China losing its power to rein in surging prices

China’s efforts to rein in surging commodities prices are likely to be in vain as it’s lost the ability to boss the market around, according to two of Wall Street’s biggest firms.

The speed of the rebound in demand in advanced economies, particularly the U.S., means China is no longer the buyer dictating pricing, Goldman Sachs Group Inc. analysts led by Jeff Currie, the bank’s global head of commodities research, said in a note.

That view was echoed by his equivalent at Citigroup Inc., Ed Morse, who said in a Bloomberg Television interview Friday that despite China’s efforts to curb price gains, the real supply-demand balance prevails.

The largest buyer of many commodities, China has been trying to temper the rally due to fears over inflation. Its actions have had some success, with local iron ore prices down more than 20 per cent since May 12. But other raw materials have been more difficult to manage. The Bloomberg Commodity Spot Index is only down around 1 per cent over the same period.

The price dip after warnings from Beijing about speculation is a “clear buying opportunity,” as raw materials such as copper and soybeans remain on an upward path on tight supply, Goldman said.

What Beijing is doing is similar to what Washington did in the mid-2000’s, according to Goldman. “When commentators are unable to understand what is driving such a paradigm shift in prices, they attribute it to speculators — a common pattern throughout history, which has never solved fundamental tightness.”

Freeport-mcmoran Inc., the world’s biggest publicly traded producer of copper, said scarcity of the metal will trump any cooling efforts.

“In the short-run, actions can have an impact, commodity trading can have an impact,” Freeport-mcmoran Inc. chief executive Richard Adkerson said in a Bloomberg Television interview Thursday. “But the commodity market for copper today is extraordinarily strong.

Both on the demand side, we’ve got new sources of demand, and supply scarcity is a real factor in the marketplace.”

There’s “mounting evidence that commodities are no longer China-centric,” Goldman said.

The main reason for the U.S.’S greater power in the market is Washington’s fiscal stimulus, but there are also structural factors — China no longer benefits as much from low-cost labour or from its previous indifference to environmental concerns — that make this a paradigm shift, they said.