HOTTER ON METALS: In the night garden with China

While most eyes have been on the competitive threat that exchanges in the USA might pose to London Metal Exchange trading volumes, another exchange has slipped one foot in the front door.

While most eyes have been on the competitive threat that exchanges in the USA might pose to London Metal Exchange trading volumes, another exchange has slipped one foot in the front door.

The Shanghai Futures Exchange (SHFE) has given its international peers a clear message: hands off our turf!

This week, SHFE announced plans to launch a night market that will almost double trading hours for its copper, aluminium, zinc and lead contracts.

Night in Shanghai means 21:00 to 01:00 the following day; all importantly for the LME, it means from 13:00-17:00 in London, when the open outcry floor in London is at its most active.

It’s a clear sign that SHFE is going international, and has no plan to roll over and let the LME wander in and take over its backyard, China.

SHFE’s market share has grown most in copper, critical in the housing and construction projects that are fuelling China’s growth.

The LME’s copper contract used to dominate trading volumes for the metal; now it is around 64% of market share, according to a recent statistic provided by the exchange.

The exchange didn’t break down which other contracts are responsible for the remaining 36%, but the SHFE will feature right up there.

Night trading launches on Friday December 20, just ahead of the holiday period in the UK.

Night trading will bring huge potential for increased arbitrage trading between the LME and SHFE copper contracts. Potentially it will also bring more business to the LME by virtue of the Chinese market being open for longer and participants being around during the kerb price-setting session.

It will also likely see SHFE participants grow their own volumes on the back of London.

In fact, as arbitrage opportunities increase and provided there is enough liquidity to align SHFE with world markets, customers in China would be able to safely hedge their risk using mainly their own domestic exchange.

Not exactly what the owner of the LME, Hong Kong Exchanges & Clearing (HKEx), will be hoping for given its plan to be the offshore meeting point for China and international investors.

HKEx ceo Charles Li acquired the LME in 2012 and said in an interview with Metal Bulletin that he viewed the exchange as an “experiment” to present to China in the hope it will continue to open up its capital account.

Li’s goal is for China to recognise the metals experiment works and open up further, working comfortably alongside HKEx to free up its financial institutions and individual investors to trade not just commodities offshore, but also equities, fixed income and currencies.

So far the idea of LME warehouses in China, contracts in yuan and new products like iron ore have remained ideas.

Overturning a ban on commodity warehouses in China run by international exchanges seems to be off the agenda for the Chinese government, potentially a sign that it is listening to SHFE, or that it has no intention of allowing western investors to enter its market as they are currently seeking.

To be fair, however, Li made it clear that these things would not happen overnight, and told LME participants not to expect great changes in the first couple of years.

Night trading does not mean HKEx will just roll over and abandon its growth plans.

Copper is the LME’s second-most traded contract, with around 1.1 billion tonnes traded over the past 12 months.

That is equivalent to around $8 trillion in notional trades and around 50 times global output in the same period.

There’s a reason why the 136-year old exchange has remained the premier base metals price setter over the years.

But it must now be more than cogniscant of the ambitions of its peers, particularly SHFE.

Andrea Hotter
Twitter: @andreahotter

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