Chinese officials and entrepreneurs said on Sunday that China should have bigger say in setting commodity prices, as oil and iron ore prices saw roller-coaster-like fluctuations in the past two years.

The drastic price changes are not reflecting real demand, but are propped up by financial speculators, said the senior executives of China's top energy enterprises at the Boao Forum for Asia (BFA) annual conference 2009, which concluded Sunday in the island resort of Boao in south China's Hainan Province.

They said commodity prices should be pulled back to normal track to reflect real demand, otherwise the inflation woe will come back and make business expansion unsustainable.

Price and real demand

"Although we are the biggest commodity buyer in the world, our role in the price setting is limited," said Zhang Xiaoqiang, vice minister of the National Development and Reform Commission (NDRC), China's economic planning agency.

China's steel makers have fallen into a prolonged bargain with the world's major iron ore producers, demanding a sharper price cut than the 20 percent-off deal plan offered by the Rio Tinto of Australia, as the world's No.1 iron ore importer has less demand amid the economic slowdown.

Iron ore prices increased five fold in the five years before 2008.

Xu Lejiang, boss of the Baosteel Group Corporation, China's largest steel maker, said at the forum that nothing is more important than the normalization of iron ore pricing, without elaborating how much more price cut he wants.

The continuously rising iron ore prices partly reflected demand, but that's not the whole picture, said Xu.

The prices tumbled by more than two thirds from a peak of US$187 per tonne last year. Speculative trading on iron ore shipping index helped fan the volatility, since shipping costs comprise a large share of the iron ore prices.

The Baltic Dry Index (BDI), a main gauge of international shipping activities, has plummeted from a peak of 11,000 points to above 600 points, which is certainly what people are reluctant to see, Xu said.

His view was echoed by Fu Chengyu, chief executive officer of the China National Offshore Oil Corporation (CNOOC), the largest offshore oil producer in China. He said the prices are bound to fall after irrational rise.

He said the loose monetary policy in the United States should be blamed for the skyrocketing oil prices last year.

"If no measures were taken, the world would see another round of inflation after we weather through the crisis," he said.

He noted the pre-emptive measures should be put into place to avoid that, otherwise the next headache for the G20 leaders will be how to fight inflation.

"We should prepare for tomorrow," Fu said.

Zhang Xiaoqiang said international collaboration is essential to enhance the oversight of the financial speculation.

Action before crisis

The volatile external conditions forced many Chinese energy enterprises to seek their own way to offset the negative impacts of price fluctuations.

Cost saving has always been important to CNOOC, said Fu. "We have cut the cost to US$19.78 per barrel, and that has allowed us to get through with ease when prices fall."

"We step up investment with the current cheap prices, and that will help us flourish after the crisis," Fu said.

To offset the negative impacts of price changes, many Chinese enterprises have been engaged in hedge trading and other derivative products investment, but many failed with mounting losses.

"CNOOC has lost nothing, since we use hedge trading to preserve value, rather than make money," he said.

"Hedge trading is not speculation," said Fu who has 30 years of experience in the oil industry.

Fu called on Asian countries to negotiate with the world's major crude oil suppliers, as Asian nations have to pay US$1 to 2 more per barrel than other buyers.

Zhang Xiaoqiang noted China will continue to liberalize domestic prices of energy products and resources, saying the recent reform of refined oil prices is a good start.

"We should beef up our commodity reserve to ensure plenty supply in order to offset the negative impacts of big price changes," Zhang said.

As the Chinese government has announced plans to build the second batch of national oil reserve bases, enterprises can try to have their commercial energy reserves in the future.

(Xinhua News Agency April 20, 2009)