Documents released in May to The Wall Street Journal revealed the argument that has been raging within the Commodity Futures Trading Commission (CFTC) about the causes of price volatility in energy and other commodities markets - and whether anything could be done about it. While CFTC chief Gary Gensler has made tackling speculative trading - what he and many politicians have argued is the major cause of price spikes - at the centre of his agenda since taking on his role last year, his plan has been dogged by opposition from both inside and outside his organisation.
Mr Gensler's key move has been to clamp down on investment in commodities as an asset class. He blames commodity index funds - which allow investors to gain exposure to commodities without having to take actual delivery of any physical products - as a "contributing factor to a bubble in commodities prices that peaked in mid-2008".
Bankers and economists argue against this thesis (as, it seems, do many of Mr Gensler's CFTC colleagues), pointing to fundamental changes such as growing demand, particularly from Asia, as the reason for rising costs.
Investors still hungry
There is no doubting the growing appetite for commodities from financial investors. Data from Barclays Capital reveals that total commodity linked assets under management rose by 36% last year, to $257bn, with exchange-traded product programmes - including commodity-linked notes and commodity linked exchange traded funds - growing by 48%.
But while politicians and regulators in the US agonise over whether it is possible to regulate or legislate price volatility out of the markets, Asia's consumption of the world's resources (as well as its economic recovery) is steaming ahead, heedless of discussions in Washington or Brussels.
The importance of Asia - in particular China - to the dynamics of the world's commodity markets is the dominant theme for commodity producers and financiers. In April, the Singapore Commodity Exchange reported that trading had risen by 54% year on year. As other countries have cut back consumption, China's demand has incrementally risen, in some cases dramatically.
While the rest of the world saw at least a 2.5% decline in oil demand, China experienced an 8% increase. Chinese demand has saved the day for a host of other raw materials. Just two years ago, China was a net exporter of coal. Last year, the country's coal imports increased by 20%, as the rest of the world experienced a 4% decline in demand.
Strong in steel
China's impact on global steel consumption growth has also been astonishing. Bank of America Merrill Lynch estimates that the country makes up 40% of global demand for base metals (and other bulk commodities), and as much as 65% in iron ore. While global steel consumption has been on a downward trend since 2006, driven by a slowdown in the US, Europe and even India, China has seen double-digit demand growth year on year, almost entirely compensating for everyone else's decline in 2009. A decade ago, China's contribution to the global steel and iron ore market was tiny.
Slow on the uptake
Many bankers argue that Western governments and legislators are not grasping what this dramatic change in commodity trade flow means. "Listening to the tone of the dialogue in Washington and Brussels, you begin to get the idea that the focus is in the wrong place. Western governments should be ensuring that our banks and corporates are playing a significant role in these trade dynamics, not looking for potential ways to hobble their business. The politicians are fiddling while Rome burns," says one senior banker.
The importance of China to the recovery of commodity economies in Latin America - where 93% of the region's population live in countries which directly benefit when international prices of farm produce and minerals increase - was spelled out by a report from the World Bank in April. "Those countries which have closer ties with Asia, particularly south-east Asia and China, are those showing the most vigour in the economic recovery," said Augusto de la Torre, the World Bank's chief economist for Latin America.
He cites the more sclerotic recovery of Mexico - where its powerful US neighbour accounts for almost 90% of its trade - with Latin American neighbours such as Brazil, Chile and Peru. Chile, for example, already exports more to China than to the US or Europe.
This, does, however, make these economies more vulnerable to any kind of slowdown in China's commodity consumption. Asia has undoubtedly put a solid floor below prices, and it will continue to support demand for commodities in 2010. However, many economists suspect that the positive demand surprises seen consistently during 2009 are not to be expected to the same degree this year. Now there is greater focus on the risk of expansionary monetary and fiscal policy measures in Asia - not least in China - being rolled back. The latter will almost inevitably be bearish news for commodities from time to time in 2010.
