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China to Launch Lead Futures Trading
Feb 21,2011 14:07CST
smm insight

SHANGHAI, Feb. 21 (SMM) – The China Securities Regulatory Commission (CSRC) said on February 18th that it has approved the trading of lead futures on the Shanghai Futures Exchange (SHFE), and the exact time for trading of lead futures will be decided after related contracts and other preparation works are completed. Lead futures will help form the lead pricing mechanism, and help lead-related enterprises hedge market risks effectively, and will have a positive effect on the optimal allocation of resources, the regulation of market order, higher market efficiency, and the development of China’s financial industry.

Stricter Rules on Lead Futures Contracts Aim at Preventing Excessive Speculation
According to the draft of lead futures contracts released by the Shanghai Futures Exchange (SHFE) on February 18th, there are some differences between lead futures contracts and previously-launched copper, aluminum, and zinc futures contracts. First, the size of contracts expands, with the size of lead futures contracts at 25 mt/lot, up from 5 mt/lot for other metals. Second, transaction margin increases, with minimum transaction margin for lead futures contract set at 8% of contract value, higher than the transaction margin of 5% of contract value for copper, aluminum, and zinc futures contracts traded on the SHFE. Based on the size of contracts and transaction margin and the latest SMM lead prices at RMB 17,250/mt in Shanghai, the minimum transaction margin for lead futures contracts is RMB 34,500/mt, higher than that for aluminum and zinc futures contracts whose value is close to lead futures contract value. Third, the requirements for higher transaction margin are easily to be met. Transaction margin for lead futures contacts will be raised to 10% of contract value when total positions of lead futures are at or higher than 30,000 lots but lower than 40,000 lots from the first trading day in the third month before entering the delivery month, and the margin will be raised to 12% of contract value when total positions are at or higher than 40,000 lots. In general, the SHFE set higher requirements for lead futures contracts in order to prevent excessive speculation.

Lead Futures Helps Improve China’s Base Metal Pricing Right
China is a heavy consumer of copper, aluminum, zinc, lead and steel, while the launch of lead futures market helps to complement copper, aluminum, zinc and steel futures markets to form China's pricing mechanism and to improve China's pricing right for strategic resources in international market. China is the largest producer and consumer of lead in the world, but pricing of lead, either in international or domestic trade activities, can only refer to LME lead prices due to an absence of a domestic lead futures market like that of copper and aluminum. This leads to international lead prices' failure to reflect regional supply and demand changes timely and accurately in China. Once SHFE lead futures market is launched, lead pricing mechanism will transform from previous LME lead price only into a combination pricing of comprehensive LME lead prices and SHFE lead prices.

The new pricing mechanism will reflect the actual demand and supply in domestic and international market to greater extent, and will also help change the situation that China's domestic lead prices only move passively along with international lead prices. From this point of view, the price discovery function of SHFE lead futures market can effectively reflect supply and demand of domestic market, form a national pricing center and send price signal to international market, helping improve  China's pricing right for strategic metal resources.

Good for Risk Management
With increasingly higher lead output in China, Chinese lead producers’ reliance on imported lead concentrate is gradually increasing. Along with rising raw material prices and strong speculation, producers will be exposed to great risks without utilizing risk management with futures contracts. Since only a limited number of domestic lead producers have qualifications to trade in international futures exchange, together with higher costs and greater difficulties in risk management, most domestic lead producers are unable to use lead futures market to hedge against risks. The introduction of a domestic lead futures market will help domestic lead producers effectively reduce potential risks, reduce management costs, and promote the upgrading of the industrial chain as well.

Opportunities Exist With Risks in Lead Futures Market
The introduction of a lead futures market will optimize domestic derivatives market, further diversifying futures products, and meanwhile allow more producers and investors to participate in base metal market trading. However, time is needed for the market to know the new-traded product. Similar to other markets, opportunities live with risks, and cautious attitude should be adopted before trading in view of risks in the futures market. 


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