Chinas Mysteries Baffle World Commodity Markets

Chinas unpredictable shopping sprees keep traders in raw materials on their toes.

With 1.2 billion people and a burgeoning economy, any Chinese foray into world commodity markets can have a huge impact. Baffling to Westerners is the way that these movements do not always seem to follow basic rules of supply and demand, traders say.

China is not really driven by normal market forces. If it was, you could at least try to monitor prices to guess its likely demands, said one.trader.

Latest to have been taken by surprise was the shipping market, where freight rates suddenly soared by 50 percent. The Baltic Freight Index, a daily index of rates on key dry cargo routes, had plummeted to its lowest in a decade in September on the back of a bumper wheat harvest in China.

It looked as if fewer vessels would be needed to ship grain to Asia. Then the Chinese suddenly bought an unexpectedly large volume of American soybeans and fertilisers.

People who felt the market was weak suddenly found that they had to scratch around to cover requirements, said John Banaszkiewicz at brokerage CIS in London.

The Chinese have taken over as a major force in the freight market. They have taken over as the major importer and exporter of raw materials, Banaszkiewicz said.

Swing factor in base metal markets: In base metal markets China is a key swing factor, with annual consumption of refined copper often outpacing its ability to mine and smelt its own metal.

Industry specialists Bloomsbury Minerals Economics (BME) estimated that China will need 1.3 million tonnes of copper this year, but the country will produce only 1.07 million tonnes.

The balance has to come from its own stocks, which are opaque, as China has commercial inventories and strategic stores. Or, the Chinese buy from a tightly-balanced market.

Despite intense international interest, much of what China does in raw materials trading is still shrouded in mystery.

Some traders try to gauge Chinas likely demand on the basis of changes in infrastructure, tax regulations and monetary policies.

China is seen trying to shift labour power to cities from farms in a drive for modernisation which could diminish its exports of raw materials and boost imports.

It is very difficult for the population in the countryside to move away but as infrastructure and transportation improves, China is going to be more of a deficit country, said an analyst with an international trading firm.

Largest wheat importer: China is the largest importer of wheat. It has stopped issuing quotas for imports following its bumper grain harvest and might not reconsider them until April 1997, traders in Hong Kong, China and Singapore have reported. Traders expect this to add to pressure on wheat prices which were already falling after bumper harvests around the world. But it may just be an excuse for the Chinese to get the price down, said one trader.

Another noted that China has seen a sharp rise in wheat demand under a government drive to produce more meat.

Chinas monetary policies are often reflected in import and export policies.

The government is very concerned about keeping control over the rate of economic growth, a trader said.

A change in per capita income has a significant effect on food demand because a high percentage of the Chinese salary is spent on food, he added.

Change from producer to net importer: China has swung from being a producer country to a net importer in many commodities including wheat and soybeans, he said, and a seemingly insatiable demand for soybean meal used to feed livestock is underpinning world prices. Traders say the Chinese were expected to import 1.1 million tonnes in 1996 and one bullish trader forecasts an import need for 2.5 million in 1997 Christopher Pack, an analyst at Czarnikow Sugar, predicts China would import around 1.5 million tonnes of sugar in 1997.

But it could move a large amount either way, Pack said. Sugar consumption is gaining momentum as soft drinks and confectionary manufacturers spring up across China.

The Coca-Cola company said in October it had begun construction of a $30- million bottling plant in the southwestern city of Chengdu, its 23rd in China.

Coffee industry leaders at the World Coffee Conference in Hamburg in September discussed tactics to promote a change of allegiance in China to their brew from tea.

One estimate was that coffee consumption in China could rise by the year 2005 to seven million 60 kg (132 lb) bags from the present 200,000. Swiss food maker Nestles range of instant coffee, chocolate and sugar-based confectionary is being produced in China. Volatility in the Chinese internal prices is usually a result of supply rather than demand, a trader said, referring to factors such as natural disasters and production problems.