China could soon become the dominant force in the world's commodity markets.

By Margaret Elliott

Think Chinese financial might and you think Hong Kong—the recently returned island financial center. Yet China's real financial might in the next century will be in the commodities markets. Already a huge force in the grain and metals markets, where the country controls vast stocks, China is just beginning to make an impact in the world oil markets.

Where China fits in the world oil markets has exchanges and oil traders thinking hard. At the New York Mercantile Exchange, a project studying Asian oil markets has been underway for several months. Because NYMEX already trades the benchmark West Texas crude and Brent oil contracts, an Asian oil contract would round out the globe. "When we say Asia,” says a spokesperson, "we really mean China.”

Members of the exchange say that the Chinese oil companies are far more visible in world oil markets than several years ago. This isn't surprising. Just look at the statistics. China became a net importer of oil products in 1993 and last year a net crude importer. Imports in 1997 are limited to 30 million tons as the government tries to keep a grip on the flows.

But why is China having to bring in oil? After all, it sits on huge oil reserves. The problem, as always, is getting it out of the ground. Production in China is inadequate; processing is poor. But the new industrial China needs the fuel to power its ever-expanding industries.

This is proving a difficult conundrum for the Chinese government, which until 1993 was able to generate enough oil to satisfy internal demand. Thus until then, the Chinese were largely absent from the world oil markets. The twin needs to fuel industrial expansion and develop a more productive internal oil production industry have sent the Chinese out into the world.

"Chinese price ceilings will eventually converge with world oil prices. We expect them to continue to import oil at the rate of about 50 million tons until at least 2010.” David Keefer consultant with ARCO Products Co.

China has been looking for foreign partners to help raise its level of offshore production and to help solve the production and processing problems in onshore production. To this end, it has signed agreements with Iran and Venezuela to provide expertise. A bigger problem may be infrastructure, as many of China's oil fields are quite remote. The Tarim Basin in the far off Xinjiang province has proved far more productive than originally though a new pipeline from Xinjiang to Sichuan will be necessary to take advantage of increased production in this field.

Isolation has allowed China to maintain artificial ceilings on oil prices. David Keefer, a consultant with ARCO Products Co., says "Chinese price ceilings will eventually converge with world oil prices. We expect them to continue to import oil at the rate of about 50 million tons until at least 2010.” This requirement will help drive world demand; the rest of the Asia Pacific region is also expected to become a larger net importer of oil.

Oil traders unaccustomed to the ways of the Chinese ought to look to the metals and grain markets, where the Chinese have been playing for longer. The picture isn't pretty; the Chinese are adept market players fully cognizant that their size allows them to move markets. In grain, the former Soviet Union's place as the biggest boy on the block has been usurped by China. Earlier in the 1990s, China was a huge net exporter of corn; two bad harvests curtailed the country's efforts, yet in the meantime it has become the world's largest middleman in the last year, according to Tim Hannagan, a grain analyst with Alaron Trading in Chicago.

In metals, China is most visible in copper. The country is thought to have copper stocks of 250,000 to 300,000 tons, more than the 200,000 tons stored in the London Metal Exchange and NYMEX's COMEX warehouses combined. China imported 1 million tons last year, up 10-fold from 1990. China's purchases tend to occur in the second half of the year and have fueled huge rallies in the copper market in the fourth quarter. To keep prices at the levels it likes—no more than $1.10 per pound—China will sell into the market to drive the price down, says Peter Hollands, president of Bloomsbury Minerals Economics in London.