Piling up commodity problems

By ANTHONY HILTON FOR MAILONLINE
Updated: 04:13 EST, 24 June 2005

AT first glance, the news that copper prices hit an all-time high this week might seem of concern only to the nation's plumbers. In fact - and with no disrespect to plumbers - it matters a lot more than that. Copper is one of the key raw materials of the modern electronic economy.

What has happened is quite astonishing. Not only has the price on the London Metal Exchange doubled over the past couple of years but the amount of metal held as stock in the LME and other market warehouses has plummeted to a mere fraction of what was the norm a couple of years ago. On some estimates, there is little more than four weeks' supply.

It is not just copper. The surge in the price of oil has been obvious to everyone, but in essence one commodity after another - gold, steel, anything used in industrial production - has been hitting new highs. And the only explanation people have for this phenomenon is the industrialisation of China coming on top of a reasonable amount of activity in the rest of the world. Hedge fund money has also poured in and helped to build up a head of speculative steam.

Everyone in the markets seems relaxed about what is going on, but are they wise to be so? According to one view, the Chinese have taken a decision to invest their vast trade surpluses across a range of asset classes to diversify their risk. Under this reasoning, the dollar - of which they have a lot - is essentially just another commodity alongside copper, platinum, antimony, cobalt, steel and the rest.

But it follows from this that as well as being a huge user of these materials, China may also be taking the opportunity to build significant stockpiles - just as the rest of the world run theirs down. And while there may not be any dark motive behind this, it gives that country huge potential leverage, particularly if shortages continue and prices go on rising.

China already has the monopoly of cheap labour. If on top of that it successfully corners the markets in the world's key commodities, it leaves the Chinese virtually in control of much of the world's manufacturing. At the very least it will be extremely difficult for the rest of us to compete.

Unfair exchange

THE battle for the London Stock Exchange has gone quiet - although it has not gone away - while the competition authorities decide whether or not bids from Euronext and Deutsche Börse should be allowed to proceed.

Things should warm up again after 12 September when the report comes out - and don't rule out Deutsche Borse coming back into the frame just because chief executive Werner Seifert has gone and the bid has been dropped once.

Assuming it gets clearance, there is still everything to play for. Meanwhile, there are many other exchanges on the market, and the fight for the future of MTS is particularly interesting. This is the electronic system on which eurozone government bonds are traded. The bidders are Euronext and US house Cantor Fitzgerald, which currently has the higher offer on the table.

Think about that for a moment. There is a distinct possibility that the market in eurozone government debt might soon be controlled by an American house and one, moreover, with a distinctly colourful reputation. Contrast this with the attitude of the Americans to foreign ownership of any of their exchanges - or even allowing foreign exchanges to compete on American turf. It just would not be allowed to happen.

In Europe, there is no mechanism to stop these kinds of bids - witness the purchase of the International Petroleum Exchange by Atlanta-based ICE at the height of the dot-com boom and an earlier bid attempt by Nymex. But America has the Securities and Exchange Commission and the Commodities Futures Trading Commission, both of which feel US consumers are best protected by making sure no non-Americans ever get the opportunity to offer them financial products or services or to compete with homegrown organisations.

As a result, much of American investment banking and securities dealing operates virtually as a cartel, with pricing to match. If a European exchange had tried to take a stake in the Philadelphia exchange in competition with Merrill Lynch's offer the other day, there would at the very least have been an investigation on Capitol Hill. When Liffe tried simply to get screens over there, and when Eurex sought a physical presence in Chicago, their applications were delayed and delayed by the regulators until all competitive advantage was lost.

When it comes to financial markets, competition is what Americans reserve for other people.