The Economist - UK (2021-11-20)

76 Finance&economics TheEconomistNovember20th 2021

increasedinlinewiththatofcopper,says

MrTrain.AndthatwouldhaveraisedChi­

na’sinfrastructurecostsbyanextra$1trn

orsobetween 2000 and2015.

In some cases China’s appetite has

helpedcreatenewfinancialsystems.Iron

ore,themainingredientofsteel,isa good

example.Between 2003 and 2016 China’s

importsoftheorerosetenfoldasitbuilt

massesof steel­intensive infrastructure.

Todayitistheworld’sbiggestconsumerof

ironore,forwhichithasalsobecome“the

world’smostsophisticated”market,saysa

managerata bigminingfirm.

Buyersinothercountries,suchasJapan

andSouthKorea,tendtopreferlong­term

contracts.InChinaa dynamicspotmarket

hasemerged,whichgivespuntersoppor­

tunitiestoresellexcessoreandinforms

thepriceoflong­termcontracts.Dozensof

seaportsactasminiiron­oreexchanges.

Theyhavestoragefacilitiesandserveas

placeswherecustomerscanbuyandsell

ore.Analystslookattheportsidepriceto

gaugetheoutlookforthemarket.

Chinese trading firms are becoming

moresophisticated,too.Thebiggest,such

as PetroChina and Sinopec, two state­

ownedoilcompanies,aregettingbetterat

strategicallysteeringthemarket,notesMi­

chalMeidanoftheOxfordInstituteforEn­

ergyStudies.Theymimictacticsusedby

Europeantraders. That includes placing

betstoshiftthepriceoftheDubaibench­

markwhich,inpart,helpsinformthepric­

esintheirlong­termcontracts.OtherChi­

nesetradersarescalingup.InMarchcof-

co, a foodgiant,announcedplanstofloat

itstradingarm.

China’scommodity­futuresexchanges

arenowworld­beating.Thethreebigones

areinDalian,Shanghai andZhengzhou.

Thenumberofcontractstradedonthesein

2020 wassixtimeshigherthanonAmeri­

ca’scmeGroup’sexchanges(seechart2).In

termsofvaluetheywereroughlyequiva­

lent.FromJanuarytoJunethisyeartheten

most­tradedagriculturalfuturescontracts

wereallChinese.Sowereeightofthetop

tenmetalscontractsandfiveofthetopten

energycontracts.

Chineseexchangeslookdifferentfrom

Westernones.Theyaredominatedbyre­

tailinvestors(whoarenicknamed“chives”

becausewhentheygetcutdown,theysoon

growback).Estimatesfrom 2016 suggest

thatthisgroupholdsaround85%ofopen

positions,comparedwith15%onWestern

bourses.Theytradesmallerlots,too,and

holdthemforlesstime,whichaddstoli­

quidity.A lackofexpertisemeansretailin­

vestors tendto accentuatepriceswings.

Forthemostpart,theyarelosingmoney,

saysXiaoJinofOrientFutures,a broker.

ForofficialsinBeijing,thenextstepin

the development ofChina’s commodity

markets isto turn thecountry’sbench­

marksintoglobalstandards.Onereason

forthisistoboostuseoftheyuan,whichis

usedtoconductonly2­3%ofcross­border

commoditytrades,comparedwiththedol­

lar’sshareof38%.Anotheristhatofficials

arewaryofWesternbenchmarks,suspect­

ingthattheymayhavebeenmanipulated.

UntilnowChina’swayofprotectingits

manufacturersandconsumersfromprice

volatilityhadbeenthroughisolation.Only

selectstatefirmscouldtradeonforeign

commodity­futuresexchanges,andonlya

smallgroupofinternationaltraderscould

access Chinese ones. Those exchanges

have no warehouses—which are where

physicalcommoditiesaredelivered—out­

sidethemainland.Foreignexchangesare

notallowedwarehousesinsideChina.

Butthenewstrategyofbenchmarkna­

tionalismisleadingChinatoslowlyloosen

therulesforinternationaltraders.Around

80 commodity­futurescontractsaretrad­

edonitsbigexchanges,nineofwhichare

availabletoforeignpunters. Thatcovers

mostly imported commodities, such as

copperandoil. Someofthesetrade on

Shanghai’sInternationalEnergyExchange,

a subsidiaryofthecity’sFuturesExchange

designedtoappealtotradersabroad.As

moreinvestmentfirmstakeadvantageof

arbitrageopportunities,thepricesoffu­

turescontractsonWesternandChineseex­

changesaremoreoftenmovingintandem.

Moreopeningupisintheworks.In

SeptembertheStateCouncil,China’scabi­

net,saidit wouldlaunchmorefuturescon­

tracts,acceleratetheparticipationofover­

seastradersinChinesemarketsandbuild

another yuan­denominated exchange

aimedatsuchpunters.

Twobigproblemsstandinthewayof

theseambitions,though.Oneisshifting

commoditydemand.Overthenextdecade

thisislikelytobecomemoreevenlyspread

aroundtheworld,arguesJeffreyCurrieof

GoldmanSachs,a bank.Climate­friendly

policiesrequirevastamountsofmetalsto

build wind turbines and power grids.

Meanwhile,China’seconomywillslowly

becomemoreservices­oriented,reducing

theneedforcommodities.Itsconsump­

tionofsomemetals,suchasaluminium,is

expectedtopeakinthenextfewyears.

Anotherhurdleistrust.China’scom­

modityexchangesarecloselytiedtothe

state.Seniormanagersmovebetweenex­

changes and government departments.

Authoritiesintervenereadilyinmarkets.

InvestorspointtoChina’sinterventionin

equitymarketsaftera downturnin2015.

Backthen,it bannedshort­sellingandtold

investors with big stakes in companies

thattheycould notsell shares.Allthis

makescommodityinvestorsworryabout

thepredictabilityofChinesemarkets.

Indeed,Chinahasdabbledwithcom­

modity­market intervention in the past

year,aspriceshavegoneberserk.Authori­

tiesworrythatrisingcostswillsqueezethe

manufacturingsector.Tooffsetthis,inthe

summertheysoldsomeoftheirmetalre­

servesandcrackeddown onspeculative

hoarding.InSeptembertheyauctionedoff

oilreserves,too.Inbothcasestheextra

supplywassosmallthatithadnolasting

effectonprices.Butanalyststhinkthegoal

wasnottomovethemarketbuttosignalto

investorsthatregulatorsarewatchingit.

The energy transition will probably

makecommoditypricesmuchmorevola­

tile, as demand and supply adjust over

timeandoneoccasionallyovershootsthe

other.Chineseauthoritieswillhavetode­

cidewhethertointerfereorletmarketsre­

spond.The paththeychoosewilldeter­

minethefutureofcommoditymarketsfar

beyondtheirborders.n

Avoraciousappetite

China,%ofworldconsumption

Sources:BP;CRUGroup; IMF; OECD; UN;

WorldBureauofMetalStatistics

1

806040200

20 2020

GDP

Population

Rice

Naturalgas

Beefandveal

Oil

Wheat

Silver

Gold

Soyabeans

Pork

Lead

Coal

Refinednickel

Steel

Refinedcopper

Refinedaluminum

Ironore(total)

Ironore(seaboneimports)

The place to be

Number of commodity-futures contracts

exchanged, 22, bn

Source:WorldFederationofExchanges

2

0.50 1.0 1.5 2.0 2.5

ICEFuturesUS

LondonMetalExchange

BorsaIstanbul

MultiCommodityExchange of India

ICEFuturesEurope

Moscow Exchange

CME Group

Zhengzhou Commodity Exchange

Shanghai Futures Exchange

Dalian Commodity Exchange