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The minor metals trade has always impressed me with the way it seems to be able to absorb the speculative money flows without becoming as dominated by them as the base metals sometimes appear to be.
Apart from the odd speculative trade in the cobalt market (and to give myself flowers, I have to say, mostly successful: somehow things are always easier when they are just a little sideline), I’ve never really been involved in the business itself.
But as well as the metal trade itself, I am fascinated by new concepts in investment, and understanding the way creative minds can point the way for the rest of us to follow.
You can imagine, therefore, my interest at coming across the Fanya Metal Exchange – later, I’m sure, than most people discovered it.
For those – like me – to whom Fanya is quite new, it’s an exchange, located in the Chinese city of Kunming, offering selling and buying opportunities for a range of minor metals.
“The Fanya Metal Exchange” its website tells us “operates in an innovated model – internet financing to upgrade traditional trading model by combining and integrating information flow, fund flow and logistics to import a large amount of private capital into producing enterprises to revitalise the real economy stocks. The Fanya Metal Exchange provides customised trading and financing service for middle and small sized enterprises, which is helpful to industrial transformation, upgrading and consolidation. Also, it reduces the sales cost, financing costs for entities and explores a reasonable international pricing mechanism effectively.”
That sounds great – I believe the intention is to enable investment capital to be routed to minor metals businesses (I’m guessing principally producers) through a trading platform which utilises metal deliveries (ie, stock) as the collateral for the financing.
I’m not going to reproduce the number-crunching that Metal Bulletin has done here but it seems to me that the model as it is described raises several interesting questions.
The Fanya price is, in the case of several quoted metals, substantially above the prevailing spot price for the same metal.
Now, while I can understand that that differential may be reflecting the cost of finance, which is part of the deal, I can’t understand that it will work in anything other than a rising market.
While there is a steady supply of buyers who are – effectively – prepared to buy as a speculative play on China’s perceived desire to maintain a stockpile of strategic minor metals, then increasing prices for the traded metals are to be expected (in the old LME phrase, “there are more buyers than sellers”).
However, without that steady stream of new money to support the prices, they would surely be vulnerable, and any drop in prices could severely affect the security of the market, as the collateral values might well no longer cover the outstanding financing.
At this stage it is unclear to me how margining works on this new exchange.
But I am somewhat worried by the fact that there are apparently already 70,000 members of the exchange; China is a populous country, but that seems a high number to be financially interested in minor metals.
It suggests to me that this market is being used by private speculators keen to find somewhere to put their money that gives a better return than conventional products.
I understand that there are a large number of individual private investors trading on the exchange.
It would be interesting to hear from such investors how they assess the fiscal and counterparty risk that is part of any leveraged financial deal in a volatile commodity market.
I am very willing to accept that I have missed the point of Fanya, and if anyone can enlighten me, please do.
Lord Copper editorial@metalbulletin.com