For all the goodwill and pleasure LME Asia Week generated it is worth noting that it took place against the background of turmoil in the copper markets, partly driven by renewed worries over China’s economy and a crackdown on lending.
Cash copper prices on the London Metal Exchange dropped by 8% from the first trading day of June to the last, when official prices were $6,750/50.5 per tonne.
The interbank lending spike that rattled markets last week was a harbinger of bigger structural changes to come in China.
The government is expected to unveil a major package of reforms towards the end of this year that will be crucial for the future of the economy and also of the financial sector as it opens up to international capital.
It became clearer last week that the future path of prices and trading on the LME will in some ways be influenced by political decisions and political bargaining in China, which is inherent in Charles Li’s policy of “collaboration, not competition”.
Li discusses the issue of price-setting on his blog, appearing to echo participants in the copper market in China, who in the past have descried the lack of influence they perceive themselves to have on prices.
“Over the years, China has been producing and consuming at high volumes, but has been failing to transform this quantity effectively into influence in pricing. In other words it has always been a price taker… As the market develops, the influence on pricing will return to the hands of the consumers,” he said.
This is an area where Li has to walk a tightrope as he lays the foundations for mainland Chinese companies to trade commodities on a HKEx platform, and thus create arbitrages with the LME.
Many outside China will disagree with his assessment, since in general terms the copper price is made as much by demand from China as it is by supply from outside the country — as 90% of the reports about copper prices (including this one) demonstrate.
Whatever the ins and outs of it, Li is sending a strong signal to the copper market in mainland China that if they have not considered it yet they could do worse than push to be able to trade monthly futures in small lots of copper in Hong Kong.
Alex Harrison
aharrison@metalbulletin.com
Twitter: @alexharrison_mb
Martin Ritchie
martin.ritchie@metalbulletinasia.com
