URSABLOG: Looking Further East

As the world geopolitical map gets hastily redrawn, again, I became aware of some other news earlier this week by a friend which at least distracted me from the distressing news coming from the Black Sea. According to Reuters, China's state planner, the National Development and Reform Commission (NDRC) has told Yulin Coal Trading Centre Corp, to stop collecting and editing, and publishing coal market news and information. They have also shut down Yulin's pricing indexes and WeChat accounts.

This, in itself, is not surprising news. China has over the last year or two made itself increasingly assertive in controlling both what can be sold and not sold, and how, but also in how the prices are reported. Yulin’s mistake, it seems, was to be reporting “untrue market information”. In a statement issued on Tuesday, the NDRC said that they “will continue strengthening information monitoring ... reining in such activities, ensuring coal supplies and price stabilisation,"

As Reuters puts it:?

"The move follows new guidelines from Beijing for managing price indexes for commodities and services, and that say regulators will suspend the activities of any price providers failing to comply with certain rules."

This begs the question: why? Yes, I know that the Chinese state wants to discourage certain types of behaviour, including personal enrichment for its own sake. But there are dozens of institutes pricing coal, including the China Electricity Council and the China Coal Transportation and Distribution Association. Local consultancies such as Fenwei Digital Information Technology and Yimei, a trading platform owned by Helue E-Commerce Corp, also publish coal prices. Why Yulin? Founded in 2009, Yulin is mainly involved in physical coal trading and logistics and also has a consulting business. Until the ban, it published daily spot coal prices for Yulin city and nearby regions, which accounts for about 13% of China’s total coal output.

Yulin maybe just didn’t take notice of the new guidelines for managing price indexes for commodities and services in general. Failure to comply with certain rules would result in the suspension of the activities of the price providers, which seems to be what has happened. Several other coal index providers, including Inner Mongolia Coal Trading Centre, seemed to take notice, and stopped updating their prices recently, one supposes to err on the side of caution.

The price of coal in China has been of great concern for some time, with power shortages and blackouts leading the government to promote and propel domestic production to new highs. Nevertheless, China’s coal prices are still hovering near record highs, fuelled by concerns about continued tight supplies and stronger demand.

Five large coal-fired power stations have been approved for construction since the beginning of 2022. The Chinese leadership also said on Monday:

Coal supply will be increased and coal-fired power plants will be supported in running at full capacity and generating more electricity, so as to meet the electricity needs for production and residential consumption.

I have found it is always instructive to read what the Chinese government itself is saying. The same NDRC that banned Yulin Coal Trading from disseminating it’s coal pricing information issued a notice, jointly with eleven other departments, to provincial-level authorities as well as the ministries and institutions of the State Council, China’s cabinet. According to the press release on the government website:

The notice asked authorities to make effective use of the 200 billion yuan ($31.6 billion) in funds earmarked for the clean and efficient utilization of coal, and stabilize the price of iron ore and chemical fertilizer as well as launch campaigns to promote the development of the photovoltaic industry and speed up major infrastructure projects, such as 5G construction.

This may at first glance seem like a bland political statement about general progress in a lot of box-ticking departments. But look closer: stabilise the price of iron ore. Indeed, according to Bloomberg, China intends to stop speculation and hoarding of iron ore within China by speculators both domestic and foreign. This came before another announcement and I am indebted once again to Roar Adland of the Norwegian School of Economics to bringing this to my attention. ?As Bloomberg reports:

Beijing wants all purchases of the steelmaking material conducted through a single state-backed platform that’s under preparation, according to people familiar with the matter. At the moment, Chinese businesses including steel mills can negotiate spot purchases independently?

Mr Adland also comments:

If you get a "Back to the future" vibe, there is a reason for that. Up until 2008/09 when a couple of investment banks, with the help of third-party Price Reporting Agencies, thought it was a good idea to establish iron ore spot price indices for the physical market, the iron ore price was negotiated annually through the "Champions negotiations" between the leading buyers and miners of the time….

What could be the implications of an effective return to "Championship pricing" between the Chinese State and the Big Three miners - which I suspect is the ultimate goal here?

- Less of the "superprofit" in the iron ore market is captured by the miners and more by the Chinese state.

- The physical iron ore spot market and associated futures market dies a slow death due to lack of liquidity.

- Potentially less volatility in seaborne iron ore demand and, thus, in Capesize spot freight rates.

?

I take a slightly different take, one informed by my obsession with the political, in this case the way that the Chinese Communist Party thinks. As Marx once pointed out, capitalists succeed when they gain control of the means of production. Communism, socialism, particularly with Chinese characteristics, has an in-built suspicion means that a suspicion of individual endeavour as opposed to state control. To pursue a policy of “common prosperity” they are going to have to start investing in something big to replace the ‘free market’ property development sector which commands almost a quarter of GDP in China, now falling thanks to the financial red lines the state has put in place.

The smell in the air is not just coal burning, and the smoke from the steel mills now the Winter Olympics have ended; the smell is of something big coming in terms of both infrastructure and the state control of it.?This is not going to be a loosening of mometary policy a la laissez faire western capitalism. There are some big works in the pipeline that the Standing Committee of the Politburo would like to take the credit for, in particular General Secretary Xi Jinping. They have to at least be able to control input costs. What better way to do so, than price control?

As Mr Adland would point out no doubt, it is volumes of iron ore that will count, not the price, and I think there is a lot of this about to be shipped from Australia and Brazil. This will be the same for coal. Australian coal is still not welcome in China, and with increasing control of the domestic sector any top ups needed will have to come from elsewhere. Indonesia seems to have got their production quotas sorted out, but we should also note that as the Russian state will no doubt be on the sharp end of western sanctions, including ceasing to import of all types of energy, China has been keeping the door open to further trade. There could therefore be a great deal of action in Far East?Russia as far as coal is concerned, especially if Japan starts looking more towards Australia as a natural ally and trading partner.

I must admit I feel uneasy about pointing this out as the globalised world fragments into different blocs, and open, state-driven, warfare once again descends on Europe, but the world keeps turning everywhere, not just in the Black Sea. A side-effect of the steadily ratcheting up of tension following a long period of calm is that tonne-mile demand is likely to increase further, and this, as we know, will be good for shipping. Just as there is little I can do when the tides of history ebb and flow except get swept up in their currents, neither is there anything I can do when tramp shipping, poster child of the world of perfect competition, gains on the back of events – bad as they are – out of their control. And as Mr Adland points out, nodding to the ancient Chinese curse, we cannot deny that we live in severely interesting times.?

Simon Ward

www.ursashipbrokers.gr