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China is profoundly changing the commodity trade — here's how
As the world's largest importer and consumer of many commodities , China drove a decade-long explosion in prices in the 2000s and is still holding sway over the raw material trade — with the country's bargaining clout expanding as its economy grows.
Here's how China has changed and is potentially changing long-established trading traditions in major commodity classes.
Agriculture
An insatiable appetite from a rapidly expanding middle class, food safety concerns and health fads are driving food imports into China.
Now the world's largest consumer and importer of soybeans — used in everything from animal feed to cooking oil — China has seen its growing affluence drive imports of non-traditional food products like olive oil and avocado, presenting new business opportunities.
Concerns about food safety are also helping the popularity of products like milk from New Zealand, which is perceived to be contamination-proof, and innovation in farm-to-table supply chain management.
Singapore businessman Douglas Foo, who runs the Sakae Sushi restaurant chain, told CNBC he has invested in aquaculture farming in South America in order to better supply his outlets — and eventually other restaurants — in China.
"We have not done aggressive expansion in [the China] market, not because of the lack of funding, but the stability of the supply chain," said Foo.
Technology is giving the food safety push a boost, with fresh produce suppliers from far-flung Australia and New Zealand using Chinese smartphone apps like Wechat to help their consumers in the country track the farm-to-table trail of what's in their meals, Reuters reported.
Energy
As the world's largest coal user, China has been facing a host of air pollution problems after its turbocharged growth over the last three decades.
Today, the world's second largest economy is pledging support for combating climate change — especially after U.S. President Donald Trump pulled out of the Paris agreement to fight global warming. (It remains to be seen, however, to what extent China's actions align with its rhetoric.)
The scale of investment in renewable energy in China is growing "exponentially," Adnan Amin, the director-general of the International Renewable Energy Agency, said on the sidelines of the annual Clean Energy Ministerial Meeting in China earlier this month.
China will launch a nationwide emissions trading system by November, a government researcher told Reuters.
Metals
As the raw material for steel, used in buildings and infrastructure, iron ore is traditionally sold on a yearly basis, but it has been moving toward shorter contract terms and spot-pricing mechanisms due to the participation of Chinese traders who started sourcing from non-traditional exporters on an ad hoc basis.
The spot iron ore market also started gaining ground amid a volatile price environment as the Chinese had no qualms breaking term contracts when prices plunged: Paying a penalty and procuring fresh spot cargoes was cheaper than honoring the higher prices agreed to earlier.
Buoyant commodity derivatives trading on mainland China also help support the case for shorter contract terms as traders can hedge their positions easily.
The same is happening for coking coal, which is another commodity used in steel making. That market used to be priced according to fixed prices on a term basis, but today the trade is moving toward an index-linked price based on the increasingly-accepted derivatives market.
More CNBC coverage of China's booming commodities trade:
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