China’s metals market surges as investors anticipate a price boom

China's Metal Markets Experience Unprecedented Surge

China's metal trading landscape is currently witnessing an extraordinary boom, with transaction values on the Shanghai exchange skyrocketing by over 260% compared to last year. This surge is fueled by a wave of speculative activity as both traders and large investment funds flock to commodities such as copper, nickel, and lithium.

Record-Breaking Trading Activity

Open interest across all six base metals listed in Shanghai has reached historic highs, reflecting strong investor confidence. Market participants are betting on ongoing global supply constraints, steady industrial demand, and a more favorable interest rate environment in both China and the United States. Escalating geopolitical tensions have further intensified the rush into raw materials.

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In December, the combined turnover for the Shanghai Futures Exchange’s six base metals, along with gold and silver futures, soared to 37.1 trillion yuan (over $5 trillion). December 29 marked the busiest trading day for copper in more than ten years.

Monetary Policy and Market Dynamics

Beyond supply shortages, the metals rally is supported by central banks’ monetary easing. Lower interest rates typically make non-yielding assets like metals more attractive to investors. Additionally, a weaker US dollar has encouraged more participants to adopt the so-called “debasement trade.”

Jia Zheng, head of trading at Shanghai Soochow Jiuying Investment Management Co., noted, “We’ve observed substantial macro capital flowing into commodities,” and mentioned that some equity funds are wagering that commodity futures will rise alongside stocks this year.

Notable Market Movements

Nickel, essential for stainless steel and battery production, climbed nearly 6% on the Shanghai Futures Exchange on Wednesday. Aluminum reached its highest price since 2021, and copper surpassed the significant threshold of 100,000 yuan per ton, despite local bearish signals such as increasing inventories.

On the Guangzhou Futures Exchange, trading—including lithium, palladium, platinum, and silicon futures—reached about 5.6 trillion yuan in December, more than six times the volume from a year earlier, though some contracts are relatively new.

Speculation and Market Risks

Despite the impressive rally, some experts caution that the pace may be unsustainable. Chi Kai, chief investment officer at Shanghai Cosine Capital Management Partnership, observed that much of the recent capital inflow is speculative. “This market will challenge traders’ abilities,” he said. “Simply holding positions won’t guarantee easy profits, and the risks are mounting.”

Volatility and Regulatory Responses

Market volatility is becoming a growing concern, particularly in Guangzhou, where a newly introduced platinum contract has hit its daily price limits eight times since late November. Following a 35% surge in lithium carbonate contracts over roughly seven weeks, the Guangzhou exchange imposed caps on new positions and raised trading fees. Although open interest has since declined, it remains historically high. The most-traded lithium futures contract rose 4.5% on Wednesday.

The Shanghai Futures Exchange announced plans to increase trading margins and daily price limits for certain silver futures starting Friday. The exchange also urged investors to act prudently, citing recent volatility in metal prices.

Outlook for Chinese Metals Markets

With base metals starting the year on a strong note—copper recently set a new record on the London Metal Exchange, and the LMEX Index tracking six major metals reached its highest since 2022—Chinese investors are expected to remain active. Macro funds, which typically maintain longer-term positions, reinforce this trend, according to Jia from Shanghai Soochow.

“Looking ahead to the next six months, with ongoing monetary easing in both China and the US, it’s unlikely that macro capital will withdraw,” she added.

Other Noteworthy Developments

• Villagers near Beijing are enduring a harsh winter, struggling to afford gas heating after local subsidies were withdrawn as part of the city’s clean air initiative.
• China has now recorded ten consecutive quarters of falling prices, marking the longest deflationary period since records began over thirty years ago. December’s data may indicate a slight easing of deflation, though credit growth is expected to have slowed.
• Canadian Prime Minister Mark Carney is set to visit China next week as his administration seeks to rebuild ties and reduce economic dependence on the US.
• China is testing US support for Japan by imposing export controls, months after former President Trump claimed to have resolved the rare earth supply issue. Japan remains well-prepared for any potential disruptions.
• The People’s Bank of China has extended its gold-buying streak to 14 months, highlighting continued official demand as gold prices reach new highs.

Upcoming Economic Events (Beijing Time)

• Thursday, Jan. 8: CSIA’s weekly solar wafer price update
• Friday, Jan. 9:
  • China’s December inflation figures (09:30)
  • Aggregate finance and money supply data for December (to be released by Jan. 15)
  • Weekly iron ore port inventory report
  • SHFE’s weekly commodities inventory (~15:30)

Reporting assistance by Alfred Cang, Yihui Xie, Martin Ritchie, and Jason Rogers.

Updated to include the latest statement from the Shanghai Futures Exchange.

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