Trading in China’s new international copper contract got off to a brisk start last week, with the new contract quickly reaching just shy of 10 percent of the volumes of the long-established domestic copper contract.
Launching new contracts is a tricky business, and even if the new International Energy Exchange (INE) bonded copper futures contract made good sense on paper, management at the INE’s parent SHFE will be pleased at the reception, domestic and international, they have garnered.
Domestic producers Jiangxi Copper, China Minmetals Corp, Wanbao Mining and Bank of China International are supporting the new contract, Reuters reported, and INE listed 15 market makers including Minmetals and Citic to help spur early liquidity. Meanwhile, there has been plenty of attention from the West, including LME broker Sucden announcing on its website that it had performed some of the first trades in the new contract.
Deliverable, and available, brands, a range of market participants able and ready to trade, and often some kind of impetus (or call it luck?) are necessary ingredients for the success of any new contract. For example, the LME aluminium contract was launched in 1979, but it took the collapse of the Soviet Union for it to trade in a meaningful way, fed by the arrival in the West of now surplus metal.
Will Covid be the driver that copper needs to succeed on the INE? Probably not, since even without Covid, there would have been strong interest.
While the LME without its Ring might not be able to function on all cylinders — copper volumes in October stood at 106,000 vs 138,000 in January — copper prices have risen more than 60 percent since March and reached 29-month highs in recent days, which has created plenty of interest in the London market.
Indeed, Covid has created price volatility, which has been vastly profitable for the financial institutions that trade markets both new and old. Adding a new venue will in all probability extend trading and arbitrage opportunities for them rather than lead to the replacement of the LME.
Were the LME contract no longer representative of the market, traders would seek viable alternatives. Physical market involvement will bolster the INE contract as a legitimate benchmark, but for some it will not be truly viable until the renminbi is convertible. When that day comes, as it surely will, that could be the impetus that sees INE volumes soar.
Meanwhile, LME copper prices are slipping from recent highs on the stronger dollar and profit taking. ChAI predicts further weakness over the next week, but copper is highly likely to strengthen over the next quarter. ChAI data shows prices will rise at both 1 Months and 3 Months thanks to investors boosting their positions as they bet on economic recovery enabled by effective vaccines.
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Originally published at https://chaipredict.com on November 25, 2020.
