What A Black Market In Rice Can Tell Us About Steel

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I read a fascinating article in Forbes last week about a growing international black market for rice. International rice prices are approximately 4 times higher than prices in China. And since China accounts for one third of the world’s production, according to the article, domestic policies in China greatly impact the global market place. What are the conditions and facts of this particular story? The specifics include:

  • Surging prices
  • Producers restricting exports
  • China is the world’s largest producer
  • Domestic China prices are lower due to domestic subsidies and export curbs

The interesting point is that the Chinese government would rather subsidize rural farmers (to keep them happy) than allow imports. In addition, the Chinese government seeks to be self-sufficient from a rice production standpoint but has now gone overboard by accumulating more than 30% of its annual consumption, as opposed to the 17-18% needed according to the UN Food and Agriculture Organization.   So what lessons can we take from this as far as steel is concerned?

We can certainly say steel prices are surging internationally. China is a very big producer and has recently restricted exports through tax changes and modifications to the VAT rebate structure, albeit last year and early this year. The one fact that inhibits a black market for steel is that the Chinese are also paying higher prices for steel, though their increases appear to be much less than we Americans have had the joy of experiencing. Why do black markets arise in the first place? One reason may be that, “…illegally supplied goods may be more expensive than normal prices, as the product in question is difficult to acquire or produce, dangerous to deal with or may hardly be available legally.”

As long as countries like the US and China continue to subsidize their domestic steel industries (we also offer an anti-dumping program for our domestic steel industry) relatively equally, we’ll avoid black markets. Now arbitrage opportunities, well that is an entirely different matter. It would be great to be able to take advantage of those again…

–Lisa Reisman

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