On Friday the Shanghai Futures Exchange (SHFE) expanded its metals trading suite to include both nickel and tin. What is the pre-eminent trading venue for industrial commodities in China now boasts a base metals portfolio that fully matches that of the London Metal Exchange (LME), which dominates trading everywhere outside of China.
In theory this should benefit both exchanges by stimulating arbitrage flows. And in theory it should also benefit Hong Kong Exchanges and Clearing (HKEx), which bought the LME in 2012 and which aims to leverage the LME franchise to replicate in the commodities space its Stock Connect mainland equities trading model.
But there remains an ambivalence at the heart of this metals trading triangle.
Are Hong Kong and Shanghai future collaborators or potential competitors in the world of metals pricing?
TWO SYSTEMS
The SHFE's launch of nickel and tin futures fills an obvious gap in its base metals offering.
But there remains a wide gulf between the Shanghai and London metals markets.
The former is still in essence a Chinese market with just about all of its liquidity deriving from mainland players.
SHFE metal prices are inclusive of the value-added-tax levied on imports and denominated in renminbi with all the accompanying constraints arising from China's capital controls.
The Shanghai market also has a significant retail investment user base, in stark contrast with the LME and its industrial and financial wholesaler clientele.
That difference in user profile helps explain why some SHFE contracts fare better than others in terms of volumes.
Copper, which is an investment favourite the world over, is the highest-volume base metal traded on the SHFE. Zinc comes in second, largely because its relatively low price appeals to Chinese retail punters.
Aluminium and lead, by contrast, have low retail investment appeal, whether in China or anywhere else, and SHFE volumes are dwarfed by the equivalent LME contracts, where only the biggest investment players dare to venture.
Even attempting the sort of volume comparison shown in the graphic above is tricky given the differing formats and methodologies used by the two markets.
The figures, for example, exclude LME options turnover because there is no options trading on the SHFE.
The SHFE volume figures are a double-count because of the SHFE's practice of counting both buy and sell as separate volume contributors. The LME volume figures, meanwhile, are as arcane as the London market's trading system with its multiple prompt dates and tiered membership structure.
Broadly speaking, the two markets are best viewed as two complementary trading systems with arbitrageurs offering a degree of connectivity, albeit one constrained by the obvious technical hindrances.
CONNECTIONS
It is precisely this gap between the international and Chinese metals markets that HKEx is looking to fill, building on its existing role as a renminbi gateway between China and the rest of the world.
The template is already there in the Stock Connect link-up with the Shanghai stock exchange. Launched in November last year, it has just passed another milestone with record "southbound" (mainland to Hong Kong) trading turnover of HK$5,593 million today.
The glittering prize for HKEx would be to achieve something similar in terms of connecting China, the largest consumer and in many cases the largest producer of base metals, with the international metals market-place.
For China it would mark another step towards eventual renminbi convertibility and a transition from resented price-taker to coveted price-setter status.
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