China loses pricing power in trade

08:08, May 18, 2010

China has almost completely lost its pricing power in international trade, as the prices of key commodities, including iron ore, oil, copper and food, have soared this year amid mounting imports by the world's second-largest economy, China's Ministry of Commerce warned Sunday.

Yao Jian, a spokesman for the ministry, noted at a business forum in Beijing that one major challenge China faces and will have to conquer is having no say in the pricing scheme of bulk commodities, Beijing Business Today newspaper reported Monday.

The long-existing problem was highlighted recently after Vale, BHP Billiton and Rio Tinto Group, the three largest exporters of iron ore, threatened last month to cut supplies to China unless steel makers accept their price demands. China's steel lobbyist, the China Iron and Steel Association (CISA), finally compromised and allowed steel makers to reach temporary private deals with ore producers.

"The steel mills, which have to accept the new quarterly pricing system raised by the global miners, will have to pay at least $70 billion more this year, based on the current prices and last year's import volume," Yao said.

The imports of crude oil, copper and food face problems similar to those confronting iron ore, which accounts for 65 percent of the global import, due to the severe imbalance between supply and demand, increasing dependency on imports and barriers to overseas purchases, and the manufac-tures have to adapt to cost fluctuations.

"A phenomenon began in the international commodity market this century: The price of a commodity will rise if China intends to buy it, and it will fall if China will sell," Yao said. "China's pricing power in the international trade system has almost completely collapsed, though our import volume is huge."

The abnormal situation in foreign trade indicates that there are many problems in our market mechanism, which could affect further opening to the outside world and sustainable and steady economic development, Yao argued.

Yao on Sunday cited three ways to change the unfavorable position, including integrating the domestic market to strengthen cooperation between enterprises; employing anti-monopoly laws and WTO rules to contain the manipulation of prices by global miners; making use of multiple finan-cial means, including futures markets, to enhance Chinese enterprises' influence on market prices.

Zhou Shijian, a senior researcher with the Center for US-China Relations at Tsinghua University, told the Global Times that low industrial concentration and the absence of an integrated domestic market are important factors affecting China's pricing power in the world's raw-materials market.

"There are too many small players in the domestic market that conduct business deals separately instead of forming an alliance in price negotiations, causing China to lose the initiative in setting prices for bulk commodities, in both imports and exports," Zhou said.

Liu Chen, an analyst with a Beijing-based futures brokerage, told the Global Times Monday that limited purchasing channels have made China more passive in pricing negotiations.

However, he suggested that the price hikes of many bulk commodities, especially iron ore, can't last long, and prices will, by and large, return to a reasonable level determined by supply and demand.

"If the prices of many commodities cannot be accepted by their end users, they will lose the foundation of a continuous rise and return to a level acceptable to the market," he said.

Chinese enterprises began to diversify their overseas investments last year, with the targeted areas expanded from Australia to North America, Latin America and Africa, and the types of materials expanded from iron ore to oil and nonferrous metals, the Guangzhou Daily reported Monday.

Yao Guang, general manager of the Galaxy Futures Broker, told the Economic Information Daily that an essential method to raise China's pricing power is to develop its commodity-futures markets, which can help enterprises avoid future risks in price fluctuations.

Futures are exchange-traded contracts that fix a price to buy or sell sugar, copper or oil a day, month or year in advance. China launched stock and commodity futures trading in the early 1990s.

According to the Washington-based Futures Industry Association, in 2008, the three futures exchanges in China traded three of the world's five most-active metals contracts and seven of the 10 biggest agricultural contracts based on volume.

However, an opinion released by the Wall Street Journal in December warned that volumes on active Chinese exchanges overstate their importance in commodity pricing. "A futures industry joke says China is second only to the weather in driving some commodity prices - but less predictable," the article said.

"It is true that we have a long-term goal of increasing our influence in terms of pricing, but to do that we have to create conditions and do it step by step," Jiang Yang, a chief futures-industry policymaker and assistant chairman of the China Securities Regulatory Commission, told the WSJ in an interview.

China's lack of pricing control is also reflected in some materials that are abundant in the country. The "underselling" of rare earth metals stands as the best example.

China has more than 50 percent of global reserves of rare earth resources, and accounts for 90 percent of the global market share.

Statistics show, however, that while China's export volume of rare earth increased by nearly 10 times from 1990 to 2005, the average price fell to half the 1990 price.

Over-exploitation and a lack of supervision have resulted in a marked price decline in the international market. Many manufacturers lower prices to compete with each other, creating more industry problems.

The Xinhua News Agency reported Sunday that a subsidiary of China's Baotou Steel Rare-Earth Company will be responsible for implementing a strategic rare-earth reserve plan at Baotou City in the Inner Mongolia Autonomous Region.

Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation, told the Global Times that what China should do is reasonably raise the price of the resources that the country has advantages over, compared with other countries, by following the rule of supply and demand.

Song Shengxia contributed to this story

Source:Global Times