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Collaborative development of Shanghai's commodity trading platforms

Photo: Shanghai sets sights on becoming international trade centre. (Courtesy of Xinhua News Agency)
Shanghai sets sights on becoming international trade centre.

Building an international trade centre is crucial to Shanghai’s “four centres” initiative (developing the city into an international economic, financial, shipping and trade centre). In setting up an international trade centre, commodity exchange is a very important aspect.

Shanghai’s efforts in accelerating the establishment of various commodity trading platforms have reaped initial success in recent years. These platforms have succeeded in linking up upstream and downstream sections of industry chains and also linking up supply and demand, acting as go-betweens in matching seller and buyer, and effecting the integration of manufacturing and services sectors. They also promote close cooperation of Shanghai with other regions and foreign countries, as well as advance the course of internationalisation of Shanghai’s economy.

Advantages of collaboration

In recent years, the Shanghai Steel Trading Center, Shanghai Metal Center, CBI Group, Shanghai Petroleum Exchange, and Shanghai White Platinum and Silver Exchange have all expanded rapidly as leading players in the commodity exchange sector. The platforms they have set up provide enterprises with all sorts of attentive services and conveniences. By providing comprehensive services that see the merging of online and offline flows in transaction, information, material and capital, they have all witnessed rapid growth in trading volumes. For example, the transaction volume of www.cbiex.com, a trading platform run by the CBI Group of Shanghai, exceeded Rmb220 billion in 2013 and is expected to double in each of the next two years so that, by 2015, it will hit the Rmb1,000 billion mark. The competitive edge of these platforms lies in their collaboration in the following areas.

1. Transaction and information

In the development of Shanghai’s commodity trading platforms, information is most critical. Most of these platforms have started out as providers of information services and subsequently set up the most complete and most accurate industry-chain databases and provide the most authoritative benchmark prices in their respective industries. With information serving as a lead, various channels and enterprises converge on these platforms. As they grow in influence and reach in their respective industries, more deals are transacted on these platforms.

The CBI Group is engaged in providing an online-to-offline (O2O) commodity trading and services platform. It actually started out as an information advisory services provider that leveraged on its insights of various commodity sectors to gather market information and data for customers. By providing real-time prices, business opportunity alerts and brand positioning advice all of which are high-value market intelligence, it has been able to help enterprises enhance profitability. CBI currently has more than 20,000 data collection points and on an average day collects some 200,000 business leads that are grouped into 200 categories for distribution to its 200,000-strong premium customers.

By utilising the latest information technology and an advanced information platform, the Shanghai White Platinum and Silver Exchange provides China’s main silver related enterprises with information advisory services such as industry reports, supply and demand information, demand forecast in addition to releasing spot silver settlement prices and price indices on a countrywide and daily basis. In doing so, it is able to bring together more than 90% of China’s silver producers and over 1,500 silver using enterprises including silver mines, silver smelters, silver importers and exporters as well as mints. Using information services as a lead, it offers spot silver trading and sets up an online marketplace (www.yinbaojie.com) for trading in investment-grade silver bullion bars, collector-grade silver bullion bars and ingots.

2. Online and offline

Some commodity trading platforms first began as physical exchange markets. Today, platforms are complete with online websites and offline trading venues, thus allowing convergence in online and offline services and providing customers with one-stop conveniences. Shanghai Metal Center has been set up for more than 20 years and has its origin as a physical market. In recent years, as its online platform becomes more robust, it has been helping offline enterprises to adapt to the highly efficient online advisory and transaction models so as to achieve greater online/offline interaction.

3. Spot and futures

A commodity trading platform combines the short-term market of spot transactions with the long-term market of futures transactions, aligning spot trading with futures trading, thus making it possible for hedging against the risk of world price fluctuations. Through years of experience and innovation, Shanghai Metal Center has developed an interactive price quoting system for spot and futures prices. Its system is capable of extracting out at any time futures prices and the premiums/discounts of spot transactions (the price differences between spot transactions which are settled daily and futures transactions which are settled one or two months afterwards). A system that offers automated quotations and automated order cancellations is now in place. This has drawn the participation of China’s leading non-ferrous metals enterprises and also the close attention of overseas institutions.

4. Transaction and finance

The commodity trading platforms have strengthened their cooperation with banks in implementing a performance bond regulatory system and a system of fund transfers among banks and merchants, the better to effectively ensure the performance of buyers and sellers as well as the delivery of goods and the recovery of payments.

The commodity trading platforms are also very adept in providing financing because web financing is simple and fast. The financial services of these platforms have also extended further by providing pledging and guaranteeing services for trading enterprises.

5. Transaction and service

Shanghai Steel Trading Center has gathered a large number of steel mills and has separately set up a platform for serving small customers and one for serving major customers. By listing all warehousing locations of steel in China, these platforms allow customers to identify the nearest source of goods and help lower their logistics costs. So far it has more than 50,000 users. Car makers have huge demand for steel and, in order to ensure stable production, they need to have an ample supply of inventory. Shanghai Steel Trading Center has therefore set up a service platform specifically for its large car-maker customers. Based on users’ perspective, it has compiled a full set of charts covering the 300,000 odd car parts that make up the supply chains, from cars through parts, steel products, steelmaking, iron making, etc. By knowing at any moment the changes in each link in various locations, it is able to implement tracking management and provide accurate information. After using this system, car-maker customers have been able to lower their costs drastically because they used to stock 30,000 tons of inventories before but now they need only have to stock 10,000 tons.

Shanghai Petroleum Exchange boasts a full complement of systems including trading rules, trading themes, technical systems and fund supervision that are required of a well-run market. Moreover, by setting up an effective price discovery and resource allocation mechanism, it has been able to coordinate both domestic and international resources and become an efficient, open and transparent platform for the sales and procurement of natural gas. China is becoming the world’s number one importer of natural gas and, for reasons such as energy conservation, emissions reduction and dealing with the smog problem, its demand for natural gas is set to grow while seasonal fluctuation in demand will be great.

Shanghai White Platinum and Silver Exchange has been hosting major industry events in accordance with the requirement of government departments. Every year it organises the National Silver Fair, the Precious Metals Summit and the China International Silver Conference besides running such activities as the voting of favourite silver brands among users. In providing comprehensive services to the industry, it also enhances its own user stickiness.

6. Transaction and cooperation

If a trading platform wants to maximise its functions, it cannot do without cooperating with various parties. Shanghai White Platinum and Silver Exchange, for example, cooperates closely with China General Chamber of Commerce, China Chamber of Commerce of Metals, Minerals and Chemicals Importers & Exporters, Gems & Jewellery Trade Association of China, and Shanghai Nonferrous Metals Trade Association. The platforms are also stepping up cooperation with international corporations and institutions as a way to raise its own profile. For example, the CBI Group has not only formed a joint venture company with Reed Elsevier, a global information solutions provider, but also has cooperation with the Chicago Mercantile Exchange, the IntercontinentalExchange (ICE) Group and Dow Jones. Shanghai White Platinum and Silver Exchange has teamed up with Intel and JPMorgan Chase.

Gaining greater voice in setting prices

By adopting centralised price quotation mechanisms and internet technology, the price information of commodity trading platforms is open and transparent and has attracted the enthusiastic participation of enterprises. For example, the CBI Group began with helping manufacturers in making price forecasts. By now it is the most authoritative source of prices in China’s energy and chemicals sectors, so much so that it not only has market coverage of more than 90%, but is also providing reference price to customs authorities.

China is a major producer and consumer of commodities, but previously, in international commodity transactions, China had little if any voice in setting prices, no matter it was a commodity of which China was a major exporter or importer. As a result, prices always went up when China wanted to import but went down when China wanted to export, and many producers found their margins tightly squeezed by upstream and downstream companies.

The development of commodity trading platforms has provided a good start in gaining a greater voice in setting prices in the international market.

In future, the development of commodity trading platforms, in particular their internationalisation, will require policy support in areas such as free convertibility of Renminbi. Also, continued efforts are needed in bringing in leading platforms and nurturing talents.

Shanghai’s logistics and distribution system and financial services system are well developed, and its edge lies in economic strength and high-quality talent. The setting up of the Shanghai free trade zone is set to create new opportunities for expediting the development of commodity trading platforms.

Qi Xiaozhai, Special Correspondent, Shanghai

Content provided by Picture: HKTDC Research
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