Source: London Metal Exchange / Shanghai Futures Exchange, via Yicai and China Steel News
The London Metal Exchange will on October 27 formally list its Shanghai Hot-Rolled Coil contract, a US dollar-denominated, cash-settled derivative that settles against the daily settlement price of hot-rolled coil futures on the Shanghai Futures Exchange (SHFE). Each contract covers 10 tonnes, with the last trading day falling on the 15th of each month or the preceding business day, and currency conversion handled by LME's sister company CPAL. The listing marks the first time a Chinese metal price benchmark has been licensed to a mature overseas exchange, under an agreement signed at the Lujiazui Forum in June. SHFE has previously licensed settlement prices for pulp and natural rubber to exchanges in Norway and Osaka, but never before for a metal product.
The underlying SHFE hot-rolled coil futures contract is the world's most heavily traded flat steel derivative, with average daily turnover of about 700,000 lots last year and record open interest of 1.9 million lots. Its 20 delivery warehouses and 22 deliverable brands cover more than 60 percent of China's hot-rolled coil output, and its price has become a key reference for buyers of Chinese flat steel across the Asia-Pacific, the Middle East, North Africa and South America. SHFE President Lu Dongsheng said a contract's sustainable development depends on being rooted in the real economy and responding to market demand.
The new listing addresses a long-standing hedging gap for international traders, who until now had what market participants describe as "only one leg". Chinese exporters could hedge physical sales with SHFE futures, while overseas buyers and funds lacked direct access and had to rely on over-the-counter instruments that carried counterparty risk and higher costs, effectively limiting participation to large banks and financial institutions. John Short, chief executive of derivatives firm Boomer Commodities, said the centrally cleared, dollar-denominated version removes that barrier, with market makers committed to a bid-ask spread of about 1.5 dollars per tonne in the most liquid months.
The launch also reflects a global steel market that is increasingly splitting into regional blocks. Aline Carnizelo, chief investment officer at Frontier Commodities, noted that US hot-rolled coil was trading around 1,450 dollars per tonne while European prices stood at 820 to 840 dollars and Chinese prices at roughly 440 dollars, a gap of about 1,000 dollars between the United States and China that she described as unprecedented. With European import quotas cut by 47 percent, and tariffs, carbon standards and local cost differences reshaping trade flows, she argued that regional exposure now requires regional contracts. Traders expect a cautious start for the LME contract, pointing to the Singapore Exchange's iron ore derivatives business, launched in 2009, which reached a record 66.2 million lots last year after years of growth.
