--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Nov 14 China's leadership
plenum may have disappointed with sparse details about economic
reforms, but there was enough to suggest the potential for major
changes in way the country buys and trades commodities.
The key elements from this week's meeting of the ruling
Communist Party's Central Committee were that markets would take
a "decisive" role and that this would happen by 2020.
If the Chinese do free up capital controls and welcome
foreign participation in their markets, then the way the world
trades commodities is likely to change, and in broad terms, the
six years between now and 2020 is a short time frame.
For a clue on how this might progress, look at the recent
and ongoing moves to establish futures markets in key
China is the biggest buyer of coal, iron ore, copper, rice,
soybeans, as well as a host of minor metals and agricultural
commodities. It ranks second in crude oil imports and is
expected to become the second-biggest wheat buyer this year.
The Chinese authorities are known to be concerned about the
pricing of several commodities, believing producers and traders
exert too much influence over the market, often leaving
consumers with a raw deal.
Establishing price benchmarks for major commodities,
especially those that lack well-developed and liquid global
markers, is probably viewed by China as key to getting prices
more reflective of its status as the world's biggest commodity
However, the dilemma for the Chinese authorities is that the
desire to exert more influence on the pricing of commodities is
inconsistent with the idea of opening up the markets in order to
ensure pricing transparency.
It's perfectly logical that there should be China-based
deliverable contracts for iron ore, crude, coal, rice and a
plethora of other commodities, but in order for them to work
well, all market participants must be welcome and able to trade
It's here that the decision by the Communist Party conclave
to let the markets take the lead may be important, if it
translates into a free-floating currency and commodity exchanges
that aren't more regulated than their counterparts in developed
NEW FUTURES MAY NOT BE ENOUGH
The new contracts for iron ore and coal have attracted
strong volumes and interest across the board, from overseas
producers to domestic consumers, but they are unlikely to
supplant existing benchmarks as long as the spectre of Chinese
government control looms over them.
So far, the bulk of the volumes have been made up by
smaller-scale domestic investors of the kind that provide much
liquidity and volumes to agricultural contracts on platforms
like the Dalian Commodity Exchange.
The Shanghai Futures Exchange plan to launch contracts for
crude oil delivered to China will appeal to domestic market
participants, but will it be attractive enough to foreign
producers and traders?
In addition to the problems of yuan convertibility and
regulation, the small pool of large buyers for many commodities
may undermine the development of deliverable Chinese futures
Take crude oil, where Chinese buying is utterly dominated by
the two state-owned majors, Sinopec and PetroChina, with
independent refiners and traders restricted in their market
It would be hard to find many in the Asian oil markets who
think that pricing the region's crude from the small pool of
crude that makes up the Brent benchmark is a good idea.
But ask them if a contract delivered into China with only
two buyers is a better idea and the answer would probably be no.
China's iron ore and coal markets may have a bigger pool of
buyers, but they are still largely the preserve of large,
This situation doesn't look like changing soon, with the
Communist leadership committing to maintaining the strength of
the public sector in the economy.
The message for China's leadership is clear if they want to
genuinely change the way they buy and pay for commodities, they
-- establish a genuine market economy with free access and
financial transactions and an independent regulator. The
proposed Shanghai free trade zone offers this chance.
-- break up the massive state-controlled companies and allow
internal competition to flourish.
-- work with producers, traders, banks, exchanges and
foreign governments to ensure the development of open markets.
-- accept that all this will provide more pricing
transparency, but at the cost of maintaining outright control.
So far, all we have from China is a somewhat vague
commitment from the authorities that they intend to move in this
The concrete steps they take will determine whether China is
able to do what it should, namely establish relevant and
dominant commodity benchmarks for the world's biggest buyer.
(Editing by Muralikumar Anantharaman)