China's own policies made it a commodity price-taker
Rather than complain, the boss of HKEx should be happy higher prices are boosting turnover on his subsidiary, the London Metal Exchange
Charles Li Xiaojia is unhappy about conditions in global commodity markets.
In his blog last week, the chief executive of Hong Kong Exchanges and Clearing bemoaned China's lack of influence on global commodity prices.
At first this sounds like a bizarre thing to say. Ask any commodity trader, and he will tell you it was China's ballooning demand for resources that drove the long bull market which saw key industrial commodities such as copper more than quadruple in price over the first decade of this century. Far from lacking influence, China could hardly have had a bigger impact on prices.
Yet Li was merely echoing a complaint made periodically over recent years by Chinese officials. China, they grumble, is a price-taker in global commodity markets. In other words, China is forced to pay the prices set by overseas producers, in markets run by foreigners.
This is not how they think things should work. They believe that, as the world's largest importer and consumer of many commodities, and as the source of almost all the world's growth in demand, China should be the price-setter, able to dictate prices to its suppliers.
Of course, we can safely assume that if China were able to dictate prices in international markets, then, as an importer of commodities it would hardly insist on paying more. So what this boils down to is a buyer whingeing because he thinks he is paying too much, and would rather pay less for what he's getting.
This raises a couple of questions. First, you have to wonder why Li, as the man who presided over HKEx's takeover last year of the London Metal Exchange, the world's biggest industrial metals market, seems to sympathise with the complaint.
After all, the LME makes its money from trading volumes, and by and large, the higher prices go, the greater the interest in trading. So if Li wants to generate returns for his shareholders, he should favour higher prices.
His attitude might make sense if Chinese buyers were price sensitive, buying less as industrial metals like copper get more expensive. But as the chart shows Chinese demand is remarkably insensitive to price. Chinese copper consumption has continued to increase, despite climbing prices.
Next, we can ask exactly why it is that in the past China has always been a price-taker, rather than a price-setter.
Part of the reason has to do with the way commodity markets have evolved. Industrial metals such as copper or iron ore have just a few big international suppliers: the giant mining companies. In contrast, China's market is far more fragmented, with legions of much smaller buyers. As a result, pricing power has always remained with the suppliers, rather than the buyers.
From time to time, Beijing has tried to redress this imbalance, restricting the right to import commodities to a few licensed buyers. But the policy has made little difference, merely fuelling the development of a lively domestic grey market and enriching a cadre of corrupt middlemen.
And this demonstrates the ultimate reason why China has always been a price-taker. For years now, Beijing's own economic policies have emphasised growth, driven primarily by resource-intensive fixed-asset investments; investments which have depended heavily on imports of industrial commodities.
However, that situation may now be beginning to change. As China's leaders curb new investments in an attempt to switch the economy towards a more sustainable trajectory, the country's commodity demand growth will start to slow, even as international miners bring big new sources of supply on stream. As a result, analysts are saying that the "commodity super-cycle" has come to an end, with prices entering a new, softer leg.
Of course, this is simply another way of saying that the balance of pricing power has started to shift away from producers and towards China, as the biggest consumer of commodities.
In that case, what really ought to be worrying Charles Li is not whether China is a price-taker or a price-setter, but why exactly he paid 150 times earnings to buy a metals exchange at the very top of the market.