{"id":73826,"date":"2022-07-14T12:00:37","date_gmt":"2022-07-14T02:00:37","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=73826"},"modified":"2022-07-14T11:47:07","modified_gmt":"2022-07-14T01:47:07","slug":"imposing-price-caps-on-commodities-like-oil-and-iron-ore-is-a-risky-business","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/imposing-price-caps-on-commodities-like-oil-and-iron-ore-is-a-risky-business\/","title":{"rendered":"Imposing price caps on commodities like oil and iron ore is a risky business"},"content":{"rendered":"
<\/figure>\n

Beijing will be keeping a close watch on the G7\u2019s efforts to cap the price of Russian oil because China is trying to do the same to Australian iron ore.<\/p>\n

As the world\u2019s biggest exporter of resources and energy, Australia has a vital interest in transparent and freely negotiated commodity markets. Its economy would be seriously jeopardised if consumers were successful in using their combined power to supress prices for specific commodities.<\/p>\n

China accounts for 70% of global imports of iron ore and has long believed that its dominance of the market should give it greater influence over prices. The China Iron and Steel Association plans to have a central iron ore buying agency in place by the end of the year to stop individual steel mills from bidding up prices against each other.<\/p>\n

The G7 plan would exploit the US\u2019s and UK\u2019s control of financial services to the shipping industry, particularly insurance, to prevent Russian oil from being loaded on tankers if its price exceeded a G7-imposed limit. Although the G7 accounts for only 30% of global oil imports, virtually all shipping insurance goes through the London markets.<\/p>\n

Insurers would be forbidden from providing coverage for ships taking on Russian oil at higher prices. Two-thirds of Russian oil is shipped in tankers owned by companies based in the European Union, the UK or Norway, which increases the G7\u2019s leverage.<\/p>\n

The idea is that the price cap on Russian oil would apply not only to the oil purchases of G7 nations but to all Russian oil exports.<\/p>\n

The G7 ambition is to stop Russia from profiteering from the energy crisis that has been partly precipitated by its war on Ukraine. \u2018We are working to make sure Russia does not exploit its position as an energy producer to profit from its aggression at the expense of vulnerable countries,\u2019 the\u00a0G7 communiqu\u00e9<\/a>\u00a0said.<\/p>\n

The volume of Russia\u2019s oil, gas and coal exports in the first three months of the war was down 15% from the same time last year, reflecting the impact of sanctions, but the average revenue is up by 60%, even after taking into account the discounts that Russian oil is suffering in world markets, according to analysis from a\u00a0Finnish think tank<\/a>.<\/p>\n

Russian oil has been selling at about a 30% discount to the Brent benchmark (based on the price for North Sea oils) to compensate for the difficulty in obtaining trade finance for dealing with Russia.<\/p>\n

Japanese Prime Minister Fumio Kishida\u00a0indicated<\/a>\u00a0that a much steeper discount was envisaged in the G7 plan, commenting that the price cap would be \u2018about half\u2019 the current market price of around US$100 a barrel.<\/p>\n

The big risk in the G7 plan is that rather than accept the imposition of a 50% price cut by Russia\u2019s adversaries, Russian President Vladimir Putin would order a halt to the country\u2019s oil exports to anyone demanding sub-market prices.<\/p>\n

Russia accounts for around 8% of oil supplies to the global market. Its former president Dmitry Medvedev recently warned that the G7 plan could take global prices well above US$300 to US$400 a barrel.<\/p>\n

That is hyperbole, but former International Monetary Fund chief economist\u00a0Olivier Blanchard<\/a>\u00a0has estimated that the removal of just 3% of world oil supplies could result in a 30% price increase.<\/p>\n

There would also be a risk that other big consumers of Russian oil like China and India would arrange their own insurance and shipping to keep their Russian oil flowing. The more oil Russia could sell outside the G7 blockade, the easier it would be for it to cut sales to the West.<\/p>\n

The defining feature of commodities is their fungibility\u2014they are the same wherever they are produced and, as a result, they fetch the same price, barring market interference.<\/p>\n

Oil is the world\u2019s biggest commodity market, with annual international trade of about US$1 trillion, or about four times the size of next-ranked iron ore. With vast numbers of sellers and buyers, it would be difficult to hermetically seal Russia\u2019s 8% market share.<\/p>\n

Even against the relatively small producers Iran and Venezuela, former US president Donald Trump\u2019s \u2018maximum pressure\u2019 campaign of sanctions had only partial success. Oil sales were reduced but not eliminated because work-arounds were developed.<\/p>\n

The idea of a G7 price cap was first mooted by US Treasury Secretary Janet Yellen in February. Last month\u2019s G7 summit agreed to \u2018explore\u2019 the concept; however, German Chancellor Olaf Scholz commented afterwards that the concept was \u2018very ambitious\u2019 and would \u2018need a lot of work\u2019 to become a reality.<\/p>\n

The danger is that a buyers\u2019 cartel would prove no more effective than the OPEC producers\u2019 cartel was in the 1970s. While OPEC engineered a short-lived price spike, within a decade its share of the world oil market had dropped from 51% to 30%.<\/p>\n

One might imagine that fixing the price of iron ore would be a lot simpler in China\u2019s centrally planned and authoritarian economy. Yet, a concerted effort to impose a buyers\u2019 cartel failed in 2009. When price negotiations became deadlocked, the China Iron and Steel Association ordered a complete boycott of Australian iron ore. However, smaller mills\u2014fearful for the security of their supply\u2014ignored the order, which ultimately led to the collapse of negotiated iron ore prices.<\/p>\n

A recent\u00a0Australian Financial Review<\/em> report,<\/a>\u00a0which appeared to reflect the thinking of the iron ore majors, commented that rumours of a central buying group had been around for a decade without coming to anything. One of the problems is that China has hundreds of steel mills. Small mills would be concerned that a central buying group would favour the large state-owned steel mills.<\/p>\n

China\u2019s demand for steel is volatile, depending on political decisions on infrastructure and other stimulus programs, as well as on the vagaries of the property sector. Central planners frequently get their forecasts of demand wrong, so both large and small mills would be left sweating on the accuracy of the central buying group\u2019s orders.<\/p>\n

All consumers want lower prices, but it\u2019s ultimately the genius of transparent markets that they deliver a price that matches both supply and demand. The suppression of a price through consumer power (known as \u2018monopsony\u2019) ultimately leads to lower investment, lower production and higher prices. In the same way, the artificial boosting of a price through a producer monopoly would lead to a search for substitutes and a long-lasting destruction of demand.<\/p>\n

The chances of either the G7 engineering a special discounted price for Russian oil or China manipulating the price of Australian iron ore are not high. However, with resources and energy accounting for almost two-thirds of Australia\u2019s exports, the new resources minister, Madeleine King, should be paying close attention to their efforts.<\/p>\n","protected":false},"excerpt":{"rendered":"

Beijing will be keeping a close watch on the G7\u2019s efforts to cap the price of Russian oil because China is trying to do the same to Australian iron ore. As the world\u2019s biggest exporter …<\/p>\n","protected":false},"author":955,"featured_media":73828,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[17,52,1296,2746,1314],"class_list":["post-73826","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-australia","tag-china","tag-g7","tag-iron-ore","tag-oil-trade"],"acf":[],"yoast_head":"\nImposing price caps on commodities like oil and iron ore is a risky business | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/imposing-price-caps-on-commodities-like-oil-and-iron-ore-is-a-risky-business\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Imposing price caps on commodities like oil and iron ore is a risky business | The Strategist\" \/>\n<meta property=\"og:description\" content=\"Beijing will be keeping a close watch on the G7\u2019s efforts to cap the price of Russian oil because China is trying to do the same to Australian iron ore. 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