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Bloomberg
China wants a price for copper made in China
(Bloomberg Opinion) – China’s next move to open its commodities markets could be a sea change: From Thursday, foreign investors will be able to trade copper futures on the International Energy Exchange in Shanghai. This isn’t the first product of its kind: a yuan-denominated crude oil contract, launched in March 2018, has had modest success. A subsequent push to allow foreigners to trade iron ore in Dalian set a global benchmark. Copper could surpass these efforts, thanks to fortuitous timing, the global appetite for an economic indicator and the influence of the world’s largest consumer. The ambition is clear. Beijing wants increased pricing power in the commodity markets it dominates, especially when the country imports that ingredient. He no longer wants to be just a price taker. China is also keen to strengthen the use of the yuan for transactions abroad, as part of a long-term strategy to raise the profile and influence of the currency. At the same time, the government wants domestic companies to do more to protect themselves against volatility. Allowing foreigners to trade petroleum and iron ore – as well as rubber, low-sulfur fuel oil, and purified terephthalic acid or PTA, a petrochemical derivative – goes to some extent in all of this. Copper promises to be an even bigger leap forward. The metal is a key indicator of an economy that has recovered faster than the rest of the world from the coronavirus. If there is a contract on the Shanghai Futures Exchange, intended for local traders, the new one, traded on the INE subsidiary, will be open to foreigners. The contract size is the same, but this will exclude taxes and duties and will be delivered to bonded warehouses, which will help it actively compete with the London Metal Exchange. Benchmarks are difficult to create, as the oil market shows. Initiatives to abandon contracts drawn up in US dollars, such as Urals crude on the St. Petersburg Stock Exchange, have failed. The Shanghai yuan-based contract is the country’s first, and perhaps the most spectacular, venture in international futures markets. Although it is performing relatively well, it has not become an indispensable benchmark nor has it caught up with Brent and West Texas Intermediate in volume, let alone in open interest rate, the number of futures contracts in Classes. A worrying spread that opened in the spring, suggesting a distortion of the market, has now rebalanced. Here, China opened an existing deal on the Dalian Commodity Exchange, which was already among the country’s most liquid derivatives. While China accounts for around 14% of global oil consumption, it is the largest steel maker. Last year, Dalian traded more than 30 times the physical maritime volumes. More and more producers, including mining giant BHP Group, are accepting payments in yuan. Now is the time for copper. China now accounts for more than half of global consumption, according to BMO Capital Markets, up from 39% in 2010 and 12% in 2000. The country’s appetite has only grown this year – it has absorbed more copper crude and has already increased its purchases of refined metal by over 1 million tonnes compared to 2019. It is telling that when broker BANDS Financial Ltd. gave a presentation on the new contract alongside the Shanghai Futures Exchange, it was viewed 15,000 times the next morning. risk of unexpected government intervention, as we have seen in the past. From China’s perspective, copper will also not solve the problem of internationalization of the yuan. It may need to add warehouse locations to compete effectively with the LME. It might become useful, but not essential. Yet establishing a credible regional benchmark relies on the alchemy of timing, structure and luck. This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.Clara Ferreira Marques is a Bloomberg opinion columnist covering commodities and environmental, social and governance issues. Previously, she was associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, UK, Italy and Russia. For more articles like this, please visit us at bloomberg.com/opinion © 2020 Bloomberg LP
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