China may try to bypass exchanges and source materials directly By Tom Stundza Purchasing June 14, 2007 China is roaming the world to source metals directly from Africa and elsewhere in order to cut out such middleman as the London Metal Exchange (LME), says Martyn Davies, director at the Centre of Chinese Studies at Stellenbosch University in South Africa. China is trying to avoid key commodity markets while it creates markets for Chinese exports.

“The policy makers and powers in Beijing have an extreme dislike for the London Metal Exchange,” Davies tells the World Mining Investment Congress in London. “Why? It is a middleman and a consequence of the colonial economic construct and that is why the metal exchange sits here in London and not in Johannesburg,” according to Davies, who is also the CEO for the strategy consulting firm Emerging Market Focus. He says the Chinese prefer to acquire the asset source and negotiate long-term off-take agreements for 20 to 25 years with the governments of commodityproducing countries.
Davies says China would attempt to set up parallel markets and exchanges during the course of the next two to three decades. “Of course we will have the traditional markets with the mining majors and the like selling on this traditional market (the LME) but China will seek to change the rules of the game,” he tells the Reuters News Service.
This approach isn’t new. Last year, China attempted to become the keystone player in world iron ore pricing negotiations with Brazilian and Australian miners. The move flopped, however, because of longstanding use of steel mills in Europe as the pricing trendsetter for the Brazilians and the steel mills in Japan for the Australians.
When buying commodities—ranging from ores to scrap to semifinished mill products—“China’s problem is not a lack of capital, it is its inability to spend it productively,” says Davies. That’s because mainland China doesn’t yet have as refined an investment climate as North America and Western Europe.

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