Chi­nese met­als trad­ing mud­dles sig­nals on global growth


Shang­hai is en­croach­ing on Lon­don as the hub of the met­als trad­ing world — a shift that in­vestors say threat­ens to erode the re­li­a­bil­ity of cop­per, zinc and alu­minium prices as a read on the health of the global econ­omy.

Trad­ing vol­ume on the Shang­hai Fu­tures Ex­change nearly tripled in the pe­riod between April 2013 and July, data on av­er­ages com­piled by IHS Markit shows. Tonnes traded in Shang­hai have climbed each year since 2013.

Fu­tures and op­tions vol­ume on the Lon­don Metal Ex­change, long the cen­tre for global met­als trad­ing, fell 12 per cent from 2014 to 2016 and is roughly flat this year, ac­cord­ing to the LME, which is still the leader in phys­i­cal trad­ing.

Be­cause in­dus­trial met­als such as cop­per are used in the man­u­fac- tur­ing of items from bridges to elec­tric ve­hi­cles, they have long been used to gauge the likely course of fu­ture eco­nomic ac­tiv­ity. Now, an­a­lysts say spec­u­la­tive Chi­nese in­vestors — rang­ing from hedge funds to re­tail bet­tors — risk dis­tort­ing that pic­ture by ac­cel­er­at­ing price moves in ei­ther di­rec­tion.

That is fu­elling con­cerns about whether prices are be­com­ing sev­ered from sup­ply-de­mand dy­nam­ics found in the world.

“Heavy spec­u­la­tion can am­plify moves in an ex­tra­or­di­nary and un­war­ranted man­ner,” said Tai Wong, head of met­als trad­ing at BMO Cap­i­tal Mar­kets. “This makes base met­als a less re­li­able global eco­nomic in­di­ca­tor.”

Com­ment­ing on the in­crease in Shang­hai vol­ume, an LME spokes­woman said the two ex­changes should be viewed as com­ple­men­tary plat­forms. “There is some over­lap in par­tic­i­pants but a change in trad­ing on any venue does not au­to­mat­i­cally re­sult in a change for an­other venue,” the spokes­woman said.

Chi­nese spec­u­la­tion was “the key driver of the rally” in base met­als this year, said Michael Wid­mer, chief met­als strate­gist at Bank of Amer­ica Mer­rill Lynch. “We’ve vir­tu­ally not seen any im­prove­ment in un­der­ly­ing fun­da­men­tals.”

China has long been a fo­cal point for com­mod­ity mar­kets. The na­tion is the world’s largest met­als con­sumer. But now, it has also be­come home to mas­sive trad­ing in met­als.

Be­cause the govern­ment has taken steps to cool the prop­erty mar­ket and the coun­try’s nor­mally volatile stock­mar­ket has calmed, Chi­nese re­tail in­vestors have turned to base met­als to gen­er­ate rapid re­turns.

An­a­lysts said they pre­ferred to trade on an ex­change within the coun­try be­cause it was eas­ier than trad­ing on for­eign ex­changes such as the LME.

On some days this year, the re­ac­tions in prices to re­ports left many in the met­als mar­ket con­founded. Prices rose even af­ter in­for­ma­tion that typ­i­cally sends cop­per and other base met­als lower. On such days, some fun­da­men­tal in­vestors and an­a­lysts blamed spec­u­la­tors.

Data on Au­gust 13 showed the pace of Chi­nese in­dus­trial out­put, re­tail and hous­ing sales, and fixedas­set in­vest­ments de­cel­er­ated in July. Still, af­ter two days of muted moves, prices of cop­per, alu­minium and nickel went on to rally for the week and con­tin­ued ris­ing for the rest of Au­gust.

On Au­gust 29, US min­ing giant Freeport-McMoRan reached an agree­ment with the In­done­sian govern­ment over a key mine — a po­ten­tial blow to cop­per prices since dis­putes between the com­pany and coun­try had lim­ited sup­ply. Yet prices went on to ad­vance in five of the next six ses­sions.

“Bullish news is be­ing used to buy, but bear­ish news is be­ing ig­nored,” said Daniel Briese­mann, an an­a­lyst at Com­merzbank.


Cop­per has long been a gauge of fu­ture eco­nomic ac­tiv­ity

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