Metals News
China to Launch Lead Futures Trading on March 24
smm insight
Mar 22,2011

SHANGHAI, Mar. 22 (SMM) -- The China Securities Regulatory Commission (CSRC) has approved the trading of lead futures on the Shanghai Futures Exchange (SHFE), and the official date for lead futures trading will be on March 24. 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 contract specification, contract months of the lead futures contracts to be traded at Shanghai Futures Exchange (SHFE) on March 24 will from September 2011 to March 2012, and bench mark price for the new contract will be announced by SHFE a day ahead of its official trading. Transaction margin is temporarily settled at 11% of contract value, and price rising and slipping limit is temporarily set at 6%. Price rising and slipping limit at the very official trading day is 12%. Transaction commission for SHFE lead futures contract is 0.01% of trading value, and delivery fee is RMB 2/mt. In general, the SHFE has 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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