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