Chinese Copper-Trading Surge Shakes Up Market

ENLARGE

Chinese investors hamstrung by stock-trading restrictions are piling into copper trading, a shift that analysts and traders say has distorted the global market for the metal.

Since the start of July, when authorities began limiting stock trading in China, trading in stock-index futures has fallen 97% to around 65,000 contracts a day, while trading in Chinese copper futures has nearly doubled to roughly 710,000 contracts a day. Because investors now face obstacles in betting against stock futures, they have turned to the copper market as they seek avenues to bet on a deepening slowdown in the world’s second-largest economy, traders and other market experts say.

Spikes in activity on China’s main commodities exchange have coincided with a period of heightened volatility in copper prices and are driving copper-trading volumes world-wide. Global volumes are on track to hit a record high this year, with traders in China accounting for the largest share.

The rising prominence of Chinese investors in the copper market is the latest example of the country’s increased heft in financial markets. In recent years, Chinese investors who used physical metals as collateral for bank loans were credited with driving up demand for copper, zinc and nickel and contributing to higher global prices. Now, some industry officials have said the heavy selling of copper futures in China has skewed prices so much that they no longer accurately reflect the supply and demand for a metal used in everything from iPhones to refrigerators.

“We saw copper being sold heavily [by Chinese traders] when trading was first being restricted in Chinese equities; it was an outlet to be able to sell risk,” said David Donora, who oversees $ 600 million invested in commodities at Columbia Threadneedle Investments. “If you stop the trading in one part of the market and there’s a proxy for offloading that risk elsewhere, you’ll use that proxy.”

China’s main stock gauge, the Shanghai Composite Index, tumbled 43% between June and late August as investors fled on fears the domestic economy was losing steam. Authorities devalued the yuan to ease domestic business conditions, while also curbing stock trading and coordinating a stock-buying effort by state-owned enterprises to stabilize the stock market. The combined measures have helped lift the Shanghai Composite 15% from its August low.

The surge in Chinese copper trading came as market regulators there made it harder to borrow money for trading stocks in an effort to stem the market’s fall, and increased the minimum deposits necessary for trading. Chinese investors have often had to cut back share dealing during the market’s tumble, either because companies have suspended trading in their shares, or because prices of many individual stocks have fallen by their daily 10% limit.

Copper futures prices are down 15% this year on the Comex division of the New York Mercantile Exchange. ENLARGE
Copper futures prices are down 15% this year on the Comex division of the New York Mercantile Exchange. Photo: Imaginechina/Zuma Press

Copper-trading volumes in China have often spiked after fresh regulatory measures were introduced. On Sept. 2, when the China Financial Futures Exchange announced it would require speculators in stock-index futures to deposit 40% of the contract’s value, up from 30%, Chinese stock-futures volumes collapsed from more than a million contracts a day to tens of thousands in the days that followed. Copper-futures volumes surged from less than 300,000 contracts on Sept. 7 to 1.3 million on Sept. 9.

Xiao Chaojiang, who manages roughly 30 million yuan ($ 4.7 million) at Shenzhen-based Jiangcheng Investment Co., said he pulled roughly 10 million yuan out of stock-index futures after the September crackdown. Instead, he placed bearish bets on copper and zinc prices, which he expects to fall as China’s demand for industrial metals wanes.

Copper prices hit a six-year low in late August, at the peak of China’s stock selloff, and neared those levels again in September as more Chinese investors switched to trading commodities. Copper futures ended Friday at $ 2.407 a pound on the Comex division of the New York Mercantile Exchange, down 15% this year.

On the other side are multinational metal traders that are able to profit from the recent swings. When metal prices in London are more expensive than in Shanghai, these traders buy copper where it is cheaper and sell it where it is more expensive, making a profit on the difference. Copper price volatility, measured by averaged price swings, rose 40% in September compared with the start of 2015, according to Mitsui Bussan Commodities.

From a trading floor in lower Manhattan, Hang Shi, a metals trader for Northport Commodities, a hedge fund, monitors futures prices on the Shanghai Futures Exchange on one of her six computer screens.

Ms. Shi’s mornings are busy because many Chinese traders stay up late—trading from 9 p.m. to 2 a.m. Shanghai time—to take advantage of the greater liquidity available when New York and London are open.

“I will join the market for a few minutes,” Ms. Shi said. Once the gap between the two markets shrinks, Ms. Shi exits the position, ideally locking in a profit. “What we do is generate a lot of trades, each one with a very small profit, but our volume is very big,” she said.

August and September were two of Northport’s best months in copper, according to managing director William Purpura.

As the increased activity in China ripples through London and New York, trading volumes world-wide are rising.

So far this year, the equivalent of 637 million metric tons of copper has changed hands among the world’s copper futures traders, according to data from Macquarie tracking the most-actively traded contracts in Shanghai, London and New York. This is a record high for the period and on pace to exceed the full-year record high of 737 million metric tons notched in 2014.

Shanghai accounted for 47% of these volumes.

Even with an active market, some market participants say the selling by Chinese investors has suppressed the copper price. Copper-mine supply lagged behind demand in recent years and inventories of the metal are dangerously low; stocks at the three main exchanges currently cover less than a week of global demand.

“It’s just not making sense. We’ve never seen copper inventories down at these levels and prices, because these levels, you normally have a much higher copper price,” said Ivan Glasenberg, chief executive of Glencore GLNCY -2.74 % PLC, during the company’s earnings call Aug. 19.

Copper’s selloff has been particularly painful for Glencore, which got 20% of its operating income from copper production in the first half of 2015. The broader commodities plunge in recent months has forced Glencore executives to shut down mines, sell stock and reassure investors that the company’s balance sheet remains solid.

Citigroup C -0.53 % estimates that roughly 1.6 million metric tons of global copper production has been lost this year due to adverse weather, worker strikes and other disruptions.

“We believe there has been a clear [disconnect] in the recognition of reduced output growth versus copper prices,” said David Wilson, Citigroup’s metals analyst, who expects copper will rally to $ 3.0391 a pound by the end of 2016.

Write to Tatyana Shumsky at [email protected]


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