ASIA COPPER WEEK: CME, LME, SHFE on competition, co-operation and new products

Senior executives at the three major metals exchanges – the London Metal Exchange, Chicago Mercantile Exchange (CME) and Shanghai Futures Exchange (SHFE) – were unanimous in their view that the exchanges are not competing with each other and their innovation and product offerings are unique and bring value to the market.

A lot of copper premium pricing in China is done on a floating basis, which enabled the CME to launch the new copper premium grade A cif Shanghai futures contract ahead of CESCO Asia week, Lucy Shitova, CME Group director of metals products, said during the 13th Asian copper conference on Thursday November 30.

“A lot of people have noticed an increasing divergence between the annual copper premium and the spot premium, hence the demand for floating premiums in underlying contracts,” she said about the newly launched contract.

“The increasing volatility of spot premiums certainly triggered the need for floating price contracts and a respective hedging tool,” she added.

The exchange had launched aluminium premium contracts in 2014 and it “took some time to onboard clients and familiarize them with the products. But recently we have seen an increase in open interest across all aluminium premiums and more participants in the market,” she said.

Physical base metals premiums are paid over the LME cash price and are reflective of demand and supply in different regions.

CME Group’s European aluminium premiums contracts, which are settled against Metal Bulletin’s duty unpaid (AEP) and duty paid (EDP) in-warehouse Rotterdam price assessments, have been gaining traction this year as well. 

Similarly Metal Bulletin’s cif Shanghai copper premium monthly average will be used for settlement of the cif Shanghai copper premium (CUP) futures contracts launched by CME on November 20.

The aluminium premiums are “unique” and “have been quite successful in the past three years” in volumes and also to mitigate risk in the industry, Jin Chang, global head of metals, CME Group, said.

She added that though aluminium premiums are more stable from historic highs the contracts have seen a record increase in open interest.

Open interest was above 60,000 contracts in total across all four aluminium premiums contracts on the CME at the end of October.

Overall, trade from Asia has been increasing, they said.

Asia is the fastest growing area for copper and other metals. We started with 10 staff and now we have 40-50 staff in the region,” Chang said, adding that the focus will be on new client acquisition, growing its business and education in the region.

Asia accounts for 33% of the average daily volume or 390,000 tonnes of copper futures traded during Asian hours this year, Shitova said during the conference.

“I don’t see exchanges as competitors in the sense that people are going to have physical contracts benchmarking to LME prices, so in general people are quite happy,” LME chief executive officer Matt Chamberlain said.

“I echo that the CME premiums contracts have been quite revolutionary and very successful,” he said, adding “[the premiums] are over the LME benchmark [price which] is fantastic from our perspective”.

“[It’s a] great example where exchange innovation can be helpful for everyone,” he said.

The LME is seeing opportunities in a parallel market and are doing a lot more on London precious “which is primarily an OTC market right now but we think we can do more on exchange”, Chamberlain said.

“We have also talked a lot about the EV story and some of the work we have been doing with a consortium of players in that space with things like lithium and cobalt sulphate which although not directly relevant to copper will help to drive that EV product and is also very positive for the copper market,” he said.

He added that the exchange had quite a lot to learn from “both SHFE and CME in terms of successful product launches, perhaps something that the LME hasn’t had confidence in the past”, adding that the strategy might be to throw up a few contracts into the market and see what works and what doesn’t.

“Some people believe exchanges competing with each other in terms of homogeneity, but I think there is co-operation and by working together exchanges can help each other,” Jianghong Zhu, associate director non-ferrous metals market at SHFE, said.

She went on to elaborate that CME, LME and SHFE have a different environment and market.

“In terms of price discovery on the LME it is net excluded taxes and denominated in USD while SHFE prices are tax included and denominated in CNY,” she said.

“LME has formed a solid foundation when it comes to benchmark pricing for metals while, SHFE is more of a local exchange around which China’s spot and futures metals markets revolve,” she added.

SHFE copper future options contract has received a green light from Chinese state regulator China Securities Regulatory Commission [CSRC].

“We have to finish other procedural steps. I can’t give a concrete timeline for the launch of options, but it depends on other Chinese procedures that we need to go through,” she said.

“We have trading rules that have been put in place, we will solicit feedback from the market to fine tune our product offering,” she said.

In the future the exchange plans to launch other commodities futures indices and options as well, she said.