“SHIFTING EAST” – PROFESSOR DANNY QUAH An interesting paper by Professor Danny Quah, published in January 2011 and titled “The Global Economy’s Shifting Centre of Gravity”, measured the change in the average geographic position of economic activity on Earth over time against 700 locations.
It found that the “average economic centre of gravity” in the 1980s was mid-Atlantic. However, this had shifted east of Helsinki and Bucharest by 2008, to Iran by 2015 and was predicted between India and China by 2050. Professor Quah’s paper could have had the LME in mind?
Chart 2: Going East
ECONOMIC ACTIVITY HEADS EAST.
Source: Danny Quah
FROM COPPER MARKET CUSTOMERS TO MARKET OWNERS Western democracies take a short term view, arguably driven by election cycles (Trump’s “trade war” from 2018-2020 is one example). In contrast, China’s long term plans have achieved a phenomenal transformation. China is the world’s manufacturer, dominating the market for raw materials and accounting for approx. 50% of global copper consumption in a physical market which has doubled in size since the 1990s.
China’s industrial development has been reflected by its activity in the commodity markets, although that has not always gone smoothly. On the LME, state-backed metals traders CNNC and CNIEC were overtaken in the 2000s by Liu Qibing of China’s SRCSR (affiliated to the State Reserve Bureau “SRB”), who was a force in the LME copper market until his downfall in late 2005.
Important lessons learned in the aftermath of that episode were taught again, when the 2008 commodity sell-off prompted China’s “State owned Assets Supervision and Administration Commission” (“SASAC”) to encourage State Owned Enterprises (“SOEs”) to consider defaulting on structured commodity hedge contracts with western banks. The Quantitative Easing program helped reflate commodity prices in 2009, sidestepping the risk of default on those contracts.
Given that experience, initially many were surprised when HK Exchange bought the LME in 2012, although it made sense for China to exercise more control over an essential market.
Consuming about 50% of global copper, and owning the LME, SHFE and INE contracts, China has achieved significant influence over global copper pricing. The centre of the copper trading world shifts closer to China.
Rohan Ziegelaar E:
metals.desk@
admisi.com T: +44(0) 20 7716 8081
19 | ADMISI - The Ghost In The Machine | Q4 Edition
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