Europe, US clash with Asia on commodities regulation

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This article is part of our special report Raw Materials.

Sharp differences emerged between EU-US and Asian policymakers over whether to regulate commodities trading during a policy debate at a European Commission-hosted conference on raw materials, held on Tuesday (14 June) in Brussels.

EU Internal Market Commissioner Michel Barnier and Bart Chilton, the commissioner of the US Commodity Futures Trading Commission, broadly agreed with French President Nicolas Sarkozy's call earlier that day for all G20 countries to commit themselves to tighter regulation against financial speculation.

But Chinese delegate Daochi Tong, director-general of the department of international affairs within the China Securities Regulatory Commission, questioned whether their diagnosis of price volatility was right.

Tong: Don't blame China – look to the US

Addressing a session on policy responses to commodity price volatility, Tong said he had heard too much blame for rising prices laid at the door of the Chinese. He said that – despite massive growth in grain consumption in China between 1990 and 2005 – the price had only shown marked rises since 2005.

He pointed to the use of grain in the US biofuels industry as being as likely to cause price volatility. "Even if the average yearly increase in consumption of grain may be small as a result of its use in the [US] biofuels sector, it has an incremental influence [on price]," he told the conference.

Speaking afterwards to EURACTIV, Tong said that he was not opposed to greater transparency or regulation in itself, but he added: "Transparency is a good thing and so too can be regulation, but not when applied in a way that distorts the market and is in effect like a trade protection move. A good example of that is the carbon tax being applied to airlines by the EU."

He said that the proposed regulation on trading in commodities "could have similar unintended consequences".

Australian: US, EU should 'stop mucking about'

Also dismissing proposals to regulate speculation on commodities, Mitch Hooke, CEO of the Minerals Council of Australia, asked when the US and EU were "going to get serious about the problem," which he said was caused by supply-side problems amid over-regulation.

He said: "There is not a lot you can do to influence the price of commodities without tackling the issue of supply constraints [caused by over-regulation], rather than mucking about on the edge of the problem."

Barnier hit back, saying: "You ask us to be serious [about dealing with the volatility in the markets], but we are being serious and we have brought forward policy proposals to deal with these issues."

He added: "I do not agree when you say ‘leave the market alone', because I do not believe that the market will regulate itself: the absence of an intrinsic morality has already been highlighted there."

Asked afterwards by EURACTIV whether he was disappointed with the negative Chinese response to regulation, Chilton said he believed that those countries upon which the financial crisis had impacted least "have a harder time seeing the need for regulation".

He added: "I understand that, but I don't think it’s the right approach to make. I don't want to see a situation where the markets gather at the shallowest [least regulated] end of the pool. The question is: how do we get to a reasonable compromise?"

Jeremy Fleming

"Transparency is a good thing and so too can be regulation, but not when applied in a way that distorts the market and is in effect like a trade protection move," said Daochi Tong, director-general of the department for international affairs at China's Securities Regulatory Commission.

He added: "A good example of that is the carbon tax being applied to airlines by the EU. So in theory it could and should be a good thing but the unintended consequences could be a bigger issue, we need to encourage a freer trade association."

Bart Chilton, commissioner at the US Commodity Futures Trading Commission, told EURACTIV in relation to Tong's response to the initiative: "I think that those countries where the financial crisis has impacted least have a harder time seeing the need for regulation. I understand that but I don't think it's the right approach to make."

"I don't want to see a situation where the markets gather at the shallowest [least regulated] end of the pool. The question is: how do we get to a reasonable compromise?," he added.

"There is not lot you can do to influence the price of commodities without tackling the issue of supply constraints, rather than mucking about on the edge of the problem," said Mitch Hooke, CEO of the Minerals Council of Australia.

He said: "We are not blaming China, but we are identifying China, and it's not doing anything that wasn't done by the US, Europe and Japan in the 19th and 20th Centuries, industrialising fast."

Hooke said that the "jigsaw of policy responses in the West was making supply constraint more difficult in Australia" and added: "We are tinkering around on the edges but in the real world it makes no difference: when are you going to get serious?"

"You ask us to be serious [about dealing with the volatility in the markets], but we are being serious and we have brought forward policy proposals to deal with these issues," retorted EU Internal Market Commissioner Michel Barnier.

"I do not agree when you say 'leave the market alone' because I do not believe that the market will regulate itself: the absence of an intrinsic morality has already been highlighted there. We are not pointing the finger of blame; speculation may not be the main cause of volatility in the markets, but it is one of the causes. There is too much overlap [between different financial interests and derivatives] for there not to be a link between speculation and volatility," Barnier concluded.

Commodity prices have surged largely due to supply and demand bottlenecks and the European Union is currently putting together a response to the challenge.

Some EU countries such as France want curbs on what they see as speculators such as hedge funds making quick gains in commodities markets at the expense of consumers.

French President Nicolas Sarkozy, who holds the rotating presidency for 2011 of the Group of 20 (G20), a policy forum for the world's leading rich and developing economies, wants new rules to curb commodity price volatility.

The European Commission is expected to be tasked with helping the G20 in its work on food market volatility and excessive price swings on energy markets.

The Commission will also be asked to present initiatives on the disclosure of financial information by mining companies, including the possible adoption of country-by-country reporting requirements.

The EU executive's February 2011 communication on raw materials includes measures to improve the transparency of financial and commodity markets.

Earlier in the day at the conference, French President Nicolas Sarkozy called for tighter controls on the speculators he blames for spiralling food and energy prices, spelling out reforms that would put more trading under the thumb of regulators.

Sarkozy, head of the G20 group of the world's leading economies, said he wants to extend the use of cash deposits to all derivative deals, not just those on formal exchanges as is current practice.

  • Later this year: Commissioner Barnier to suggest measures for increasing transparency and regulating speculation in commodities trading markets.

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