Bloomberg News

Shanghai Plans Fivefold Increase in Metal Bonded Warehousing

September 02, 2011

(Adds comment from Jiangxi Copper in fourth paragraph.)

Sept. 2 (Bloomberg) -- Shanghai will increase storage for metals at bonded warehouses as much as fivefold, lowering costs for commodity trading and potentially boosting shipments into the world’s largest consumer of copper.

“As we expand our physical and futures-related trading businesses, it’s likely to become a globally influential price- forming center for certain commodities” when trading volumes become large enough, said Wang Xinling, vice chairman of the Shanghai Free Trade Zones Administration.

Increased bonded warehousing space in Shanghai, the world’s busiest container port, may help China’s metals trading hub bring prices more in line with international rates as shipments are exempt from import duties. Demand from the world’s second- largest economy has helped fuel a rally in metal prices since 2003, with increased trading in Asia prompting the London Metal Exchange, where benchmark prices are settled, to offer futures products in Singapore.

“Bonded warehouse storage facilitates exports and helps us to avoid currency risks, so it’ll be easier for overall international trade as we exploit arbitrage opportunities,” said Su Li, president of Jiangxi Copper International Trading Co. The company is a unit of China’s largest copper producer.

The area for storing metals in Shanghai’s free trade areas will increase to 200,000 square meters to 250,000 square meters next year from 50,000 square meters, according to Eric Ni, a business development manager at Shanghai Free Trade Zones United Development Co.

More Space

“The exchange may consider expanding the pilot program to other commodities as well, and this is also what we want to do,” Wang said. “Ten major industry players, including Trafigura, Citi, Jiangxi Copper and Xi’an Maike, have registered within the free trade zone, and we believe their participation will bring more industry players.”

The administration manages free-trade zones in Shanghai’s Yangshan, Waigaoqiao and Pudong Airport. Two warehouses in Yangshan started in March offering delivery services for copper and aluminum futures traded on the Shanghai Futures Exchange. Metals stored there are exempt from a 17 percent value-added tax and import tariffs, bringing prices more into line with those traded in London and New York.

Receipt financing services and an electronic trading platform for companies within the zone are also being considered, Wang said.

Tough Competition

Shanghai Futures Exchange, one of the three commodity bourses in China, trades refined copper, aluminum, zinc, lead, gold, fuel oil, natural rubber and steel futures in yuan, and is off-limits to investors outside of China.

The S&P GSCI Index, which tracks 24 commodities, has more than doubled since the end of 2002 and copper in London has gained sixfold as average annual economic growth of more than 10 percent in China during the same period spurred demand for raw materials.

Increased focus on trading during Asian hours has prompted the London Metal Exchange to start smaller-sized copper, aluminum and zinc futures jointly with Singapore Exchange Ltd. on Feb. 15. The LME also started unofficial three-month futures prices for copper, aluminum and zinc, the so-called Asian benchmark reference prices, starting from Jan. 24.

The influence of Shanghai prices has already exceeded those on New York’s Comex exchange and has made the London bourse uneasy, Wang Zhouyi, an analyst at Shanghai CIFCO Futures Co., said by phone. “That’s perhaps how the new products came into being,” said Wang, referring to the LME’s Singapore futures.

Foreign Restrictions

China has prohibited foreign futures exchanges from establishing warehouses in the country for the physical delivery of commodity products against contracts, according to a statement from the China Securities Regulatory Commission in August 2008. The move denied Chinese investors the opportunity to more easily trade futures on the London Metal Exchange.

Importers and traders rely instead on LME storage facilities at Asian ports that already have approval including Busan and Incheon in South Korea, and Singapore.

Trading volumes climbed by 43 percent last year on the Shanghai exchange, bourse data show. Volume increased by 7.4 percent on the London Metal Exchange, it has said.

Still, “Shanghai still has a long way to go to have a bigger influence as there are lots of policy innovations needed,” CIFCO’s Wang said.

Global players must be allowed to trade in these markets if China’s futures are to become more important benchmarks, Nick Ronalds, executive director of Futures Industry Association Asia, said in April.

--Richard Dobson, Editors: Richard Dobson, Ovais Subhani

To contact Bloomberg News staff for this story: Richard Dobson in Shanghai at rdobson4@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net


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