“Davidson” submits:
First Read the following story from the WSJ:
China’s Iron Hand Comes Up Against Market
By CHUIN-WEI YAP
For China, there’s just seven points between national pride and market savvy.
Some of the bluest of China’s blue-chip steel mills have struck deals with major iron ore suppliers, accepting a provisional 33% cut to last year’s price.
This is the beginning of the end of an annual closed-door ritual that sets sale terms for one of the world’s most important industrial commodities.
This year, the negotiations have become particularly tortuous as China, the world’s biggest iron ore consumer, squared off with heavyweight miners, in hopes of getting a discount of 40%.
The acceptance of the smaller cut signals a fissure between the country’s steelmakers and the Chinese government, which together with the steel association heading the iron-ore price negotiations, has resisted any compromise.
The steelmakers say the latest deals are just temporary, and any difference will be refunded once China’s terms are set.
But their message is clear: Those who negotiated on their behalf miscalculated.
Analysts say the Chinese should have a struck a deal in February when the domestic economy was weak enough to warrant steeper discounts from miners. Steel prices in China have been rising for more than two months.
Certainly, Beijing’s decision to arrest four employees of the Anglo-Australian miner Rio Tinto hasn’t helped the country’s cause. The arrests are now widely accepted as linked to the iron ore price standoff.
As far as prices are concerned, Chinese officials are already softening their stance, saying they are willing to settle for a discount between 33% and 40%.
Now all the miners have to do is stand pat.
Craving certainty the Chinese market has spoken out — it is willing to settle for 33%.
Of the news, “Davidson” opines:
Free Market Continues to Take Control in China
This speaks volumes. The command economic tactic, i.e. dictated by political leaders, to negotiate iron ore discounts of 40% from suppliers has had to make way for the free market which dictated a 33% discount. Rather than following government guidelines the top steel makers seeing prices rise with world demand decided to take contract decisions back into their own sphere of influence and ignore the bureaucrats and the top down instruction.
This is what brings about democracy and free markets. That this happened in China speaks volumes as to the sea change which began in 1979 when Deng Xiaoping launched his economic reforms and continues. See the attached BusinessWeek article of September 27, 1999, “China’s New Capitalism”
Stories of single events such as this one which details the transfer of power from the political sphere to the free market have enormous impact to building free markets and democracy around the world for the long term.
For those who question the viability of the global economy, fear the future and the next bank failure, this report if read in the context of the BusinessWeek article should generate much enthusiasm for the future. When investing, I advise having both a “Top Down” and a “Bottom Up” methodology with the goal of grasping an understanding of as much of the global market as possible and with this the critical investment themes.
Disclosure (“none” means no position):