Promising future for futures exchange

Shanghai Futures Exchange (SHFE), the biggest of the three commodities futures exchanges in China, is exerting an increasing influence on the global pricing of such key commodities as copper, aluminum and natural rubber. Teng Jiawei, executive vice-president of SHFE, says: "China's increasing pricing power in the international commodities markets has helped guarantee national economic security that has a far-reaching impact on the country's long-term development." For many physical commodities, cash-market participants often base spot and forward prices on the futures prices that are discovered in the competitive, open-auction markets of futures exchanges. SHFE is emerging as an important pricing center for non-ferrous metals, copper in particular, second only to the London Metal Exchange (LME). Statistics show the coefficient index, an indicator reflecting the correlation between LME copper prices and those in Shanghai, has increased from less than 10 percent to 40 percent in the past several years. Industry analysts say the weekly inventory report published by SHFE every Friday usually has a great impact on LME's copper prices. For example, the price of copper futures on LME jumped 2.2 percent on August 24 to close at US$7,430 per ton following reports that SHFE's inventory of the metal had dropped 22.5 percent, or 16,000 tons. Because of the time difference between Shanghai and London, the pit trading on SHFE is 11 hours ahead of the trading on LME, and the closing prices on SHFE usually have a huge influence on the opening prices on LME. What's more, "the copper prices quoted on SHFE serve as the most important barometer for producers and consumers all over the world after trading hours on the LME", says Li Jingyuan, an analyst at Haifu Futures Co. William Adams, senior metals analyst of BaseMetals.com,says: "We feel China will remain a force to be reckoned with on the demand side," adding the fluctuations of Shanghai's inventory levels and futures positions have become a major consideration of international traders when they assess the trend of the international copper market. A benchmark Copper futures prices quoted on SHFE have been taken as a benchmark for major copper producers and consumers in the world. A case in point is Chile. The biggest copper producer, whose output accounts for one-third of the world total, is keeping a close eye on the inventory and price information on SHFE to direct its production activities. Peter Sellars, CEO of Sempra Metals Ltd, a leading international metal trader, says: "Future is never exactly like the past. There are unique challenges in populous Asian economies, especially China." Industry experts say Shanghai, as an emerging pricing center in the world, helps to secure "China's voice" in the global market to better serve the national economy. "Emergence of a strong Chinese demand growth has raised global demand growth above expected supply growth. Trend growth rates globally are high and accelerating," says Jim Lennon, executive director of commodities research of Macquarie Bank, an Australian financial and banking services provider. The prices of natural rubber futures contracts traded on SHFE have also become the major force leading the global market trend. Analysts say enthusiasm for foreign investors to participate in China's natural rubber market has also reaffirmed its global influence. "More and more institutional investors and futures traders from Japan are coming to Shanghai to seek exchanges between the two markets," says Lin Hui, a natural rubber futures analyst at China International Futures (Shanghai) Co. "Attracted by the increasing pricing power of natural rubber in Shanghai, foreign investors hope to be more deeply engaged in China's booming market." SHFE last year surpassed the Tokyo Commodities Exchange (TOCOM) to become the world's largest natural rubber futures market in terms of trading volume. In 2006, the trading volume of natural rubber futures on SHFE amounted to 260 million tons, well above the 48 million tons traded on TOCOM. Pricing center Industry analysts say China's position as the largest natural rubber consumer has catapulted SHFE to the position of the commodity's pricing center. In 2006 alone, China's consumption of natural rubber totaled 3.8 million tons, accounting for one-fifth of the aggregate global consumption. The import of natural rubber also increased 14.6 percent to 1.6 million tons from a year earlier, according to statistics from the China Petroleum and Chemical Industry Association. Analysts forecast the trading of natural rubber on SHFE will become more and more active in the following years, as the auto industry in China continues its growth momentum. SHFE's enlarged trading scale and the expanded product range since its establishment in 1999 has also largely increased its importance in pricing in some of the global markets. Statistics compiled by SHFE show that between 1999 and 2006, the exchange's combined trading value of all futures products increased 23 times to 12.61 trillion yuan. In the first seven months of 2007, the trading value rose 77.37 percent to 12.79 trillion yuan, exceeding the total turnover in 2006. SHFE is currently trading a range of futures products, including copper, aluminum, zinc, fuel oil and natural rubber, and has received the go-ahead to trade gold. Given its fast-growing importance in global consumption and production of various commodities, China has great potential for expanding the scope of its commodity futures markets. Bao Jianping, head of research and development center of SHFE, says further effort should be made to create a more conducive environment for product innovation and to quicken the pace of developing the domestic commodity futures market in keeping with the growing size of the national economy.