In the last two days we have seen significant price increases for two major Chinese production inputs that will have ramifications for the commodity markets and for the growth of China.
Gasoline prices were raised 17%, diesel by 18% and jet fuel 25%. Gasoline is subsidized in China, but the different between the global market price and the internal price was getting too large. This increase will not close the gap in price but starts to rationalize the market. This type of increase suggests that gasoline prices are going to stay at current high levels. Fuel lines have been formed around the country, but it is expected that this increase will have little impact on demand. Demand for gasoline is fairly inelastic. While we are seeing some cut in demand in the US, that has only occurred after 75% increase in some parts of the country.
China has negotiated for iron ore from Rio Tonto in Australia for a 96.5% price increase over last year. The increase in 2007 was only in the single digits. This will have an impact in all parts of the manufacturing and construction business in China. Additionally, it tells you how transportations costs are rising. The Chinese are willing to pay a premium for Australian ore over Brazilian ore which was negotiated for a 75% increase just a few months ago.
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