It's a basic rule of investing that you
should distinguish between risk, which is largely measurable,
and uncertainty, which isn't. Embrace the former and, unless
you have nerves of steel and deep pockets, be very wary of the
Anyone planning to ship scrap to China in
recent weeks would certainly have been reminded of the
difference between the two.
The Chinese scrap trade has never been simple
sudden tightenings of customs inspections, contract defaults
and sharp swings in demand have always posed risks for sellers.
The rewards-$500-a-tonne ferrous scrap at the docks, for
example-have recently been enough to justify them.
April's announcement by China's Customs
Bureau that it was planning new rules for scrap imports was
another matter. Depending on who you spoke to, the rules would
ban all loose scrap, require shippers to bale or bag all
material, or effectively shut out some mixed-grade shipments.
Or none of the above. "From first-hand discussion with Customs
people, I can tell you that they don't exactly know how to
enforce these regulations yet," one industry official said.
Rather than risk, this was uncertainty-an
unpredictable, opaque rule-making process that no-one is quite
sure will be implemented, or what the impact will be even if it
is. And it's something that everyone with a connection to China
should get used to.
The arrest and imprisonment of four Rio Tinto
iron ore executives is another high-profile example of China's
uncertainty principle. The executives were taking bribes, if
the Chinese court and subsequent admissions are to be believed.
But bribery is rife in China, and the singling out of the Rio
employees would seem arbitrary if it wasn't clearly politically
motivated. Another charge-of stealing commercial secrets-was
even more disorienting, as the "secrets" in question seemed to
include such routine market information as Chinese steelmakers'
iron ore demand profiles.
Other recent examples abound. China's steel
association announced an impromptu ban on low-grade iron ore
imports, which few think will work. And provincial authorities
in Hunan closed down 99 percent of antimony smelters, sending
prices of the minor metal spiraling up.
If there's a common theme knitting all these
events together, it's that they are attempts by China's
government, industry bodies or bureaucrats to reassert control
over the country's freewheeling commodity markets.
Paradoxically, that in itself might create more uncertainty,
even if in the long term it serves to reduce risk.
That China is changing might be an obvious
statement. But the way in which China is changing is itself
evolving over time. The government has made it clear that the
days of chasing unbridled economic expansion are over; instead,
the watchwords are sustainability, consolidation and control
(admittedly combined with double-digit GDP growth).
There are two widespread misconceptions about
China that Beijing can impose its will on industry and the
provinces-it often can't-and that economic development has
reduced the role of central government in the economy. In fact,
China's state power is on the rise and likely to keep on
rising. In metals, that likely will mean a more consolidated
steel industry, with a handful of mills exercising greater
pricing discipline and purchasing power; more regulations; and
even a crackdown on some private enterprise, if one theory for
the Rio arrests-that they were part of an attempt to rein in
China's privately owned steel sector-is correct. Any of that
If Beijing gets its way, the days of China as
a "Wild West" economy could be coming to an end. That will
eventually make China an easier, if potentially
less-profitable, place to do business. But reducing risk in the
long term is likely to increase uncertainty along the way.