July 30, 2018 / 11:09 PM / 21 days ago

Shanghai first half nickel volumes within whisker of all-dominating LME

LONDON (Reuters) - A more than doubling of nickel volumes on the upstart Shanghai Futures Exchange (ShFE) in the first half has brought it within a whisker of the tonnage traded on the tradition-bound London Metal Exchange, an analysis of exchange data showed.

FILE PHOTO: A company logo of Shanghai Futures Exchange is displayed at a booth during LME Week Asia in Hong Kong, China June 14, 2016. REUTERS/Bobby Yip/File Photo

The jump in Chinese nickel volumes, fuelled by speculators, was part of a wider uplift in global metals trading, driven by strong global growth and galvanized by U.S. sanctions on Russian aluminium producer Rusal and lurching trade conflicts.

But while the U.S. CME Group (CME.O) enjoyed surging copper turnover, neither it nor ShFE are yet seriously threatening the dominance of the 141-year old LME, which still commands the majority of global metals trade.

“The growth in ShFE nickel has been phenomenal, especially for a contract that launched in 2015 compared to one that’s been around since the 1960s,” said Oliver Nugent, commodities strategist at ING Bank in Amsterdam.

“But the LME’s dominance in the sector is still pretty remarkable. There aren’t many places where you can see that much of a monopoly. You’re talking paper cuts against a giant.”

Volumes in nickel, a key ingredient for electric car batteries, soared 132 percent on ShFE in the first six months of the year, representing 63.65 million tonnes of metal.

The LME, owned by Hong Kong Exchanges and Clearing Ltd (0388.HK), saw a 6.8 percent uplift in nickel volumes to 64.98 million tonnes.

But other volumes were patchy in Shanghai, with many metals showing declines, including a 28 percent slide in zinc volumes and a 5.5 percent dip for copper. Even with the leap in nickel, overall base metals tonnage traded on ShFE slipped 7.9 percent.

The bulk of metals trading in Shanghai is typically by day-trading speculators, who are lured from market to market amid shifting trends.

While optimism over the electric vehicle revolution has spurred nickel volumes, the lack of arbitrage opportunities so far this year curbed zinc and copper, analysts said.

ShFE did not respond to a request for comment.

The offices where the London Metal Exchange is headquartered are seen in the City of London, Britain, January 18, 2018 REUTERS/Peter Nicholls

GRAPHIC - Shanghai H1 Nickel Volumes Soar: reut.rs/2K3rhN7

LME REBOUND

The LME enjoyed a 10 percent rebound in overall volumes in the first six months of 2018 after several years of lacklustre performance, including a 0.5 percent rise last year and a 7.7 percent fall in 2016.

The LME volumes spiked 41 percent in April alone, fuelled by the United States imposing tough sanctions on United Company Rusal (0486.HK) and then relaxing them, causing aluminium prices to gyrate sharply, generating profits for brokers.

The LME’s 10 percent gain is after stripping out from the raw volume numbers “unallocated” trades, which were launched in January to help members comply with the European Union’s MiFID II regulatory reform, but which also inflate volumes.

For internal purposes, the LME also smoothed out the volume figures by removing the April spike, which results in a 5 percent first-half gain, Chief Executive Matthew Chamberlain said.

“From the perspective of this organisation and our shareholder and our members, that is an absolutely fine rate of growth,” he told Reuters.

“We’re a play on global growth, we’re a play on industrialisation, urbanisation, and that feels that it has a sort of 5 percent background growth rate.”

GRAPHIC - Comex gains in copper, LME still dominates: reut.rs/2mU2vWI

CME COPPER CLIMBS

In the United States, CME copper volumes climbed 43 percent in the first half versus 3 percent for the LME’s copper contract.

“We are seeing multi-year, double-digit growth across all metals products at CME Group,” Young-Jin Chang, global head of metals products, said in an emailed statement.

The CME, the world’s largest futures exchange operator, however, has seen modest volumes in aluminium premium contracts, but there has been little or no volumes in its aluminium, zinc or lead futures contracts.

Fund managers and speculators prefer the CME’s copper contract over the LME’s due to its traditional futures set up with a single monthly expiration date.

The LME has a complex date structure, with daily prompts available for the first three months, so that miners or industrial consumers are able to time their hedging programmes with the exact arrival dates of shipments.

“I don’t think we should really be surprised that some of our peer exchanges are seeing a higher growth rate from those financial people because their market structure is really set up to appeal to them,” the LME’s Chamberlain said.

“We’ve made a very deliberate decision that we’re going to retain the date structure and that means that to a certain extent we’ve ceded the hot money to other venues that focus on this type of growth.”

Despite the higher growth rate, total copper metal volumes traded on the CME at 199 million tonnes in the first half are still well below the LME’s at 445 million.

In copper, the LME’s share of the global copper futures market has declined to 58 percent from 61 percent in the same period last year, the CME has increased to 26 percent from 20 percent while ShFE has declined to 16 percent from 19 percent.

Nugent said other factors were behind the strong growth rate for the CME copper contract.

“Comex might be set up easier for the funds, but it’s also had an element of luck in terms of politics. If you chart that surge in open interest, it was around the U.S. election in 2016.”

At first, the prospects of a U.S. border tax on commodities such as refined copper spurred a build-up of CME stocks while more recently trade war fears have fanned speculative trading.

Additional reporting by Tom Daly in Beijing; Editing by Veronica Brown and David Evans

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