By Pratima Desai and Siyi Liu
LONDON/SINGAPORE- China is locking in steps to shape the pricing of the vast quantities of industrial metals it produces and consumes, with moves to attract foreign firms to trade on Shanghai’s futures exchange, which would eventually fragment global markets.
After buying mining assets around the world over the past two decades to secure metals needed for industrialization and more recently to meet its carbon emissions targets, China now wants a bigger say in how prices of those metals are determined.
But it has lost market share in metals futures trading and needs to persuade international investors to use the Shanghai Futures Exchange (ShFE), according to interviews with more than 10 brokers, traders, analysts, risk managers and consultants with direct knowledge of ShFE’s plans.
If successful, the push would help give Shanghai’s contracts benchmark status and upend the system for reference prices of industrial metals in place since 1877 when the London Metal Exchange (LME) started life above a hat shop in London.
ShFE benchmarks would eliminate the need for Chinese firms to link their physical contracts to LME prices and create a need for foreigners to trade on ShFE to influence reference prices in their contracts, shifting market sway from the west to China.
In recent meetings, the exchange told industry players the plan is high on its agenda and was likely to be put in place soon, but it did not discuss deadlines, two people said.
ShFE did not respond to requests for comment or to questions on timelines, amounts available to invest in this project, the challenges it faces or how success would be measured.
However, state media in June reported Wang Fenghai, general manager at ShFE, as saying: “Only through opening up can we draw in foreign investors, participate in the process of ShFE’s price establishment, therefore enhance price influence.”
Wang added that cross-border delivery capability was an area ShFE would focus on in terms of attracting global participation.
In a key step, the exchange has been looking to line up warehouses outside China to store metal delivered for copper contracts that were launched on its International Energy Exchange (INE) for foreigners in 2020.
ShFE has told industry stakeholders it intends to expand soon into international metals storage, two other sources with direct knowledge said, bidding to rival the LME’s global network of more than 450 registered warehouses that hold thousands of tons of aluminum, copper and other metals.
“They (ShFE) have a plan, they are coming out, they will list warehouses outside China, … the government wants this to happen,” one source familiar with the exchange’s thinking said.
While the metals industry has known since last year that ShFE plans to line up warehouses offshore, starting in Singapore, its latest comments to foreign firms suggest it is closer than ever to going ahead.
“A real price people want to use needs warehouse stocks the world over,” a source at a consultancy with knowledge of ShFE’s plans said.
Once ShFE makes a firm decision to offer metal storage outside China, the process of registering warehouses would be a matter of weeks if not days, as facilities already exist at ports that see large flows of metals, warehousing sources said.
ShFE will not need regulatory approvals for warehouses that can store metal deliverable against its contracts as long as they are located in free trade zones, so metal can be stored free of taxes until delivered to customers. – Reuters