Written by Pratima Desai and Siyi Liu
LONDON/SINGAPORE (Reuters) – China is closing in on measures to fix prices for a wide range of industrial metals, in a move to lure foreign companies to trade on the Shanghai futures exchange, sending world markets reeling.
After buying up mining assets around the world over the past two decades to secure the metals needed to power industries and more recently to meet its carbon emissions targets, China now wants a bigger say in how the prices of those metals are determined.
But it has lost market share in metal futures trading and needs to persuade international investors to use the Shanghai Futures Exchange (ShFE), according to interviews with more than 10 traders, brokers, analysts, risk managers and consultants with direct knowledge of ShFE systems.
If successful, the pressure could help give the Shanghai contracts a standing position and boost the system of reference prices for industrial metals that has existed since 1877 when the London Metal Exchange (LME) began life above a hat shop in London.
ShFE benchmarks will eliminate the need for Chinese firms to link their physical contracts to LME prices and create the need for foreigners to trade in ShFE to influence the reference prices in their contracts, shifting market dynamics from the west to China.
In recent meetings, exchanges have told industry players that the plan is high on their agenda and could be put in place soon, but did not discuss deadlines, two of the people said.
ShFE did not respond to requests for comment or to questions about the amount of money available to invest in the project, the challenges it faces or how success will be measured.
However, the state media in June reported Wang Fenghai, the general manager of ShFE, saying: “By opening only where we can attract foreign investors, we participated in the price establishment process of ShFE, so we improved the influence of the price.”
Wang added that cross-border delivery capacity is an area ShFE will focus on in terms of attracting global participation.
In a key step, the exchange was looking to consolidate warehouses outside of China to store the metal delivered by copper contracts launched on the International Energy Exchange (INE) for 2020.
ShFE has told industry stakeholders it intends to expand soon into international steel storage, two other sources with direct knowledge said, calling it competition with the LME's global network of more than 450 registered warehouses that store thousands of tons of aluminum, copper and other metals. .
“They (ShFE) have a plan, they are going out, they are going to write a list of warehouses outside of China, … the government wants this to happen,” said another source familiar with the thinking behind the plan.
While the steel industry has known since last year that ShFE plans to consolidate offshore storage facilities, from Singapore, its latest comments to foreign firms suggest it is closer than ever.
“The real amount of people who want to use it needs shares all over the world,” said a source with knowledge of ShFE plans.
When ShFE makes a firm decision to offer steel storage outside China, the process of registering warehouses will be a matter of weeks if not days, as facilities already exist in ports that see large flows of steel, warehouse sources said.
ShFE will not require regulatory approval for warehouses that can store iron that can be delivered against its contracts as long as it is available in free trade zones, so iron can be stored duty-free until it is delivered to customers.
Singapore makes a good start as it is already home to LME warehouses, meaning the regulatory framework is already in place.
All the people who spoke to Reuters asked not to be identified as their discussions with ShFE were confidential.
COMPETITORS TAKE MARKET SHARE
The Shanghai exchange is facing a tough road against the LME, as China consumes more than half of the world's supplies of copper, aluminum and zinc and produces large amounts of these metals.
“Any exchange that aspires to be international will face challenges … ShFE will face many challenges and various obstacles if it aims to become a global price center,” Luo Xufeng, chairman of Nanhua Futures told Reuters.
Finally the exchange intends to list aluminum, zinc, nickel, lead and tin in INE, sources with knowledge of ShFE plans. Those metals are already traded on the LME, the largest and oldest metals platform, run by Hong Kong Exchanges and Clearing (HKEx).
On the LME, copper volumes, which are important in construction, electrical systems and electrical goods, are stable at around 60% globally.
But ShFE's home market has lost its base to COMEX in the US, which is part of the CME Group (NASDAQ: ), since 2015, and ShFE last year accounted for about 15% of the world's traded copper futures, while the share of COMEX was 22%. In the first nine months of 2024, trading prices for ShFE's INE copper futures fell by about 43% from the same period last year.
“The only way to increase capacity is to get more international involvement in ShFE,” said a steel trader with direct knowledge of the matter, adding that the Chinese government was behind the project to internationalize ShFE contracts.
The China Securities Regulatory Commission (CSRC), which regulates ShFE, and the State Council, China's cabinet, did not respond to questions from Reuters.
Meanwhile, the LME is working on plans to list new contracts using ShFE prices and is set to approve the expansion of its steel storage network in Hong Kong before the end of this year.
The LME said it intends to “strengthen our collaboration with the ShFE by working together on product innovation to better leverage international stakeholders in risk management and price discovery,” in response to a request for comment on its plans.
SHFE TESTS
ShFE's ambition has been a long time in the making. When HKEx bought the London exchange in 2012 in a plan to charge revenue by expanding the LME's warehouse to China, the ShFE told local authorities it could emulate the LME's network and give China power and influence in global steel markets. .
Some of that influence will come from some foreigners who trade in ShFE having to hold yuan accounts, which will further Beijing's goal of gaining global acceptance for its currency. ShFE contracts and its INE platform are denominated in yuan.
“ShFE has been trying to do this for over 10 years,” said Dan Smith, head of research at Amalgamated Metal Trading.
“The biggest challenge is that there are still restrictions on the conversion of yuan into dollars.”
China's currency exchange controls that limit the amount of money companies can take out of the country at any one time, partly as a measure to control currency volatility, are a potential deterrent for foreign investors.
The sources also mentioned the fear of the policies of the Chinese authorities designed to regulate the commodity markets and market interventions of the government, such as margin requirements – cash deposits or mortgages need to cover possible losses.
“They don't like volatility. They can double, triple the fees and margins overnight if they want. It makes people panic,” said a source familiar with the matter at a fund focused on services.
