SHANGHAI, Sept. 16 -- Chinese traders have renewed calls for lead futures to be launched on the Shanghai Futures Exchange (SHFE) following weeks of volatility in LME lead.
LME lead futures rose to a record high of USD 2,518/mt on September 8 on news of the Chinese crackdown on polluting smelters, only to plummet 14% to as low as USD 2,085/mt on September 10, its biggest slump in years.
When LME lead futures plunge or surge, it becomes harder in China to buy or sell the metal in the local spot market, said a physical trader in Shanghai.
"Take last Thursday, when LME prices dropped sharply and domestic suppliers became more hesitant to sell their material and there were just a few offers transacted that day," she said.
"If we can do business in a [local] futures market, things totally change. Liquidity is much better in the futures market," she added.
The SHFE has plans in place for lead contracts but has not yet received the go-ahead from China's Securities Regulatory Commission.
Market participants said that a lead contract may even limit volatility on the LME by allowing arbitrage.
"Just take an easy example, if LME lead rises by more than 8%, SHFE lead is likely to increase by a maximum of 5% on the first day to stay in line. Then investors start to buy Shanghai lead and correspondingly sell the LME," said an analyst in Shanghai.
As long as they can buy into Shanghai lead futures, they can earn, so LME lead will fall and surges will smooth themselves out, he said, adding that same will happen when LME lead plunges.
"I've been doing LME Asian trading for years, and to be honest, these gains and losses of more than 8% do not happen very often," said a futures trader in Shanghai.
"This recent price volatility has had a negative effect on the industry, harming both the stability of the market and the confidence of traders," he added.
Since the SHFE launched zinc futures in 2007, LME lead futures have not seen any daily changes larger than 8%, claimed the physical trader.
The Shanghai Futures Exchange is technically ready for lead futures but is waiting for final approval from the CSRC, said exchange officials.
"Technically, we are ready, as we have mentioned many times either publicly or privately," said an official at SHFE's nonferrous metals department.
"The trading of lead is not much different from existing zinc contracts, but we await the go-ahead from our supervisors," he said.
"The price volatility this time round could help to speed up the listing of lead futures in Shanghai, but as always, no one can tell the timetable," said the analyst.
"I think we may need to experience several major ups and downs in prices before lead futures will finally be listed. Let's say at least three times," he said.
The first will prompt producers and traders to push for the listing, the second will spur on investigations by the SHFE and the third just might push the government into finally approving it, he said.
(Source: Metal Bulletin)