition in Singapore that will give it a powerful position in the oil pricing hub for Asia.

China is also grooming the Agricultural Bank of China to be a world player in grains trading, and has teamed up with Japanese firms in a move that will give it more expertise in agricultural markets, where it is expected to become a major player eventually as its food demand exceeds local supply.