China wants to dominate trading in lithium carbonate futures as it tries to take the financial infrastructure linked to metals that are vital for the clean energy revolution from the dollar-based western financial system.
The Guangzhou Futures Exchange launched contracts last month to track the price of Lithium Carbonate, a mineral that is used in the production of batteries for electric vehicles.
In just three weeks, open interest, a key indicator of market size, had reached more than 20,000 tons. This was far greater than the activity of rivals London Metal Exchange (LME), Singapore Exchange, and US-based CME Group which launched their own version only days earlier.
The increasing number of futures contracts for key elements in electric vehicle products, such as copper, lithium carbonate, and nickel, reflects, in part, the importance of this industry as companies across the supply chain seek to protect themselves against price fluctuations.
Guangzhou’s early lead has shown how China wants to gain greater control of trading in a group it considers essential for the 21st Century. Beijing is trying to reduce the reliance of the commodities market on the US Dollar by establishing its trading hubs, and benchmarks in renminbi. This has been intensified after the US sanctions were imposed against Russia for the Ukraine War.
Tiger Shi, the chief executive of Hong Kong’s Bands Financial broker, said that China “certainly wants to be a price power in all these markets.” It will take some time, but this is the direction.
Chinese companies are the owners of a number mines, and their products are almost exclusively exported to Asia’s biggest economy. The desire to create a trading system that matches the western exchanges, which have historically dominated the market, is growing.
Marc Bailey, the chief executive officer of Sucden in London, which has a strong presence on the Chinese market, said that China will become a global powerhouse in terms of derivatives, not only domestically but also internationally.
The announcement comes at a moment when the London Metal Exchange’s dominance, which was the hub of global metals trade for most of the 146 years it has been in operation, is under severe threat.
Since the nickel crisis of March of last year, when the prices soared out of control, the LME has suffered a loss of reputation. The exchange suspended and then cancelled trades worth billions of dollars.
Martin Abbott, the former CEO of the LME, said that the original metal standards followed the flow of metals from around the world into London. “We cannot assume that we are the natural home of all these things.”
China faces many obstacles in its quest to turn its dominant position over commodity flows into global pricing power. These include the use of a currency which cannot be freely traded and the lack of a global warehouse network for China’s five futures exchanges.
Hong Kong Exchanges and Clearing owns the LME and it does have a warehouse network outside of China. It also claims that its nickel futures contracts — which represent the lowest quality metal in the lowest part of the globe — are more representative of global markets.
Its pricing system is based upon the value of trades on its exchange. This is supplemented by “regional premiums”, which reflect local issues such as distribution.
We have great respect for Chinese commodity exchanges. Matthew Chamberlain is the chief executive officer of the LME. He said that they are very good at pricing domestically in China. He said that “we must reflect the reality of metals flows and how members’ clients use them globally”.
Reports this year that the Shanghai Futures Exchange considered plans to build a warehouse network outside China underscored the potential of Chinese bourses competing with the LME.
Shi, from Bands, said that the most important step is to give global players access to your contract so it can be used widely as a benchmark for pricing. “A global warehouse and delivery system would be helpful.”
The warehouses play a vital role in enabling an exchange to act as a “market of final resort”. They provide a place where metal can be stored or taken when there are too many or not enough produced.
Raju Daswani is the chief executive officer of Fastmarkets in the UK. He said that to create a global rival for LME, they would need a network, and not just a few scattered around Asia. “It is a long time off.”
Executives say that the LME’s failure to adapt to nickel production changes has contributed to its stumble. The Shanghai Futures Exchange rival contract tracks daily data, including nickel sulphate – a chemical compound that is used in EV battery. Producers, traders, and consumers are all closely watching this market.
The futures contracts available on the Shanghai exchange are not accessible to foreign suppliers, who may be able to start embracing the renminbi price for orders coming out of China.
The idea of trading on a market in which officials can intervene without warning, in the name or stability, may be unappealing to international traders. Beijing warns traders to stop trading when commodity prices are volatile or stops it entirely.
Abbott, who runs Global Commodity Holdings – a platform for commodity pricing – does not see China as necessarily worse than other countries. He said that the political motivation to invest in volatile markets was a worldwide phenomenon.
Analysts and traders say that even if China takes a while to gain traction in the global commodity futures market because of these factors they still believe Beijing will have a significant impact simply because of its size and ability to control the supply.
Trevor Allen, BNP Paribas’ head of sustainability research, said that China has the size to move the market, but also the penetration of EVs, which is not seen in Europe or the US.