GM181114_20X copper prices

With the start of the futures, China is aiming to have a stronger influence on copper prices

Shanghai is challenging London’s dominance in metals trading by issuing a new futures contract on copper, which analysts say has the potential to become a global benchmark.

The Shanghai International Energy Exchange (INE) will begin trading monthly copper futures on renminbi in contracts based on the metal on Thursday for delivery to warehouses in China.

The launch offers the country’s first copper-bonded product directly available to foreign investors – following similar initiatives in recent years for crude oil, iron ore and other commodities.

Analysts said the new copper deal would help Beijing increase its leverage over pricing in a market critical to its economy, as well as aid efforts to expand the use of its currency in the global financial system.

“China doesn’t want its economy or markets to be shaken by international markets,” said June Zuo, president of Huatai Financial in the US, which is part of the Chinese securities group.

China’s dominant status as a buyer of the industrial metal used from household cables to wind turbines has been the key driver behind the market’s rebound from the coronavirus sell-off. Copper hit a two-year high of $ 7,179 per ton on Monday due to strong demand, reflecting the world’s second largest economy from the pandemic.

According to market participants, Chinese decision-makers are increasingly interested in reducing the negative effects of downturns in other countries. The experience with crude oil futures has “given them the need to list the new copper products,” said Ms. Zuo, a former INE employee.

Shanghai signed its international crude oil deal two years ago, fulfilling the regulatory authorities’ longstanding goal of “gradually strengthening China’s pricing power in international markets”.

The market faced a stress test in April when coronavirus and the oil price war drove US crude oil prices below zero for the first time. China’s contract, on the other hand, stayed in the region of USD 30 a barrel. This premium led to a spate of shipments to China as traders took advantage of the opportunity to store oil on the exchange. Within a week, the amount of oil in the stock exchange’s facilities doubled.

Some have suggested that the gap between regional markers is a signal of a decoupled market. Researchers at the Oxford Institute for Energy Studies have cited private investor involvement in China as the cause of this “anomaly” rather than the strength of local oil demand. However, they find that the crude oil futures contract benefited as capacity and liquidity were pulled into the exchange.

This helped repair the global market, said John Browning, founder of Shanghai-based brokerage band Financial. When ships went to Shanghai to unload oil, he said, “Raw materials began to flow and international prices began to rise.” He added that it was a “realized theory”.

Nymex's line chart versus INE futures, reset to 100, shows that Shanghai's oil futures did not fall that far in April

A copper deal could shape global markets even more, as China is by far the largest consumer of the industrial metal, buying more than 50 percent of the world’s mining supplies. Some in the industry believe this could ultimately call into question the role of the London Metal Exchange as the global price setter for the metal.

While China has already listed a copper futures contract on the Shanghai Futures Exchange, foreigners will have to start a local business to take advantage of it. The INE’s copper contract gives foreign companies direct access and its price will not include VAT, which is similar to international prices.

The metal is stacked in so-called bonded warehouses, which are outside the customs area and are therefore free of import duties and taxes. With the London Metal Exchange – owned by Hong Kong Exchanges and Clearing – not having warehouses on the mainland, the INE deal could be a compelling alternative, Browning said. “When it gets going, there is no reason why producers and consumers in the region couldn’t use it as a benchmark.”

Colin Hamilton, an analyst at BMO Capital Markets, said the deal had a “high chance of being hugely successful” as more than 70 percent of copper consumed across Asia. China is now the “last resort for buyers” provided they can take the currency risk, he added. “[We] Expect this to become the international benchmark for the copper market over time. ”

The LME said it would not comment on trades on other exchanges but added that it “welcomed any initiatives that could increase the flow of trade and provide more arbitrage opportunities for market participants”.

The new launch is part of a relaxation of the rules for foreign investment in China’s domestic capital markets. This month, China also relaxed the rules for qualified foreign institutional investors (QFII) to facilitate access to domestic futures, including commodities.

The copper futures contract will make it easier for domestic traders to hedge international price risk in their own currency, say commodities experts. And it should help Beijing’s goal of promoting the use of the renminbi overseas, said Richard Fu, a metals analyst.

“It will weaken the dollar’s impact on the world market,” he said. “That is the key they are trying to develop – to internationalize the currency and also to have more influence on the global market price system. China consumes almost half of the world’s raw materials, so it happens. ”