China makes first step towards taking control of world copper market

China copper Beijing yuan London Metal Exchange Hkex
China has rolled out a new copper futures contract in a push to boost yuan adoption and take pricing power away from the London Metals Exchange.

China has rolled out a yuan-denominated copper futures contract open to foreign traders — a move that is being seen as an attempt to prise open the London Metal Exchange’s (LME) domination of trading in the red metal.

It is also a clear signal that China is pushing ahead with plans for full internationalisation of the yuan.

The new futures contract began trading on Thursday (19 November).

Beijing wants to be a price-maker, not a price-taker, especially when it is largely dependent on imports for any commodity.

It should be assumed that its goal is eventually to have the yuan price dominating copper trading, not the greenback.

News reports have quoted copper suppliers expecting to be dealing in yuan rather than dollars down the track.

In 20 years, China has grown from consuming 12% of the world’s copper supply to using more than half of it now.

The Shanghai trade contract is not the city’s first copper instrument — but is the first international one.

Copper is the world’s most traded metal

While the existing copper contract put in place was tradeable only by Chinese investors, the new one will be available to foreigners, bringing in a potentially larger number of trades.

It is also significant because copper is the world’s most traded metal.

While Beijing’s other attempts to gain footholds in commodities trades — a yuan-denominated crude futures contract, the Shanghai Gold Exchange and iron ore contracts traded in the northern city of Dalian — have made progress, this is the first venture into the LME’s territory.

So far as one can see, China — which has managed to dominate the processing of many commodities (think graphite, rare earths, tungsten, tin, antimony, among many) — is now clearly looking at controlling the supply and trading of commodities.

The new copper contract is traded through the Shanghai International Energy Exchange (INE), the exchange that also operates China’s crude oil futures trading.

The INE is a subsidiary of the Shanghai Futures Exchange.

China copper futures uses same system as LME

Copper traded under the new futures contract will be free of taxes and customs duty — and with the copper having to be delivered into bonded warehouses, just as the LME operates.

The INE crude contract has clearly shown China the potential of engaging with the international futures market.

While it is still well behind the West Texas Intermediate (WTI) and Brent benchmarks in terms of market clout, the contract’s trading has increased substantially in its first two years of operation and attracted foreign participants.

China Beijing yuan copper price chart November 2020
Copper prices have rebounded from the depths of the coronavirus induced plunge.

However, China accounts for only 15% of global crude oil consumption. This could be one reason why the INE crude contract remains still a bit-player, with many other Asian countries still working on WTI or Brent as their oil price guidelines.

Copper is quite a different kettle of fish.

The country’s influence on copper is likely to grow to a much greater extent than its one on crude oil.

Yuan to supplant greenback

Not only does the move give China some pricing power, it being the world’s biggest importer, it extends the international role of the yuan (and diminishes that of the US dollar by the same degree).

It helps, too, that the red metal’s “Dr Copper” moniker gives the metal a particularly high profile as investors use it to assess economic health.

One commentator described the new copper contract as “the country’s first, and perhaps most dramatic, endeavour in international futures markets”.

This is because of its impact on the yuan as an international currency is just as vital to Beijing as its ability to put a lid on copper prices.

China wants to make increase the yuan’s convertibility and for this it needs what one banker described as the “availability of deep, liquid markets for financial products”.

Hong Kong controls LME

The yuan being an equal to the US dollar on international markets is a high priority for the Chinese leadership.

The LME has been in operation for 147 years.

It is wholly owned by HKex, the Hong Kong based operator of the Hong Kong Stock Exchange and the Hong Kong Futures Exchange

HKex’s website’s home page proclaims its mission as “reshaping the global market landscape”.

As we have seen in the past few months, Beijing is tightening its control of Hong Kong’s politics and economy.

And Beijing is also in the business of “reshaping the global market landscape”.

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