LONDON/BEJING, July 13 (Reuters) – The Shanghai Futures Exchange (ShFE) is looking to expand its storage network for commodities outside of China and is examining systems and regulations in the sector overseas, three sources with direct knowledge of the matter told Reuters.
China’s dominant commodity exchange has a domestic network of 216 storage facilities for futures contracts, including the metals traded on its market, as well as other materials such as rubber.
“ShFE intends to expand into overseas warehousing. They think about what they want to do, how they want to do it and when they want to do it,” one of the sources said.
Expanding its global presence in metal storage would put ShFE in direct competition with the London Metal Exchange (LME), which dominates the industry outside of China, and potentially challenge London’s position as the center of global metal pricing.
China, the world’s largest consumer and producer of industrial metals like copper, wants domestic players to have more leverage over prices, the sources said.
To achieve this, an international copper futures contract was launched on the Shanghai International Energy Exchange (INE) in November 2020, according to two of the sources. For the contract to thrive, liquidity is required and for that, inventory is required.
Another source familiar with the matter said: “As an exchange providing services to global clients, ShFE is always paying attention to overseas warehousing infrastructure, policies and regulations. Further investigation and market research is required as to where warehouses are to be set up in the future.”
According to the sources, no timeline was given for the implementation of the expansion.
While the ShFE has a firm grip on China’s metal trade and warehousing, the LME has long dominated elsewhere with a warehousing network that includes more than 500 facilities in 32 locations across the United States, Europe and Asia.
The London-based exchange, owned by Hong Kong Exchanges & Clearing (0388.HK) and the world’s oldest and largest metals trading venue, has been unsuccessfully striving to gain a foothold in China warehousing since 2012.
Copper inventories in LME-registered warehouses currently total 54,450 tonnes, or nearly US$463 million at current LME prices, while copper inventories in ShFE-certified warehouses total 74,638 tonnes, or more than US$634 million.
KEY DIFFERENCES
According to sources, there are some major differences between the way warehousing works in China and the rest of the world.
One, they say, is the way rents or storage fees are collected. ShFE provides guidance on what its storage operators may charge based on location and metal. The rents that LME-approved warehouses are allowed to charge are capped.
Another contrast is the insurance. ShFE regulations hold storage companies responsible for problems with stored metal. Outside of China, the metal is insured by its owner and the storage company is usually only liable if they can be shown to have been negligent.
“Other problems are that INE copper is denominated in yuan, which complicates matters for the international market, and there is a general low inventory problem,” said an industry source.
China has capital and currency controls to limit the inflow and outflow of foreign funds.
Low inventories in the LME system are reflected in the volatility of spread trades, such as that between cash-copper and the three-month futures contract, which regularly rises as traders look to the exchange for supplies.
Warehouses registered with the LME are usually located in countries or regions that consume and import large quantities of metals such as copper. An exception to the LME is Singapore, which does not consume large amounts of metals but is an important transit location.
ShFE has an office in Singapore, which the sources said was being explored as a potential site for warehouses to store metal under ShFE permit – a title document conferring ownership of metal.
“Another location ShFE has been looking at for INE’s international rubber contract is Thailand,” said a second source familiar with the matter.
Thailand is a leading rubber producer and could also be used as a transit point for other parts of Asia.
“Maybe a lot of rubber goes to China, but Thailand could be more flexible in planning and supplying rubber for the Southeast Asian market,” the second source said.
Reporting by Pratima Desai; Edited by Veronica Brown and Jan Harvey
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