- The Washington Times - Sunday, September 25, 2005

In Burgenstock, Switzerland, John Zarocostas also interviewed for The Washington Times Roy Leighton, chairman of the London-based Futures and Options Association and of NYMEX Europe, about global commodity markets. Mr. Leighton also chaired for five years the International Task Force on Commodities Risk Management at the World Bank.

Question: The commodities boom driven by demand from China and other emerging Asian economies — will it continue, or might the cycle start to go south?

Answer: No, certainly I do see strong conditions. Not necessarily this strong level of growth we’ve seen in the very recent years. If you look back over the last 25 years, there have been individual sectorial booms, but what we’re now seeing is virtually across-the-board. Except for a few tropical agricultural commodities, most markets are moving ahead very strongly.

It’s all part of what we would describe as a new Industrial Revolution, with manufacturing just flooding out of the mature economies of the European Union and the United States and into countries like China, India and some of the other Asian economies.

China is the easiest example to talk about. You don’t, at the moment, have the same vertical integration that you have had in American and European industry, where there have been companies with physical investments in mines and oil production.

China built all the added volume manufacturing competence, but they haven’t had investments in copper mines and oil fields, and you can see a whole new phase of China’s development in the last 12 months, where they’re looking to make significant equity investment in oil companies and in mineral companies, running into problems getting authorization. You’ve had Unocal not working, you had Minmetals of China wanting to buy Noranda, one of Canada’s biggest listed corporations, that also pitted out.

It’s interesting that you now see China turning to other nations — a mistake for mature economies not to let them in — so we’re entering a new phase.

Q: We’re talking energy products like oil, coal, and metals like copper, aluminum?

A: Yes — it’s the whole energy complex, including coal.

Energy, if you look at China, is the last energy sector that is not, within China, trading at world prices. They have kind of adjusted to the world price of copper, the world price of aluminum, zinc, et cetera.

Because China has such a dramatic need for the moment to import energy-type products, coal within China is not trading at the world price, crude is not trading at the world price, and the products are not trading at world prices. They want to move toward world prices.

Q: They’re trading at below the world prices?

A: Yeah, below world prices.

Q: So, they’re subsidized?

A: Yes, the central government is continuing [to subsidize manufacturing].

Q: Can they afford to do this?

A: Yes, the central government has significant surpluses of physical goods, and they can afford to do this. But it’s not in their long-term strategy. I’m sure that is the situation.

If you get away from the prosperous coastal regions, you’ve still got poverty inland and the need for transportation. So, they’ve got to manage this carefully … China would really like to adjust coal to proper world prices. But a lot of their coal mines are in the inland provinces, and to pay the miners a better price would bring prosperity to the inner regions — which is one of the main strategies of the Chinese government.

But the energy sector overall — oil, gas, coal, electricity — is the only major commodity product in China where it is not trading at world prices, and that’s got to still feed on their economy.

Q: On July 21, the Chinese cut the solo peg to the U.S. dollar. How do you see this playing out?

A: Well, I think they have to move correctly to a more broadly based peg and gradually move to a more transparent system, but it’s highly sensitive. They’re under a lot of political pressure from the U.S. to revalue the RMB yuan. They’re taking their time about that, and I think that’s prudent and sensible, because they’ve got to feed that gradually into their economy. I see that trend continuing.

But you’ve got to think about the people making a lot of these decisions in the central bank, the Ministry of Economy — they are the mature people of 50 to 60 who were all brought up in a very different system of a command economy, and it’s quite difficult for them to let the reins go. My feeling is they will let the reins go, but gently, gently, over a period.

Q: Concerning oil — aside of the strong demand in China, India, et cetera, are shortfalls in capacity also behind the recent upward push in prices?

A: My view of the oil market is that the significant demand and the quite tight supply situation were two key factors that worried the markets six months ago.

One was what happened in Russia, where there were various problems which have now been resolved as exports now flow on time.

The other is Iraq, where they’re not on stream for the sort of production levels that they are capable, so that’s the missing link.

For the moment, the swing factor in all this is Saudi Arabia, which can bridge the gap, hopefully, while Iraq comes to its real potential.

What is to me also very interesting is that there is a lot of potential in new production in West Africa, but it’s not going to arrive tomorrow. You’ve only got to travel around West Africa — we all know Nigeria and Angola have oil — but there are significant new finds closer to the Horn of Africa, in countries like Chad.

And I think if I raise my eyes to the horizon and take a medium-term view, this is going to balance itself out. I don’t think we’re ever going to have that cheap crude oil.

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