Policymakers need new commodities roadmap
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By Javier Blas
Published: July 21 2010 18:23
Since commodities prices peaked in 2008, slumped and then rose again, lawmakers and policymakers at the G20 have had a fixation with speculators in financial commodities markets. The emphasis – particularly in Washington – is about limiting the involvement of hedge funds in these markets and making financial markets more transparent. But that is neither the problem nor the solution.
True, speculation in financial commodities markets can lead to price volatility. Also, transparency and regulation remains critical and needs to improve. The lightly regulated London-based commodities markets, in particular, need to improve transparency, even if these steps do not reduce price volatility.
Aside from the short-term impact of speculation, over the medium term, prices in commodity markets respond largely to murky supply, demand and inventories signals. And here is the problem that policymakers are ignoring the perils of the world economy. We know little about physical commodities markets and our understanding is worsening. The International Organization of Securities Commissions, an umbrella of regulators, made the point clear in a recent report* to the G20, warning that “the relative imbalance in the degree of transparency between financial [commodities] markets versus physical markets leads to greater scrutiny of financial markets – which are, ironically, by far, the most transparent markets – and obscures analysis of the many complex inputs into commodity prices”. Commodity financial markets track prices of and information from the underlying physical markets, Iosco said. Yet we know little about them.
The statistical and policymaking system for most physical commodities was put in place in the 1960s-1970s, when emerging countries were minnows in raw materials markets. The system still represents mostly rich, industrialised countries such as the US, UK, France, Germany and Japan, where demand for commodities is growing little or even falling. Meanwhile, consumption in emerging countries is rising fast, leaving the system ill prepared to monitor the new trends. As a result, our understanding of the markets is deteriorating, rather than improving. To all intents and purposes, policymakers are at the wheel relying on a commodities road map printed four decades ago – no wonder they crash the car at unexpected potholes.
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Published: July 21 2010 18:23
Since commodities prices peaked in 2008, slumped and then rose again, lawmakers and policymakers at the G20 have had a fixation with speculators in financial commodities markets. The emphasis – particularly in Washington – is about limiting the involvement of hedge funds in these markets and making financial markets more transparent. But that is neither the problem nor the solution.
True, speculation in financial commodities markets can lead to price volatility. Also, transparency and regulation remains critical and needs to improve. The lightly regulated London-based commodities markets, in particular, need to improve transparency, even if these steps do not reduce price volatility.
Aside from the short-term impact of speculation, over the medium term, prices in commodity markets respond largely to murky supply, demand and inventories signals. And here is the problem that policymakers are ignoring the perils of the world economy. We know little about physical commodities markets and our understanding is worsening. The International Organization of Securities Commissions, an umbrella of regulators, made the point clear in a recent report* to the G20, warning that “the relative imbalance in the degree of transparency between financial [commodities] markets versus physical markets leads to greater scrutiny of financial markets – which are, ironically, by far, the most transparent markets – and obscures analysis of the many complex inputs into commodity prices”. Commodity financial markets track prices of and information from the underlying physical markets, Iosco said. Yet we know little about them.
The statistical and policymaking system for most physical commodities was put in place in the 1960s-1970s, when emerging countries were minnows in raw materials markets. The system still represents mostly rich, industrialised countries such as the US, UK, France, Germany and Japan, where demand for commodities is growing little or even falling. Meanwhile, consumption in emerging countries is rising fast, leaving the system ill prepared to monitor the new trends. As a result, our understanding of the markets is deteriorating, rather than improving. To all intents and purposes, policymakers are at the wheel relying on a commodities road map printed four decades ago – no wonder they crash the car at unexpected potholes.
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To make the situation worse, the collection of key statistics is split among a myriad of independent bodies, from the International Copper Study Group to the International Energy Agency. In total, more than 25 international organisations track physical commodities markets. While some of them are effective, others are hopeless. Some key commodities – iron ore is the most dramatic example – even lack a global body tracking supply, demand and stocks data. The industry lacks enthusiasm to improve the statistical flow, as companies see their intelligence as proprietary information, key for their trading. Oil is emblematic of the problems. The International Energy Agency, which acts as the de facto policymaking and statistical institution for oil, was set up in 1974 as a rich countries’ club.
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China, the world’s second-largest oil consumer, is not a member; nor is Saudi Arabia, the world’s largest oil exporter. The agency recently acknowledged it lacks “reliable” information on developing countries, which account for nearly 50 per cent of the market. Even worse, estimates about supply from key nations rely on tanker trackers, which literally count the number of tankers leaving oil ports. Efforts to fill the gap have had limited success so far.
The statistical vacuum is not the only problem – oversight is too. While financial oil markets are tightly regulated, not a single official entity monitors transactions on the physical global oil markets.
The industry relies on common law; and private companies such as Platts or Petroleum Argus, which compile prices of physical transactions, had become de facto regulators of the market**.
This ignorance and lack of oversight must end. The G20 needs a political consensus to merge policymaking and statistical bodies into fewer entities, improving their output and broadening their membership. Oversight should follow.
While there is no need of formal regulation, it is necessary to monitor both the markets and the private parties which act as de facto regulators. Policymakers need a new road map for physical commodities, incorporating new destinations, say, China or Brazil.
*‘Task Force on Commodity Futures Markets: Report to G20’, International Organization of Securities Commissions, June 2010
**‘Rapport du Groupe de Travail Sur la Volatilité des Prix du Pétrole’, French Ministry for the Economy, Industry and Employment, February 2010
Copyright The Financial Times Limited 2010.
The statistical vacuum is not the only problem – oversight is too. While financial oil markets are tightly regulated, not a single official entity monitors transactions on the physical global oil markets.
The industry relies on common law; and private companies such as Platts or Petroleum Argus, which compile prices of physical transactions, had become de facto regulators of the market**.
This ignorance and lack of oversight must end. The G20 needs a political consensus to merge policymaking and statistical bodies into fewer entities, improving their output and broadening their membership. Oversight should follow.
While there is no need of formal regulation, it is necessary to monitor both the markets and the private parties which act as de facto regulators. Policymakers need a new road map for physical commodities, incorporating new destinations, say, China or Brazil.
*‘Task Force on Commodity Futures Markets: Report to G20’, International Organization of Securities Commissions, June 2010
**‘Rapport du Groupe de Travail Sur la Volatilité des Prix du Pétrole’, French Ministry for the Economy, Industry and Employment, February 2010
Copyright The Financial Times Limited 2010.
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