Everyone’s talking about Chinese speculators. This year has seen an unprecedented surge of trading volumes and open interest in Chinese markets as institutional and retail investors pour money into commodities.
Both the Shanghai Futures Exchange (ShFE) and the Dalian Exchange are upping margin requirements and transaction fees to try and calm overheating contracts such as steel rebar and iron ore.
The stampede appears to have been halted with both prices and trading activity losing some of their recent froth.
But the current trading frenzy shouldn’t distract from the growing global influence of China’s domestic commodity exchanges.
In a market such as nickel the dramatic rise of the ShFE is exerting an increasingly powerful gravitational pull on physical units, causing ripples through the global refined metal supply chain.
The ShFE launched its nickel contract in March last year, since when volumes and open interest have grown dramatically.
The contract hasn’t been totally immune from the cross-commodities feeding frenzy of the last few weeks but activity has been on a fast upwards curve ever since the day of launch.
Volumes already regularly exceed those on the London Metal Exchange (LME), which has dominated wholesale nickel trading for many, many years.
In March, for example, the ShFE contract traded around 10.76mn tonnes for nickel, even factoring in Chinese exchanges’ habit of counting both sides of a transaction in their volume figures.
On the LME, where volume figures are inflated by the exchange’s complex spread structure, headline activity amounted to 10.50mn tonnes.
The Shanghai nickel contract has also seen a steady build in market open interest, currently just over 707,000 tonnes.
That’s still some way short of the LME’s 1.96mn tonnes but it’s noticeable that the Shanghai nickel contract hasn’t seen the wild swings in open interest that have characterised some of the most frothy commodity contracts in China in recent weeks.
The take-away is that although Shanghai nickel may be prone to the same day-trading investment crowd flooding other local markets, its success is founded on bigger, more institutional players who are prepared to hold positions for longer.
Indeed, so quickly did trading activity explode into life that the ShFE nickel contract almost immediately ran into trouble in the form of a squeeze on shorts on the July 2015 contract.
The problem was that there were insufficient stocks of the six Chinese good delivery brands to satisfy short position holders looking to settle their positions with physical metal.
So the exchange allowed the delivery of three brands of Russian nickel produced by Norilsk Nickel.
And in doing so, it altered both flows and stocks of refined nickel around the world. Because Russian metal has been flooding into China ever since. Imports from Russia jumped from 75,000 tonnes in 2014 to 194,000 tonnes in 2015 and were running at an annualised 295,000 tonnes in the first quarter of 2016.
Chinese imports of refined nickel have always included some Russian material but this typically accounted for between 45-55% of the total.
That ratio jumped to 64% last year and further to 68% in the first quarter of this year and that in the context of sharply higher overall import volumes.
Some of that metal has gone into ShFE-registered warehouses, where stocks have been trending ever higher. They currently stand at just over 80,000 tonnes.
More has disappeared into off-market obscurity. David Wilson, analyst at Citi, estimates that there is somewhere like 250,000-300,000 tonnes of metal in bonded warehouse and mainland non-exchange storage. (“Nickel - More Funds than Fundamentals”, April 26, 2016)
Much of it is tied into one form or another of financing deal. This is nothing new. Nickel has long been a favoured collateral commodity because of its relatively high value.
But it’s a moot question as to whether a local exchange delivery option has given the financing business an extra fillip by affording lenders on the mainland an added level of security.
The Shanghai contract’s gravitational pull on Russian nickel is altering both the composition of LME stocks and the physical market premium structure.
Norilsk is the world’s largest producer of full-plate cathode, a form of nickel that has historically accounted for almost all registered LME nickel inventory.
This is because full-plate has also historically been the cheapest form of refined nickel.

Andy Home is a columnist for Reuters. The views expressed are those of the author.
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