Commodity oddities

Next week will see uncomfortable news from the Chinese corporate sector. On Wednesday, the country’s largest integrated copper producer Jiangxi copper announces its first-half earnings, weeks after its warning of falling demand from appliance makers sent its stock price sharply down. On Thursday, Shanghai Petrochemical, a downstream subsidiary of Chinese state oil firm Sinopec, will announce losses from the first half arising from higher refining costs.

The firms are unfortunate to be caught between high (if no longer record) prices on the one hand, and faltering demand on the other. Some firms further upstream are doing nicely: Shell oil, for instance, recorded another quarter of record profits at the end of July, and this month mining firm BHP Billiton reported annual profits of 17.6 billion Australian dollars (US $15.3 billion) -- a record for any Australian firm. However, those firms are benefiting from their private status as much as their market position. Sinopec and Jiangxi copper firms face an additional burden arising from their association with government, at a time when prices are a politically sensitive.

The nostrum of recent years that state-run resource firms from larger developing countries have investment advantages over their private counterparts, with the support of political patrons and access to the reliable pools of state cash, is giving way to a more nuanced position. After all, political patrons take as well as give, making demands in exchange for their support. Sinopec’s state subsidies pale into comparison to the losses it has sustained as a result of controls on the prices it can charge -– and its results this year are vulnerable to a change in its tax status by government fiat. Indian Oil Corp faces a similar problem, squeezed between artificially-low prices and the market-determined price of refining (indeed, private-sector Reliance has identified an opportunity in making up shortfalls in diesel refining from investment-troubled state firms). Added to these setbacks, developing world champions are beginning to bump against the infrastructural limits of the countries in which they operate -– Jiangxi copper has had to cut production in August, having been asked by local authorities to reduce consumption in the face of generation shortages.

Raw material costs may decline, easing the burden on these firms, but it is hard to plan on this basis -- commodity prices have fallen from recent records, but their massive recent volatility, along with the changed fundamentals arising from an expanded global market, make the future level of prices uncertain. Given this, state firms are hoping for a relaxation of subsidised prices, to help escape from their current squeeze. Indian oil minister Murli Deora met with refiners on August 19 to discuss price rises, but the best he could offer them was to avoid a cut. They may have to grin and bear it for a while longer.