How will INE’s bonded copper futures support the real economy?
The launch of bonded copper futures is necessary for the continued growth of China’s copper industry. And with the more opened-up economy, it also enables the futures market to better support the copper industry, not least by providing it with an international risk management tool. Specifically, the product offers enterprises in every segment of the industry a tool to avoid price risks in international trade, thus boosting their operational stability. It will also boost China’s influence in the global pricing of copper, accelerates the internationalization of renminbi, and helps build China into an international pricing center for copper.
What are the general principles behind the design of bonded copper futures contract?
Shanghai International Energy Exchange (INE) is due to launch its latest product, the bonded copper futures (product symbol: BC), also referred to as international copper futures. Bonded copper futures will be listed and traded on the basis of “international platform, net pricing, bonded delivery, and RMB denomination” to fully engage overseas traders.
As yet another futures product in China accessible to foreign investors (i.e., “specified domestic (futures) product”) after crude oil, iron ore, PTA, TSR 20, and low-sulfur fuel oil (LSFO) futures, bonded copper futures will be regulated by the same set of tax, foreign exchange, and customs policies as for crude oil futures, TSR 20, and LSFO futures.
Why does the internationalization of copper futures use a “dual contract” model?
The principal consideration behind the bonded copper futures is to introduce it as a specified product without changing the existing copper futures listed on Shanghai Futures Exchange (SHFE). China imposes export duty and VAT on copper and other major nonferrous metals, which in effect has created two spot markets for copper: a tax-included domestic market and an on-shore (in bonded areas) bonded market.
SHFE’s copper futures are aimed at the former, and reflect the domestic supply and demand of refined copper. Its price has become a benchmark for spot copper trades in China. By contrast, the bonded copper futures are designed for the tax-excluded markets outside Chinese customs, including on-shore bonded areas and the markets of countries and regions in the Far Eastern time zones. These markets reflect the copper supply and demand in the international markets. The dual-contract model enables the introduction of an internationally oriented product for the bonded market and the market of the Far Eastern time zones, without disrupting the domestic market. This helps providing the global copper industry with a better risk management tool.
What are the main similarities and differences between bonded copper futures and SHFE copper futures in contract design?
The bonded copper futures contract is designed in line with the international best practice and based both on the domestic market and, to a larger degree, the Far Eastern market. As a result, the two contracts are identical in contract size, minimum price fluctuation, contract months, trading hours, and last trading day, but different in delivery period, the grade and quality specifications of deliverables, how price is to be quoted, and position limit, etc.
Table 1: Comparison of Bonded Copper Futures and SHFE Copper Futures