GRAVITY SHIFT


On 19 November 2020, the Shanghai International Energy Exchange (“INE”) launch a bonded Shanghai copper contract (first prompt March 2021), which is open to foreign participants, priced in Yuan and free of VAT and


customs duty. The INE is a subsidiary of the Shanghai Futures Exchange (“SHFE”), which launched a domestic copper contract in 1993 including duty and VAT (currently 13%) for the domestic market. Foreign traders became well established on the SHFE contract via “Wholly Foreign Owned Enterprises” (“WFOE”s), although these took some effort to set up and there are obstacles to repatriating profits.


THE LME WAS


FOUNDED IN 1877, BUT CAN TRACE ITS ROOTS BACK TO THE OPENING OF LONDON’S ROYAL EXCHANGE IN 1571.


China’s bonded copper market allows traders to hold metal in China free of duty, until the domestic arbitrage widens enough to make importation attractive. The bonded copper market in China is very large, with an estimated 500kmt stored in early 2020 (scope for the INE’s approved storage to increase from 175kmt), and is currently served by traders using other bonded warehouses in China or London Metal Exchange (“LME”) approved warehouses elsewhere in Asia.


LONDON METALS EXCHANGE (“LME”), 1990S CENTRE OF THE METALS WORLD


The LME was founded in 1877, but can trace its roots back to the opening of London’s Royal Exchange in 1571, and it has dominated metals trading to an extent unseen in other global markets.


China’s domination of copper trading is relatively recent. When I started in metals in 1993, London was the centre of the metals world and perhaps 95% of the world’s physical copper was priced basis LME Settlement.


But change was coming, the top copper trader was Japanese and the LME was beginning to attract significant interest from US financial investors, encouraged into “commodities as a hedge against inflation” by Alan Greenspan.


London was also the centre of the metals social scene, with the LME dinner attracting the market’s big players, and guests from the across the world were increasingly joined by Chinese customers from the late 1990s.


The LME’s contracts dominated, and the COMEX copper contract was mostly used by US consumers, producers and traders for domestic or COMEX-LME arbitrage business, with US producers using the LME’s deeper and longer dated market for their strategic hedge programs.


Back then, the US was the world’s economic powerhouse, consuming over 20% of global copper. A number of other factors helped the LME – COMEX Cu arbitrage:


• both were US$ contracts,


• some LME and COMEX warehouses were in close proximity,


• much of the same copper could be delivered into LME or COMEX after adjusting for lot size (LME lot = 25Mt, COMEX lot = 25k lbs)


Copper’s relatively high value and physical uniformity make it well suited to a global market (in contrast to steel, which doesn’t trade as freely). In 2009, the SHFE wisely approved many of the same copper brands already accepted by the LME and COMEX, with SHFE and INE also sharing the same good delivery brands.


The INE’s warehouses charges (inbound circa $3-$5/ Mt, $0.08/day, outbound $3-$4/Mt are much lower than LME ($0.47-0.51/day, FOT $40-$55/Mt) or COMEX, making the INE a much cheaper and faster way to hold metal against the domestic arbitrage market than using LME stocks held elsewhere in Asia.


16 | ADMISI - The Ghost In The Machine | Q4 Edition


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