Shanghai’s new copper futures will start trading this week to challenge London dominance

China will roll out a new copper futures contract this week that will be open to international traders, in a push to boost the use of yuan overseas and challenge London’s dominance in the trading of the metal.

The Shanghai International Energy Exchange (INE) will start trading monthly copper futures denominated in Chinese yuan on Thursday, in contracts based on the metal to be delivered into warehouses in China. China’s flagship international crude oil futures also trade on the exchange.

While China already has a copper futures contract listed on the Shanghai Futures Exchange, foreigners need to set up a local company to use it. The new INE’s copper contract will allow foreign entities direct access, and its price will not bake in value added tax, making it similar to international prices.

The INE copper contract will be settled in yuan but investors using an overseas intermediary will be able to use dollars for the initial margin, the collateral investors must stump up to trades the futures, albeit with a 5 per cent haircut.

While limits on yuan convertibility remain a barrier to wider adoption of the contract, the addition of copper, the world’s most-traded base metal, to a growing suite of international commodity futures will increase China’s appeal to the global trading community, analysts say.

China is the largest consumer of the metal by a large margin, buying more than 50 per cent of global mined supply. China’s dominant status as a copper buyer has been the crucial driver of the market’s rebound from the coronavirus fallout. Copper hit a two-year high of $7,179 a tonne on Monday on the back of strong demand, reflecting the recovery of the world’s second-largest economy from the pandemic. 

Some in the industry think the contract could eventually challenge the London Metal Exchange’s role as the global price-setter of the metal.

“There is no reason why China, being such a big consumer, shouldn’t be the price-maker…and not the price-taker,” John Browning, managing director of Bands Financial, an international intermediary brokerage for Chinese commodity exchanges, said in a webinar this month.

A trader who is watching the INE contract closely said China’s line-up of yuan-denominated commodity futures was starting to make it a formidable trading venue. “We now have gold, silver, oil and international copper contracts in yuan. That should scare the dollar.”

Colin Hamilton, an analyst at BMO Capital Markets, said the contract had a “high chance of being extremely successful”, given that more than 70 per cent of copper consumption takes place across Asia.

China was now the “market of last resort for purchasers”, assuming they can stomach the currency risk, he added. “[We] expect this may become the international copper market benchmark over time.”

The new launch forms part of a relaxation of the rules governing foreign investments into China’s domestic capital markets.

The copper futures contract will make it easier for domestic traders to hedge international price exposure in their own currency, commodity experts say.

And it should help towards Beijing’s goal to promote the use of the yuan overseas, said Richard Fu, a metals analyst.  “It will mitigate the dollar influence in the global market,” he said. “That’s the key thing they are trying to develop — to internationalise the currency and also have more influence in the global market pricing system. China consumes almost half of the world’s commodities, so it is happening.”