China's Commodities Trade Thrives as Uncertainty Spurs Wagers

  • Metals veterans Shi and Browning bullish on nation's reforms
  • China's exchanges see volumes boosted as prices swing

Economic uncertainty is a boon for China’s commodities trade, lifting volumes and expanding the nation’s sway over global markets for raw materials even as its own demand slows, according to two veteran metals brokers who share more than 50 years experience in the industry.

“Volatility is going to remain in the market this year and that is going to increase turnover,” said John Browning, managing partner at BANDS Financial Ltd., the brokerage he founded with Chinese business partner Tiger Shi last year.

China, the top buyer of everything from copper to rubber, is the epicenter of a collapse in metals to multi-year lows as it struggles with the slowest growth in a generation. Prices have rebounded in recent weeks as investors bet on output cuts and policymakers move to stabilize the economy. Trading volumes on the Shanghai Futures Exchange in January and February were at a record in the first two months of the year.

Chinese exchanges have opened a flurry of contracts in recent years. Iron ore on the Dalian Commodities Exchange, established in 2013, saw volumes surge 169 percent to a record in 2015 amid a plunge in prices. The SHFE’s nickel contract, launched March 2015, is already trading around three-quarters of the tonnage seen on the London Metal Exchange, the world’s benchmark, based on data for January and February.

QuickTake Iron Ore

“The market is changing consensus all the time, so people aren’t putting in a position and holding it for six months any more,” said Browning, speaking last week by phone with Shi from their office in Hong Kong. The two worked in the city at Jefferies Group LLC, before the bank withdrew from commodities last year, and plan to set up an office in Shanghai later in 2016.

Copper Drops

Copper in Shanghai dropped from 46,260 yuan a metric ton in May to 33,510 yuan in November and was last at 36,900 yuan.

Price moves on China’s exchanges are increasingly setting the tone for global markets, helped in part by aggressive trading from Chinese hedge funds, said Shi, who began his career in 1996 at the State Reserve Bureau, China’s strategic stockpiling agency. Browning, a U.K. national, started out at metals warehousing firm Henry Bath & Son Ltd. in the 1970s.

“The reason these hedge funds are doing so well in commodities is that China has been the driving sector of the whole commodities story, and these people are very close to the fundamental market in China,” Shi said. “We shouldn’t give them all the credit for market moves but there are certain times and certain moments they trade in and out with huge volumes.”

Shanghai Booms

While the SHFE is booming, LME trading slipped 4 percent last year for the first decline since 2009, as western financial institutions reduced their exposure to slumping prices, regulators imposed tighter rules, and the exchange raised fees. Although the number of contracts traded on the SHFE exceeded those of the LME, tonnages were much lighter due to smaller lot sizes in Shanghai.

Shi and Browning want to capitalize on the growing number of Chinese asset managers looking for overseas investments, and also serve western investors seeking access to Chinese markets as the country pursues financial reforms. While China’s futures markets remain ring-fenced by rules that restrict access in both directions, its leaders have pledged to gradually open up the country’s exchanges and securities to outside participants, and introduce more market-based pricing.

“Commodities are slowing down but financial market reform has only just started in China and will continue,”’ Shi said. “We want to place ourselves in that trend to profit from the shift from west to east. China’s investor population is growing in wealth and sophistication but a broad spectrum of investment products does not exist yet.”

It’s a track that bigger outfits are following. Hong Kong Exchanges and Clearing Ltd. has plans to bridge the gap between Chinese and world pricing with a three-year plan for commodities, after buying the LME for $2.2 billion in 2012.

While banks including Jefferies, JPMorgan Chase & Co., and Morgan Stanley have pared back their metals activities, units of Chinese banks such as Industrial & Commercial Bank of China Ltd., and Bank of China Ltd. have moved into commodities and joined the London Metal Exchange. Meanwhile, the amount of copper held in SHFE warehouses surpassed LME volumes for the first time in more than a decade, underscoring the importance of China as a center of price discovery.

“There are a lot of interesting things going on in this part of the world to connect onshore commodity prices in China with offshore commodities prices,” said Shi. “These are going to be very interesting opportunities.”

— With assistance by Martin Ritchie

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