Q&A: SHFE accelerates its pace of internationalisation

China's Shanghai international energy exchange (INE), a subsidiary of the Shanghai futures exchange (SHFE), launched its yuan-denominated bonded copper futures contract on 19 November , which will be open to foreign investors.

This is the fourth international futures contracts on the INE, following the launches of crude, low-sulphur fuel oil and technically specified rubber 20. Market participants also consider this an important move for China to enhance its pricing power in the global commodity markets and promote the internationalisation of its currency. Argus spoke to Shanghai INE spokesperson Li Yun about the exchange's bonded copper futures and its long-term plans on futures for other metals such as rare earths and battery metals used in new energy vehicles (NEVs). Edited highlights follow:

Why did INE launch the bonded copper contracts since its parent company SHFE already has copper futures contracts? What are the main differences between the two copper futures contracts?

China has become the global largest refined copper producer and consumer, and the world's biggest importer of copper concentrate, following rapid developments in the country's nonferrous metals industry in recent years. China produced 9.784mn t of refined copper in 2019, accounting for 41.24pc of the global total output, while its consumption of the red metal took up 50.72pc of the global total last year, reaching 12.08mn t, according to data from the China nonferrous metals industry association.

There has been rising demand for risk management in the copper industry, as the metal's trading volumes have steadily increased. Objectively, there are two spot markets for copper in China, including a Chinese domestic market with the customs tariff and value-added tax included, and a bonded zone market without the tariff and VAT. There are different price trends and fluctuation ranges in the two markets. The newly-launched bonded copper futures contract on INE and the existing copper futures contract on SHFE are respectively anchoring to these two different markets and provide market participants a new platform to hedge and manage risks.

On the basis of keeping the SHFE copper futures contracts, the launch of the bonded copper contracts has made it the first dual-contract mode in China. It is a new exploration and new attempt to help market participants in and outside of China to better control risks, but also integrate the copper market players in China and overseas markets deeper.

The SHFE copper futures contracts and the INE bonded copper contracts are consistent in terms of the trading unit, minimum price change, contract month, trading time and last trading day. But we have introduced a differentiated design for the price definition, delivery grade, position limit, major client report, market maker system, delivery mode, transaction fee and trader suitability system. Among them, the price definition, whether the price includes the customs tariff and VAT or not, is one of the main differences between the SHFE copper futures contracts and the INE bonded copper contracts.

As the largest nonferrous metals trading platform in Asia, what trading patterns are available on your platform to assist enterprises in the industry to control risks under the global shadow of Covid-19? Can you explain it using copper as an example?

SHFE has formulated a "one body, two wings" development strategy. One body means the futures trading, and two wings refers to options trading and standard warehouse receipt trading. China's domestic companies can conduct risk control management by participating in futures trading on SHFE for nonferrous metals, including all base metals such as copper, aluminium, lead, zinc, tin and nickel, and options trading for copper, aluminium and zinc, or use standard warehouse receipt trading for base metals on SHFE's standard warehouse receipt trading platform, while the INE bonded copper futures trading can be used as a risk management tool for both domestic and foreign investors.

SHFE launched its standard warehouse receipt trading platform on 28 May 2018, and listed the copper options on 21 September. Copper was listed in the first batch of standard warehouse receipt trading items on 28 May 2018. As of 25 November, 11,339 transactions had been processed, with a total of 126,100 warehouse receipts for 3.16mn t of material, and the turnover reaching 149,921bn yuan ($22.9bn), accounting for 20.56pc, 13.67pc, 26.29pc and 40.24pc respectively among the 12 standard warehouse receipts on the receipt platform. By the end of October, 9.06mn lots of copper options had been traded, accounting for 9.69pc of the underlying futures trading volumes in the same period, which is higher than those of its European and American competitors.

Copper option contracts have been launched on SHFE for over two years since September 2018. How is the contract running? Compared with the

Metal Exchange and Chicago Mercantile Exchange, two established exchanges that also have copper option contracts, what are the differences in terms of trading body and trading style?

The market scale of our copper option contracts has been steadily expanding since it was listed on 21 September 2018, with a total of 9.06mn lots traded by the end of October 2020, accounting for 9.69pc of the underlying copper futures volumes in the same period. The ratio between SHFE's trading volumes of copper options and the underlying futures contracts is higher than the exchanges in Europe and America.

There has been an increase in investors who have participated in our copper options trading. The investor structure has gradually shifted from mostly being market makers at the initial stage of the trading to being multiple participants including market makers, companies and natural persons. Industrial customers currently participating in copper options have basically covered all the upstream and downstream sectors of the industrial chain.

Your exchange's party secretary Jiang Yan in the middle of September 2019 said in a CCTV-4 programme that all nonferrous metals were eligible to be open on SHFE to foreign investors. Which contract or contracts are most likely to be listed next?

SHFE aims to promote a higher level of "opening up". Having internationalised the contracts for crude oil and copper in recent years, we will study and demonstrate the feasibility of internationalising nonferrous, ferrous and precious metals futures, and launch them once completing the feasibility study.

There are industry discussions that SHFE is working with the association of China rare earth industry (ACREI) to launch rare earth futures contracts. How is this going?

SHFE in March 2018 signed a framework agreement for strategic co-operation with ACREI, and we are doing preliminary research and development for rare earths futures contracts. Additionally, in our 2018-2022 strategic plan, SHFE is on target to expand its business to energy, shipping, rare/precious metals.

The NEV market has emerged as a new force that has brought a lot of attentions and bolstered demand for battery metals such as cobalt, nickel sulphate and lithium. Does the SHFE have any plans to list these battery metals?

SHFE will orderly promote its research and development on futures contracts for NEV power battery-related metals to serve the development of strategic emerging industries. We are willing to strengthen co-operation with Argus and other price reporting agencies to jointly promote the NEV power battery-related metals futures.

Related News