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Local and global


LME initiatives help global trading
The London Metal Exchange’s strategic pathway is on track with numerous new developments aimed to come to the market over the next few years.

When the strategic pathway vision was launched in September 2017, it highlighted a number of areas that the LME wanted to develop or expand, and new contracts that it wanted to present to the market. “When we first launched the strategic pathway we were well aware it was a four- or five-year plan. But now, in the second quarter of 2018, we can firmly say that we are on track and doing well,” said Matthew Chamberlain, chief executive officer of the LME.

As LME Asia Week approaches, it is the perfect time to look at the developments which will aid the Asian markets. For example, LMEselect, the exchange’s electronic trading platform, has already created broader access to the market outside of London. The member-to-member trading system has tradable hours from 01.00-19.00, Monday-Friday (London Time) and can be accessed by category one and two members of the exchange.

In early 2019, the close-of-day settlement prices on the LME – which currently take place on the official trading Ring – will be tested on the electronic platform. The trial is expected to last for three months. “The trial will begin with nickel early this year – we have chosen nickel because it is a good happy medium. It is not as huge in volume as copper and aluminium, but it usually is a good mover,” Chamerblain said.

“If we are going to have this debate [about whether close prices should be removed from the Ring], then it needs to be informed by proper quantitative and qualitative data,” he added. The trial has raised concerns over the potential closure of the LME Ring, which is the oldest surviving open-outcry trading ring of its kind. Over the past few years many other exchanges have converted to electronic trading instead – including the London Stock Exchange in 1986 and, more recently, the New York Mercantile Exchange (Nymex) in 2006.

Despite worries in London, the trial can be seen as a positive to those outside of the capital city – with the trial meaning that those in other locations, and category two members, are able to contribute to the close settlement prices each day.

“There are people on both sides of the coin. Settlement prices would be good on [LME]select but also they work fantastically on our Ring,” Chamberlain said. He stressed that there is no pre-meditated outcome of the test and once the results and consultations are complete, it could be that settlement prices remain on the ring.

“Our mind is not made up, this trial is for us to have a well-supported discussion. If it does not work, the technology we have created will be put to use elsewhere – such as LMEprecious,” Chamberlain concluded.

New contracts
The LME is also reaching out to add extra value to its product line with a number of new contracts set to launch within the next few years.

“We are working hard to expand in four key markets, and add some new products to the market and believe these are contracts the market wants to see,” said Robin Martin, LME head of market development. These areas are the precious sector, the aluminium complex, ferrous contracts and the battery material market.

“Firstly we will start with the options of gold and silver, which will launch first and are scheduled for launch around November 2018,” Martin added.

In the aluminium complex the exchange is looking to introduce new contracts that will complement its current benchmark aluminium three-month price. The exchange notes that introducing cash-settled premiums contracts could offer a solution for premiums volatility. In this area the LME hopes to launch a cash-settled US premium, European duty-unpaid and duty-paid premiums, and an MJP (main Japanese ports) premium.

Alongside this, it will also dig further back into the supply chain with the offering of alumina. “Alumina represents an opportunity in our core market – it will allow for improved risk management along the aluminium value chain,” Martin said. The launch of regional cash-settled aluminium premiums and alumina is currently planned for the last quarter of 2018.

The offering of cash-settled cobalt and lithium contracts are expected to join the product suite in 2019 or beyond.
The development of new contracts and moving with current market trends means the LME will remain attractive to market participants globally – including the Asian market – and will continue to expand.

Alice Mason

CME Shanghai copper premium pauses
Trading on CME’s new Shanghai copper premium futures contract has paused after an encouraging debut because market participants have been too busy with aluminium amid US duties and sanctions, sources said. But the contract, which was launched in November 2017 and is settled against the monthly average of Metal Bulletin’s daily assessments, is still closely monitored for liquidity growth and seen as a useful hedging tool against increased volatility in the Shanghai copper market.

“We are keeping an eye on the contract and remain optimistic about it,” a futures trader said. “There is appetite to have it and use it. But many have had their hands too full with aluminium to allocate resources to this new and less liquid product.”

The aluminium market has been very hectic and volatile in the past two months with US President Donald Trump first imposing a 10% duty on imports from a number of countries before announcing sanctions on April 6 against Russian oligarch Oleg Deripaska and associated businesses, including UC Rusal.

Meanwhile, the copper market has been more stable, with a surplus of refined cathodes and flat demand in China capping the Shanghai premium upside despite firmer LME prices. “People are certainly watching the contract and some are watching it especially closely, but just haven’t traded it yet because the price hasn’t moved enough,” another source said.

A total of 534 lots, or 13,350 tonnes, have traded on the CME’s copper cif Shanghai futures contract since it was officially launched on November 20, with December the busiest month but no trade reported in March and April so far. Open interest was at 247 lots at the end of March, according to CME data.

The contract was indicated at a premium of $77 per tonne cif for April 2018. Metal Bulletin’s latest spot assessment was at $70-85 per tonne cif Shanghai, with an average of $76.70 so far this month, up from $67.70 in January.

“Our copper contract is the first, financial settled exchange-traded futures product to enable customers and market participants to hedge their exposure to the China copper premium,” said Young-Jin Chang, Global Head of Metals Products at CME Group. “We believe this contract, which complements CME Group’s existing physically-delivered benchmark Comex copper futures, will become a valuable tool for the copper industry in Asia,” she added.

Trading houses have been the main user of the contract so far, with banks, producers and consumers staying on the side-line and waiting for liquidity to build up. “New contracts are always slow to take off. But it’s a good product – it just needs a couple more market-makers,” another futures trader said.

“It’s been a slow start to the CME contract and despite SSY being 100% of all the brokered deals in the contract, we do require more volatility,” said a spokesperson for SSY. “We have a number of trade houses and banks that are active in the physical copper market but have limited requirement to hedge the risk given the lack of price movement,” he added. “SSY are committed to all the listed base metal premium products and have continued to grow our presence in Asia with our second largest office outside of London being Singapore, where our broking team is fluent in both Chinese and English, which will provide the basis to tap into the natural buyers of the cif Shanghai copper premium contract.”

He concluded that when the market sees some much needed volatility SSY will be in a great position given its commitment. 
Some see activity in the Chinese copper market picking up on the back of seasonal demand and a reduction in the value-added tax (VAT) to 16% from 17%, effective on May 1. This could give a boost to CME’s premium contract.

Perrine Faye

Singapore Exchange continues expansion
Singapore Exchange (SGX) achieved a record net profit in the January-March quarter of 2018, with revenue from the derivatives business rising on a year-on-year basis. The exchange posted a net profit of S$100 million in the March quarter, up 21% year-on-year. Revenue stood at S$ 222.2 million in the period, up 10% year-on-year. The derivatives business accounted for 41% of the overall revenue in the period, up from a contribution of 37% in the same period last year.

“We achieved a strong set of results this quarter, with our net profit reaching a new 10-year record high and our revenues hitting their highest levels since we listed in 2000,” Loh Boon Chye, CEO, said in a statement this month.

“We actively engaged liquidity providers and focused on outreach to investors, which contributed to increased activity in the securities market,” he said. “Our marketing efforts, together with longer trading hours enabled by our new derivatives trading and clearing platform, added to an increase in global participation across products and trading sessions,” he added.

Higher volumes in SGX FTSE China A50 futures, Nikkei 225 futures, and SGX Nifty 50 index futures, reflecting higher volatility and increasing activity in the underlying markets, resulted in rising revenue from the equity business, the exchange said in April this year. This was offset by lower volumes in iron ore due to lower volatility, it added. The exchange’s derivatives business includes iron ore hedging instruments and coking coal risk management tools.

In 2016, the exchange also bought the Baltic Exchange, which it identified as a “very good strategic fit for [SGX’s] commodities business”.

Looking ahead, market participants will closely follow the impact on iron ore trading once the Dalian Commodity Exchange opens up its futures market to foreign investors on May 4. At present, SGX accounts for the bulk of the offshore iron ore market, offering derivative contracts settled against a 62% Fe iron ore index.

Demand for higher-grade iron ore in the physical market – the segment whose prices are reflected by Metal Bulletin’s 65% Fe Iron Ore Index –  has been robust since last year amid strong steel mill margins in China. Last year Vale announced it will price all of its Carajas sales contracts based on Metal Bulletin’s 65% Fe Iron Ore Index. It remains to be seen if the exchange will widen the suite of iron ore offerings in the future.

Meanwhile, SGX has widened its global footprint over the past year, with the opening of an office in Chicago, United States, and equity derivatives plans in India. “Given the size and depth of the market, spanning financial institutions, funds, trading firms and futures commission merchants, the US is an important market for us, both for our financial and commodity derivative products,” said Michael Syn, head of derivatives at SGX, last year, following the opening of the Chicago office.

SGX will also list new India equity derivative products in June 2018. “We are still exploring a solution that would bring the liquid international market directly into Gujarat International Finance Tech city, in a way that meets our clients’ regulatory requirements while growing the overall market,” Syn said this month.

Deepali Sharma

Shanghai Futures Exchange’s diversification
In 2017, trading volume on the Shanghai Futures Exchange (SHFE) shrank by almost one-fifth to 1.36 billion lots, mainly led by a drop in rebar and bitumen trading, official data shows. 

Trading turnover nonetheless rose by 5.8% to 89.9 trillion yuan, accounting for a 47.9% share of China’s futures markets, followed by Dalian Commodity Exchange, which accounted for 27.7% of the total, according to its official data.

The base metals complex saw its turnover rise by 15% to 73.9 trillion yuan, thanks to a 70% rise in zinc trading. Total lots of zinc traded reached 183 million, surpassing copper to be the most traded metal on the Shanghai bourse last year. Total lots of lead traded rose the most amongst all the products – 1.7 times to 12.5 million – while that of aluminium also surged by 47% to 65 million.     

Deliverable stocks of aluminium at SHFE’s approved warehouses rose by 1.6 times from a year ago, to 991,780 tonnes as of mid-April 2018. Copper stocks rose by 17% to 280,836 tonnes, while zinc stocks declined by 11% to 137,853 tonnes during the period.
To cater for rising stock in China, SHFE now has a total of 86 registered warehouses for delivery, mainly distributed in Shanghai, Jiangsu, Zhejiang, Guangdong and Tianjin. That includes the former Impala bonded warehouse in Shanghai’s free trade zone recently reopened by Henry Bath in March.

Over the past three decades, the number of Chinese enterprises interested in futures markets has grown in the country. Currently, it has 196 company members, of which 76% are futures trading companies.

As of April this year, there are 14 futures contracts listed on the exchange: copper, aluminium, zinc, lead, nickel, tin, gold, silver, rebar, rod, hot-rolled coils, crude oil, asphalt and natural rubber.

In an attempt to widen the scope of its products, SHFE has launched various new products including a natural-rubber futures-based insurance policy, as well as the long- awaited crude oil futures launched March this year.

The crude oil futures contract, widely expected to be the first oil benchmark in Asia, is one of the very first commodity futures contracts that are accessible to foreign investors. Historically, the Chinese government has put strict restrictions in place to keep foreign capital out of its financial industry. The crude oil futures contract is seen as a significant trial product. If it is successful, it could provide a template for China to open up other commodities, including base metals, to overseas funds. 

Julian Luk

Iron ore futures on the Dalian Commodity Exchange have gained increasing influence over the physical market since listing in 2013. Their trading volume reached 657.49 million lots, or 65.749 billion tonnes in 2017, down 3.95% on the year, according to the exchange.

China imported 1.075 billion tonnes of iron ore last year, a year-on-year increase of 5%, the National Bureau of Statistics reported. The country itself produced 249.62 million tonnes of iron ore concentrate in 2017, 7.7% higher than 2016, according to a report released jointly by the Metallurgical Mines’ Association of China and a local information provider.

In September 2017 the exchange modified the delivery standards for iron ore contracts to cater to changes in physical market pricing of different products, thereby closing the door to some brands valued less in use. The new standards will take affect from the September 2018 contract.

DCE is opening iron ore futures to global investors and institutions on May 4 after gaining regulatory approval and completing preparations and trial runs. According to the plan, overseas participants with offshore yuan or US dollars could trade directly via onshore futures companies or commission offshore brokers to do so.

In line with the timing of the new delivery standards, overseas investors are allowed to trade the September 2018 contract and those later. Amid Beijing’s efforts to open up more widely to the world, the iron ore futures internationalization is aimed at improving its participant composition and the representativeness of prices.

While currently the yuan-denominated DCE iron ore futures are mainly utilized to hedge or for arbitrage against price volatility at Chinese ports, the US dollar-denominated swaps and futures market on the Singapore Exchange are the usual option to hedge seaborne cargoes.

With the opening up to overseas capital in US dollars, the exchange is looking to better integrate those markets to form a pricing and hedging tool. After the internationalization, iron ore futures prices could move closer to the fair value with greater sensitivity, a Chinese futures company source said. They may correlate more tightly with the SGX swaps, and walk in the direction of crude oil, he added.
It remains unclear whether the overseas investors are allowed to be totally free in going long and short like domestic participants, however, a futures analyst in Beijing told Metal Bulletin. “Theoretically more overseas capital is naturally on the short side, for example the miners need to hedge their iron ore production,” he said.

In terms of market volume, the capital increment may be limited in the short term, because many foreign companies have already been taking part in DCE iron ore trading through their onshore entities, a futures analyst in Shanghai noted.

July Zhang

Chinese Stainless Steel Exchange importance grows
The Chinese Stainless Steel Exchange (CSSE) based in Wuxi city, Jiangsu province, is growing in importance as Asia’s biggest stainless steel exchange centre. Its function in the spot physical market is increasingly crucial for traders, who look to it for daily spot price direction. CSSE has a variety of contracts traded on its platform, including silver, nickel, stainless steel cold-rolled coil, indium, tin and cobalt futures.

“Trading activity picked up more from last year onwards, especially as more market participants came onto our platform to trade stainless steel cargoes,” CSSE spokesperson Jiang Hai Ling said. This was mainly due to the desire to have more liquidity and a larger pool of buyers and sellers to trade with, Jiang said.

The average daily transaction volume of stainless steel forward contracts in 2016 and 2017 was more than 41,000 tonnes, including a highest one-day trading volume of over 125,000 tonnes. The average daily transaction positions entered were more than 300,000 tonnes, and reached as high as 470,000 tonnes on a single day.

The volumes of stainless steel spot delivery contracts have also climbed. In 2016, the trading center had a stainless steel spot delivery volume of 10,820 tonnes. However, in 2017, the center’s spot stainless steel delivery volume had reached 46,804 tonnes, more than four times the volumes from the previous year.

The center has seen transaction volumes grow even more rapidly this year. In 2018, it took a mere three months for the stainless steel spot delivery volume to exceed 181,000 tonnes. This included 100,000 tonnes in a single month, setting a new record for the exchange. 

CSSE’s refined nickel forward contract averaged over 84,000 tons per day in 2016. In 2017, the average daily turnover of refined nickel futures contracts was more than 91,000 tons, which was an increase of 8.3% year-on-year. Refined nickel spot delivery volumes have shot up by five times within a short span of two years. In 2015, electrolysis nickel spot settlement volumes reached 33,000 tonnes. In 2016, refined nickel spot delivery volumes reached 70,000 tonnes. In 2017, the refined nickel spot delivery volumes reached 151,000 tonnes, accounting for more than 30% of national refined nickel consumption. 

 In addition, the CSSE cobalt and indium contracts have also been increasingly accepted by the market, with active transaction and delivery volumes remaining at high levels. In 2016, Wuxi delivered 843 tonnes of cobalt. In 2017, the amount of delivered cobalt more than tripled on a yearly basis to 2,964 tonnes, which accounts for 35% of total annual domestic consumption. In the domestic indium market, spot prices have moved in lockstep with changes on the bourse. 

 CSSE expects the Shanghai Futures Exchange’s proposed listing of stainless steel futures to be a boon when it happens, instead of a threat. “We are optimistic about the market opportunities which SHFE’s listing will bring in the future as we think that it will increase the market’s acceptance of CSSE’s role in the spot markets,” Jiang said.

CSSE hopes that SHFE’s listing will bring about more liquidity and support for them. “We hope that CSSE and SHFE’s presence will be able to help the Chinese stainless steel markets continue growing healthily in the future,” Jiang said.

Paul Lim

Zhengzhou Commodity Exchange
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.

Karen Ng

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