Trade row adds to commodity concerns
THE ongoing trade row between the United States and China has so far sidestepped commodity markets.
Nevertheless, key metals such as copper have already been hit by a sharp reduction in demand from China and international concerns about unpaid debts on commodity and foreign exchange dealings. A trade war would create further concerns about China's raw materials dealings, traders said.
China is a key importer and exporter of metals, steel, cotton, grains and other commodities. Any changes in trade can have a major impact on international prices.
'A trade war with the US could worsen China's economic and debt problems and lead to further reductions in metals imports,' said Simon Hunt, chairman of Brook Hunt and Associates, British metals consultants. He estimated that the nation's imports of refined copper would fall to 100,000 tonnes this year, from 210,000 tonnes last year.
'China tends to be a major swing factor in the copper market,' Mr Hunt said. 'So a reduction in imports would be negative for prices.' He predicted copper imports would decline this year, mainly because manufacturers and other consumers in China overbought in 1993 and 1994.
Mr Hunt said there were large stockpiles of copper at Shanghai and other warehouses.
Meanwhile, credit squeezes and slowdowns in factories that imported metals were curbing demand for imports. Uncertainty surrounding successors to Deng Xiaoping was also raising political and economic risks, he said.
London metals dealers were treating China's trading firms with caution, said dealers.
CITIC (China's giant investment and trading corporation that owns amongst other assets a stake in Cathay Pacific) delegates, visited London in recent weeks, offering deferred payments in settlement of a $40 million debt on unpaid metals deals with 14 London Metals Exchange (LME) brokers, said one creditor. CITIC also wanted LME firms to waive brokerage fees on deals, said a director of a metals firm.
The dispute relates to losses that were incurred on copper deals that were opened in 1993 and closed in the first half of 1994, said dealers. Brokers with 'substantial exposure' to the CITIC copper losses include Merrill Lynch, Lehman Brothers, PruBache Securities and several leading members of the LME, said dealers.
CITIC wanted to settle and had already appointed Price Waterhouse to investigate its books, said creditors.
Yet CITIC officials have said that it could not be responsible for speculative activities of staff who had made the deals on the LME. For this reason, it did not want to pay brokerage fees. Brokers, on the other hand, said that the company could not walk away from their commitments and were hoping for full settlement.
Lehman Brothers is suing for repayment on foreign exchange losses of nearly $100 million allegedly incurred by Minmetals International Non Ferrous Metal Trading Export and United Petroleum & Chemicals.
Since there had been so much pressure and publicity relating to alleged debt defaults by China's government-backed commodity trading organisations, the nation's authorities feared that its international borrowing programme could be affected, said bankers. 'CITIC is a huge borrower on global capital markets, so it will just have to settle on an acceptable basis,' said a London banker.
LME brokers have tightened credit controls and several said they would do business only with Hong Kong firms that were independent of China. The Hong Kong parties which deal with London metals firms would have to accept the risks with mainland corporations.
The US bought a large proportion of its strategic metal imports, notably antimony, tungsten and titanium, from China, according to Roskill Consulting Group. In the event of a trade war, China would be the loser, Roskill analysts said.