On November 19, 2020, Shanghai International Energy Exchange will soon list international copper contracts. What changes will the international copper listing bring about? The author analyzes the current situation of international copper, international copper trading opportunities, and the future outlook of the international copper market.
Status of International Copper Listing
For a long time, due to the characteristics of copper standardization and easy for storage, copper spot trading is highly market-oriented and has extremely high liquidity. Therefore, copper import trade has become a good opportunity for financing-oriented trade under China’s unique financing environment, and the large amount of financing trade has made domestic copper prices lower than foreign copper prices for a long time. As imported concentrated copper and other raw materials need to be priced in LME dollars, while the products sold in China need to use the local copper price. The above-mentioned long-term inverted domestic and foreign prices are naturally a "losing-money business" for the domestic copper industry that relies heavily on the import of raw materials and the copper processing enterprises. However, due to the demand for profits, various domestic copper companies have to speculate prices in the futures market to make profits in the process of spot good pricing and hedging. Various cases of trading loss have been heard over the years.
Due to the huge demand for copper in China and the long-term inversion of internal and external price ratios, in order to avoid import losses, imported CIF copper has to be stored in warehouses in Shanghai Free Trade Zone. For a long time, the copper inventory in Shanghai Free Trade Zone has exceeded the sum of domestic duty-paid copper inventory and LME global warehouse inventory. Since Shanghai Futures Copper does not allow foreign companies to participate, the price of Shanghai Futures Copper cannot be used as a price for copper trade in the bonded zone outside the customs. The copper trade in the Shanghai Free Trade Zone has to use LME dollar price plus the CIF premium for the pricing.
The annual long-term supply of electrolytic copper between Chinese enterprises and foreign suppliers and the annual long-term negotiation of concentrated copper processing fees are the most difficult issues in the industry. This is why CSPT (China Copper Smelting Enterprise Purchasing Group) negotiated prices between major copper smelters in the United Nations and foreign copper ore suppliers.
International copper trading opportunities
As the most well-known domestic and internationally influential futures contract, there has been a very active arbitrage transaction between Shanghai Copper Futures and LME Copper Futures for many years. The cross-border arbitrage transaction of copper futures has existed for more than 30 years. However, due to the fragmentation of the domestic and foreign capital markets and the restriction of the inability of RMB to be freely convertible, cross-border copper arbitrage is more often due to the large fluctuations in the price for fund management and the pressure of risk control has increased the risk of arbitrage trading.
By using INE International Copper Contract, the original barrier between Shanghai Futures Copper and LME Copper will be narrowed, and foreign investors participation in China’s copper futures market will also be unimpeded. This means that there will be arbitrage transactions between Shanghai Futures Copper and International Copper without cross-border barriers and exchange rate risks. The author believes that with the full participation of market forces as well as the all parties involved in the market, the barrier-free arbitrage between Shanghai Futures Copper and INE International Copper will fully occurred, and the arbitrage and logistics between INE Copper and LME Copper around the CIF dollar premium implied by INE price will also fully occurred. In the future, the relative prices of Shanghai Futures Copper, INE International Copper and LME USD Copper will fluctuate in a very efficient and flat range. This will significantly improve the cost control and profit of domestic copper importing companies and copper smelting companies. However, when all parties in the market have not yet fully participated, for example, 6-12 months from the beginning of international copper listing, this will be the most ideal time for "smart capital" arbitrage.
Market Outlook of International Copper
The subject matter of Shanghai International Energy Exchange’s International Copper Contract is graded as Class A copper cathodes in the Shanghai Free Trade Zone. RMB net price transaction contract will realize RMB pricing for the trade of copper inventory in the existing bonded zone. At the same time, these copper spot traders have an additional counterparty which is Shanghai International Energy Exchange Center with national credit rating. This will greatly improve the liquidity of copper spot trade in the bonded area.
With the increase in liquidity of international copper contracts in the forward months, the formation of the forward curve, the contract pricing of maritime trade copper and even long-term trade copper will gradually be priced with reference to the international copper forward contract price. One or two years later, when Codelco (Chile National Copper Company) reported a premium of US$88 for the long-term order price of 2021 to Chinese customers today, Chinese customers will remind South American suppliers to refer to (corresponding to its implicit US dollar premium) and even use INE international copper in RMB price to price the trade contract between them.
At the same time, it is understood that large foreign mines and main traders are also paying close attention to the progress of the contract. In the future, due to the existence of the “pipeline” of international copper, the price inversion between the prices of Shanghai Futures Copper, INE International Copper and LME Copper will be greatly reduced. This will provide China’s copper smelting enterprises the incentive to negotiate with the raw material suppliers by using INE International Copper prices its raw material procurement contracts, it not only reduces the loss of buying the high price of raw materials and selling the low price of the products, but also avoids the risk of foreign exchange fluctuations and the frictional losses of foreign exchange hedging in RMB settlement.