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Commodities

Copper price fall hints at manufacturing slowdown in China: LME head

Exchange plans to launch lithium contracts with Chinese price as benchmark

The LME is in talks with Chinese authorities to open its first warehouse in mainland China.    © Reuters

TOKYO -- Falling copper prices are a signal that Chinese manufacturing is slowing down amid the trade spat between Beijing and Washington, said Matthew Chamberlain, CEO of London Metal Exchange, in a recent interview.

Copper prices yield clues to the state of the economy because the metal is used in many industrial products including wire cables and semiconductor parts. As China accounts for nearly half of global demand, the direction of copper prices also reflect the state of the Chinese economy.

The LME three-month copper price stood at $5,929 per ton in July, down 10% from March. The price hit a six month low in June. "Falling copper price probably does reflect a view of slowing manufacturing based on a large extent on trade tensions," said Chamberlain.

Ongoing trade tensions, however, contributed to an increase in trading volume on the LME, which was up by 5% from a year ago. Chamberlain attributed the increase to a combination of fee reduction and higher volatility caused by trade tensions and sanctions taken by the U.S. against Russian billionaire Oleg Deripaska who had shares in Rusal, Russia's biggest aluminum supplier. LME's aluminium volumes went up as more investors who seek opportunity to gain profit in the short time came into the market.

LME is planning an investment worth "tens of millions of U.S. dollars" in a new trading platform that will enable market participants to trade faster and that offers more graphical interface. Chamberlain said LME hoped to bring it to market in 2021.

London Metal Exchange CEO Matthew Chamberlain said falling copper prices reflect a slowdown in Chinese manufacturing. (Photo by Rurika Imahashi)

Chamberlain said trading volumes on the exchange are unlikely to match those last year as the market had not been as volatile, especially in aluminum.

The LME is currently working on adding lithium carbonate and lithium hydroxide contracts to its offerings. Lithium is used in batteries and there has been growing need from the industry for a clear benchmark as demand for electric cars increases.

Chamberlain said that the benchmark will be based off the Chinese market to reflect the country's presence as the world's biggest lithium consumer. The LME announced in June that it chose Fastmarkets, a U.K.-based price-reporting agency, as a reference price provider.

The exchange was initially planning to launch the benchmark this year, but Chamberlain said that it would now wait until next year. "We don't want to go before the industry is ready," adding that "there is still a lot of work with the physical industry to get the price adapted."

The LME is now in talks with Chinese authorities to open its first warehouse in China. Chamberlain stressed that having its own warehouse there has been "a strategic aim" ever since Hong Kong Stock Exchange bought LME for $2.2 billion in 2012. China does not yet allow overseas exchanges to warehouse products locally.

However, Chamberlain said that China wants to "participate in the formation of the price," and hence, Beijing could eventually come round to LME's plans. Chamberlain said that allowing LME warehouses in China will show Beijing's willingness to open up and enables Chinese flows to be "a big part of global price as well as the Shanghai price."

He said that the Chinese would want the ability to trade Shanghai futures and LME futures so that they can do business with domestic and international partners. This also suits Beijing's flagship Belt and Road Initiative which he said was very much about a "global vision."

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