Category Archives: Commodities

A Glittering Year For China’s Gold Bugs

Demand for gold in China rose by 20% last year, according to the World Gold Council’s latest Gold Demand Trends report. Some of that reflects a long-standing Chinese affection for the metal; some a newer obsession with all things conspicuously luxurious. The Council says Chinese consumers bought 510.9 tonnes of gold jewelry in 2011, worth $25.8 billion and a 13% increase over the previous year (the global market shrank 3%). China surpassed India as the world’s largest market for gold jewelry in the second half of last year, the Council says.

The fastest growing demand for the metal in China came from investors, however. Only a slither of that is likely accounted for by the People’s Bank of China. Globally, central banks more than quintupled their net gold buying last year from 2010’s levels, to 439.7 tonnes, to diversify their foreign-exchange reserves and reduce exposure to the travails of the two main reserve currencies. However, China’s is not among eight central banks the Council names as prominent official buyers, with Mexico and Russia’s accounting for nearly half of net central bank purchases.

Individual Chinese are now able to buy more easily through both the official exchange in Shanghai and unofficial exchanges in other big cities. They were the driving force behind China’s investment demand in 2011. In a year that saw the gold price hit a record of $1,895 an ounce in September before falling back, consumers bought a record 258.9 tonnes of gold bars and coins, worth $12.9 billion, up 38% on 2010’s purchases.

Domestic investors saw gold both as a traditional hedge against the year’s high inflation and as a better alternative than stocks, property or cash savings in an uncertain year. The appreciation of the currency meant the metal’s price rose by only 4.3% in yuan terms over 2010 compared to its 8.9% rise in dollar terms.

With the gold price pulling back 15% from its record high, authorities cracking down on illegal trading and inflation moderating, will China’s gold bugs be as bullish in 2012? “Signs of economic slowdown in China, and the increasing maturity of the market, are likely to result in a deceleration of recent growth rates, evidence of which was already coming through last quarter,” the Council warns.

This is an edited version of a post first published by China Bystander.

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China Shrugs Off WTO Criticism Of Its Export Curbs

China has reiterated that export controls its imposes on some raw material are within the world trade rules. Earlier this week in a briefing paper prepared for its biennial review of China’s trade practices the WTO took aim at China’s export curbs, a mix of license requirements, quotas, tax rebates and outright prohibitions that Beijing says have been put in place for environmental reasons and to reduce the country’s huge trade deficit.

A side effect of exports curbs is to divert supplies of the targeted goods or particularly in China’s case raw materials to the domestic market, thus pushing down prices there. “The resulting gap between domestic prices and world prices, the WTO said, “constitutes implicit assistance to domestic downstream processors of the targeted products.”

Which is what Beijing U.S. and E.U. critics have claimed has been the underlying aim of China’s export curbs all along. China is unlikely to changes its practices unless its loses WTO complaints brought against it over its bauxite and other raw material exports.

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If Adam Smith Had Been Chinese

If China can have state guided capitalism and state-owned corporations there wouldn’t seem to be any reason that it can’t have state-guided markets, too. Its proposed carbon trading market due to start in 2014  seems to fall squarely into that category.

Feng Shengbo, deputy director of the China Clean Development Mechanism Project Management Center of the Energy Research Insititute of the National Development and Reform Commission (NDRC), told Bloomberg that authorities are drawing up rules for a market to be run by “associations” overseen by  government. “The government will not directly control the market,” Feng said, “but if the associations make misleading policy it’s for the government to guide them.” Not exactly Adam Smith’s invisible hand.

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Oiling The Decline Of The Dollar As The World’s Reserve Currency

More on the dollar and its growing role as the fault line of the China-U.S. relationship: China, Russia, Brazil, France and the Gulf States are plotting to switch global oil trading out of dollars, according to Robert Fisk writing in The Independent. Instead they would price oil against a basket of currencies and gold. Secret meetings of finance ministers and central bankers to this end have been held, Fisk says.

What is no secret is that less of the world’s oil trade is priced in dollars than was once the case as buyers and sellers have sought to dampen the volatility that the dollar has exhibited in recent years. The mechanics of pricing oil against a basket of currencies and commodities would be a nightmare, unless the IMF’s special drawing rights (SDRs) or some close facsimile become a widely accepted currency, which this Bytander doubts will happen anytime soon. And what constitutes a secret meeting when it comes to finance ministers and central bankers getting together is another thing of definitional fuzziness.

Saudi central bank governor Muhammad al-Jasser has flatly denied The Indie’s report, saying there have been no such discussions secret or otherwise. Japan’s finance minister Hirohisa Fujii said much the same. But it is certainly no secret that China, along with some other leading developing economies, is steadily chipping away at the notion that the dollar should be the world’s sole reserve currency, and with it the U.S. sway over the world economy.

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BHP Billiton Drops Rio Tinto Bid, Cheering Steelmakers

A rare piece of good news for steelmakers: BHP Billiton is walking away from its bid for Rio Tinto. Aluminum Corp. of China, Chinalco and other Chinese steelmakers, in particular, were among the most outspoken about fears that the combination of two of the largest natural resources companies would have too much control over prices over their feedstock, iron ore. As our sister site noted in Chinalco Gets Australia’s Limited Nod For Rio Tinto Stake, the Chinese steelmaker went as far as taking a stake in Rio Tinto to ensure it would have a place at the negotiating table.

BHP said the reason for dropping the bid was that asset sales that anti-trust regulators in Europe would likely require would have to be done at fire-sale prices and that financing would have been difficult to secure in the current global financial crisis. Further, servicing the high level of debt that would have been involved would have been risky at a time of tight credit and diminished cash flows following the collapse in world commodity prices.

One sign of the impact of the crisis on the all-share bid is that its value had fallen from $140 billion when it was made a year ago to $66 billion now.

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