(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Dec 7 Is there a
longer-term cost to be paid by China for its ongoing efforts to
curb what the authorities in Beijing see as unjustified price
spikes in commodity prices on the country's futures exchanges?
Certainly it is becoming clear that the authorities are
continuing to ramp up their campaign against the so-called hot
money pumping up commodity prices, with new measures designed to
cool price action in iron ore, steel and coal among others.
In recent weeks the Dalian and Zhengzhou commodity exchanges
and the Shanghai Futures Exchange have all toughened trading
requirements several times.
The measures imposed include raising trading margins, hiking
transaction fees and imposing trading limits.
For example, the Dalian Commodity Exchange (DCE) lifted the
trading margin for its coking coal and coke contracts three
times within the space of week, ultimately taking it to 15
percent effective from Nov. 11.
These measures are designed to cool speculative flows into
commodity futures as Beijing becomes increasingly concerned
about price spikes and the potential for bubbles in futures
markets impacting on the real-world economy.
DCE coking coal has dropped about 22 percent since
its closing peak this year on Nov. 14 to a close of 1,280 yuan
($186) a tonne on Tuesday, showing the measures to cool the
market have had some impact.
But the contract is still some 126 percent higher than it
was at the start of the year, which is perhaps a realistic
reflection of the state of the market.
Coking coal demand from China has been strong this year
given higher-than-expected steel output and earlier steps by the
authorities to limit domestic coal mining.
By comparison, free-on-board coking coal prices in
Australia, the world's biggest exporter of the fuel mainly used
to make steel, have quadrupled this year to more than $300 a
tonne. Demand from China has outstripped supply available from
an industry that has spent the last five years downsizing as
prices fell from record highs in 2011.
The coking coal price action this year underscores the
dilemma facing the Chinese authorities.
While the overall increase for the year is a reflection of
the global state of the market, the authorities would have been
concerned about the rapid pace of the much of the year's gains,
the bulk of which came in a frenzied two-month period from
mid-September to mid-November.
The coking coal contract doubled from 855 yuan a tonne on
Sept. 13 to 1,644 yuan by Nov. 14, a rally that prompted the
ongoing measures to force speculators from the market.
CHANGES UNDERMINE CONFIDENCE
The problem is that every time the authorities change the
rules in order to force a change in prices, they surrender some
of their credibility as a safe, reliable destination for
It's no secret that China, as the world's largest producer,
consumer and importer of commodities, believes it should be
centre-stage when it comes to trading and price-setting.
To this end China has increasingly touted its exchanges as
where the world should be heading, even if progress on some
fronts has been slow.
So far efforts to set up a viable crude oil trading hub have
come to nothing. It's yet to be seen whether a state-backed
commodity hub recently launched in Shanghai that aims to become
the main Asian trading point for natural gas will take off.
China has had more success in establishing dynamic markets
for steel, iron ore, coal and agricultural commodities such as
But exchanges like Dalian and Zhengzhou cater largely for
Chinese retail investors, as well as smaller-scale trading
While not absent, larger companies and foreign banks and
trading houses are less prevalent. Part of this may be because
they aren't fully comfortable investing on exchanges where the
rules can be - and are - changed frequently in order to meet
desired official outcomes.
A Western bank or trading house would undoubtedly prefer to
deal with the Singapore Exchange, where the rules are more
constant and akin to other major global bourses, such as ICE and
In essence, ultimately the Chinese authorities are going to
have to decide whether they want their commodity exchanges to be
true global players, attracting a broad spectrum of users, or
whether they should remain as sort of casinos for yield-chasing
Once that decision is made, appropriate regulations can be
made, implemented and maintained.
But as of now, every time the authorities change the rules
for a short-term aim, they serve to remind investors why they
should be cautious about trading commodities in China.
(Editing by Kenneth Maxwell)