LME ASIA WEEK: Chinese ferro-alloys price volatility signals relevance of ZCE futures contracts

Ferro-alloy futures trading on China’s Zhengzhou Commodity Exchange (ZCE) has come a long way since both ferro-silicon and silico-manganese were first listed on the exchange in August 2014.

A clear sign of its relevance can be seen in how volatile trading on the ZCE affected ferro-alloy prices in 2017, especially in December, which led the bourse to issue a statement warning of “heightened uncertainties” in ferro-silicon and silico-manganese trading.

Close to 4.9 million lots of ferro-silicon were traded in December 2017, a huge increase on the corresponding period in 2016, data from the China Futures Association showed. Meanwhile, 3.14 million lots of silico-manganese were traded in December 2017, also a high multiple of the level for the corresponding period last year.

The big leaps in trading volumes have blurred the line on whether spot prices are driving futures or the other way around. “Futures and the spot market are now affecting each other. Smelters are raising offers due to cost pressures and also due to the rising futures prices; investors are buying futures on speculation as well as the rising spot prices,” an analyst in Shanghai said.

Ferro-silicon is a good example of the blurring. In December last year, the most-traded January ferro-silicon contract price on the ZCE jumped more than 23% in a week to 9,062 yuan per tonne on December 8. Volatile trading prompted the exchange to hike trading margin fees to 14% from the usual 5% on December 6 last year, and to raise trading limits to 8% from 4%.

On December 8, Metal Bulletin assessed Chinese domestic spot prices for ferro-silicon basis 75% silicon at 10,000-12,000 yuan ($1,510-1,813) per tonne – up almost 50% from the prior week. Chinese ferro-silicon prices were hitting a ten-year peak, according to Metal Bulletin historical data, on a sudden cut in supply as there was a government order to shut down ferro-alloys refineries in Ningxia province.

While silico-manganese did not show that much drama, there was still substantial movement in December last year. The most-traded silico-manganese January contract on the ZCE closed at 8,590 yuan per tonne on December 8, 17.5% higher than the close of 7,310 yuan per tonne on December 1.

The ZCE’s most-traded January silico-manganese contract hit its daily upper limit on December 6, with gains of 8.5% compared with the previous day’s close. The contract repeated the feat two days later when it reached its daily upper limit with a rise of 7% on December 8. The rise in futures prices not only boosted silico-manganese spot prices, but also drove up manganese ore prices that week.

Looking ahead, the exchange is still mulling the possible launch of other ferro-alloys futures, such as ferro-chrome.

This article forms part of a larger market spotlight first published in the May issue of the Metal Market Magazine, which carries in-depth feature articles, analyses and reviews of metal and steel markets.