China has signalled it will demand a larger role in setting global
commodities prices, with an announcement that it will form new industry
negotiating groups to leverage its buying power to secure lower prices.
Wei Jianguo, a vice-minister for commerce, the ministry responsible for
trade, said China would establish negotiating groups "as soon as possible"
covering oil, alumina and copper, in the same way it did for iron ore this year.
Mr Wei's comments reflect a belief in China that its emergence as the
largest, or fastest-growing, market for many commodities should allow it to have
a greater influence over their price.
Many of China's old-style
officials, also believe that any profit made by sellers of raw materials should be
limited to a small margin above the cost of production.
China's plan faces potential legal barriers because global trading rules
limit such bodies if they are government-run, and it also must overcome the
multiple other factors that dictate resource prices.
In China, most heavy industrial sectors are still state-owned and remain
closely supervised if not controlled by the government.
China's rapidly growing industrial economy has been a key factor in pushing
raw materials prices up to generational highs, especially for commodities such
as iron ore, copper and alumina.
Resentment has been smouldering in official circles in
China since 2005, when the world's main iron ore producers won a 71 per cent
annual increase in the price of iron ore in negotiations with Japan and Europe.
Although China is by
far the largest importer of iron ore, which is used to make steel, it played no
role in the talks and was forced to accept the price.
China organised an industry group for this year's annual iron ore
negotiations, which, although it did not manage to set a benchmark price, stuck
together relatively well, a first for the fragmented local industry.
"With reference to the model set for iron ore, we should
start as soon as possible a price-negotiating system for oil, alumina and copper
and other commodities, and expand the use of long-term trade contracts," Mr Wei
wrote in the Economic Daily, a local newspaper.
"We are a large buyer but lack
international pricing power, and as a result, the cost of buying resources and
energy products is getting higher and higher."
Jim Lennon, a commodities analyst with Macquarie Equities in London, said
that China, by trying to form a united industry front in negotiations, was
simply trying to do what Japan had done in a number of resource sectors for many
years.
China's prevalent, short-term, trading mentality,
combined with its inexperience in managing long-term contracts, has resulted in
many of its companies relying on the spot market for resources.
This has been a disastrously
expensive strategy over the past four years, a period in which tight supplies
have forced spot prices even higher than contract prices.
China's size and the fragmented
nature of its industry structure have made it difficult for the government to
force companies to negotiate together, unlike in Japan, where industrial
associations are well-established.
