¡¡¡¡Director of the Dept. of International Market, Chinese Academy of International Trade & Economic Cooperation

¡¡¡¡Editor¡¯s foreword: The current round of global economic growth began in 2003. Since then, buying and selling of resource products have gradually heated up to a degree that never before seen, with complex interactions between various factors causing deep changse to the general pattern of global trade. In the meantime, governments have also been stepping up interventions, and control over resource products and of inflation has become an ever important subject of research for all countries.

¡¡¡¡Market under the interaction of influential factors

¡¡¡¡Energy products

¡¡¡¡(1) Demand high, supply insufficient. Judging from short-term balance, demand for crude oil stood at 86.15 million barrels a day in 2007, as against the production of about 85.34 million barrels per day, leaving a gap of 530,000 barrels. This explains why prices have always been hovering so high. Not that all this insufficiency of supply is due to a lack of resources. Rather structural problems such as technology, investment, environment protection and cost etc have also played a hand in the whole matter. In terms of middle-term balance, short supply is however attributed mostly to the shortage of refining capacity quite in spite of the vestige of formerly sufficient production ability.
¡¡¡¡(2) Increased flow ability raising asset prices. In this new round of growth, the United States, Japan and Europe, the three most vital economic bodies of the world, have each adopted a currency policy that favours low interest. The U.S. Federal Reserve lowered interest rates more than 20 times after ¡®9/11¡¯, whittling it down from 7% to 1%; Japan has long kept it at zero, while Europe has maintained levels at around just 2%. Thus, much flow ability has been released onto international markets, powerfully driving up prices for crude oil, gold and other products.
¡¡¡¡(3) Weakness in the USD has become a strong prompt for opportunistic activities, and dropped it in value against all other principal currencies amidst high financial and trade deficits. With devaluation reaching above 20% on average since 2002, it has actually helped to shore up the price of crude oil and raw materials as calculated by the US dollar. In the international market, the price for crude oil and gold has perched high and been very sensitive to both appreciation and devaluation of the US dollar.
¡¡¡¡(4) Geographical conflict may cause worries about the fluctuation of supply. The nuclear problem of Iran had in fact proved a serious challenge to the market in 2006 and 2007. A short time ago, Turkey also decided to attack Kurdish troops gathered in Northern Iraq, raising a new wave of market reaction. 

¡¡¡¡Mineral products

¡¡¡¡(1) Demand checked by Sub-prime Mortgage Crisis. Recently, the pricing trend for copper and aluminium etc has obviously been influenced by the sub-prime mortgage crisis in the U.S. real estate sector. A flow crisis at first forced certain contractors to sell cheap a large number of bills, touching off a sudden tumble in housing prices. When the tension of flow was finally eased with the announcement of lower interest rates, fear of USD devaluation caused immediately a back-flow of capital to stiff up metal prices. Nevertheless, foreseeing a definite economic slow-down in developed countries due to the incident, and especially discouraged by the drop in house construction therein, demand for mineral products has fallen palpably the world over.
¡¡¡¡(2) Market monopoly. Mineral resources are currently highly concentrated globally, with five aluminum producers controlling 54% of the total supply, and three iron ore owners 75% of all the iron ores carried by sea in 2006. High concentration means high monopoly, which leads inevitably to high prices. Recent years have seen Chinese steel and iron production and export growing at high rates, resulting in a continual increase of iron ore imports from abroad. Presently, the increased demand in China for iron ore accounts for 80% of the increased global demand. Great demand and high monopoly have both contributed to the rigid spiral-up of price.
¡¡¡¡(3) Government interference. Continual growth of international demand for mineral products has finally stimulated governments to step up interventions in the production and export of resource products. In the period of 2003-2004, export of zinc ore was forbidden in Indonesia, followed by the introduction of a licensing system for the export of zinc ore in 2006. In India in 2007, 300 rupees were charged for the export of every ton of magnesium. All such measures have produced a papable influence on the pricing of related products.

¡¡¡¡Agricultural products

¡¡¡¡New technology turning grains into energy resources has pushed up their prices in the recent years, and brought on a big change in the market. New demand has not only stimulated the price of maize, palm oil and other similar products that generate biological energy sources directly, but also that of soy beans and wheat, giving rise consequently to some competition in the expansion of plantations for maize, soy beans and wheat etc. Under the influence of these changes, the prices of beef, pork, eggs and soft drinks etc have also climbed up accordingly. Meanwhile, global climate change seems to have contributed to a greater frequency of drought, flood and other natural disasters, which have all led to higher prices and reduced grain production.
¡¡¡¡Lowering fuel prices by providing energy subsidies was once a popular practice in many countries. But the need for energy conservation and higher awareness of the need for environmental protection have changed the situation, and instead, increasingly high tariffs for oil consumption, for instance, are now coming into effect.
¡¡¡¡Currently, China and India are the two major forces affecting the crude market, accounting for 2/3 of the world¡¯s increased oil consumption. While high economic growth may furnish the major reason for high oil consumption, the policy of fuel subsidies adopted by both countries must not be ignored as well. India, for example, which imports 70% of the oil it needs, had fuel subsidies running up to no less than 500 billion rupees (equivalent to US$12.7 billion) in the fiscal year of 2007. Under the current circumstance of high oil price, certain Asia countries, including India, China and Malaysia, suddenly find themselves hard pressed to raise or to consider raising the fuel price both to force down consumption and to ease their financial pressure. With continual economic globalisation, China also has exhausted the traditional means like interference with investment scale and pricing etc to achieve the purpose of macro control.

¡¡¡¡Victims of monopoly

¡¡¡¡Mergers and business recombinations have been flourishing in the mining sector in the recent years, and reached a total volume of US$ 106 billion in value in 2007 alone. Most recently, the potential combination of BHP Billiton and Rio Tinto has also attracted much attention. Monopolies doubtless pose a serious challenge for China, rendering the international expansion of its companies more difficult on the one hand, and further squeezing their right of speech and right of action on the other. The fact that China is called the ¡°factory of the world¡± decides that it must be a big consumer of resources. But when resources are highly concentrated, it is the upper-stream companies on the production chain that have the final say on profit and cost.

¡¡¡¡Growing pressure of inflation

¡¡¡¡One of the principal reasons for agricultural products being priced higher and higher is that grains are being turned more and more into energy sources. This influence on China should be fully considered, for several reasons.
¡¡¡¡(1) It is no short-term factor. With the steady consumption of non-renewable energy resources such as oil, demand for renewable energy supplies is sure to rise. And the current trend of turning grains into energy sources too will remain in a foreseeable period of time. Meanwhile, it will be equally difficult to keep the price of agricultural products from going up in the middle-term period. It may come down at times, but will inevitably bounce back up again at some later stage.
¡¡¡¡(2) Turning grains into energy sources has an extensive influence on the pricing of foodstuff. Research of the Agriculture and Countryside Development Centre in Iowa (USA) reveals that when the price of maize, wheat and soy beans increases by at least 30%, that of eggs will go up by 8.1%, poultry by 5.1%, pork by 4.5%, beef by 4.1% and dairy by 2.7%. Because foodstuff in developing countries represents a higher proportion of CPI than in developed countries (150% in the Philippines, 42% in Indonesia, 35% in Thailand, at least 30% in China, a considerable percentage in Russia, but only 15% in the U.S.A), the risk of inflation caused by rising foodstuff pricing is indeed very great for developing countries.
¡¡¡¡(3) Effective strategies for reducing the prices of agricultural products are lacking. Currently, newly rising market countries like China are experiencing rapid industrialisation and urbanisation. It is impossible for them to increase grain supply by the expansion of plantation space. Imports, then, seem the only way left to meet such a need.